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Question: Air France–KLM (AF), a Franco-Dutch

Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements According to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2019, are available under the Finance link at the company’s website (www.airfranceklm.com). This case addresses a variety of characteristics of financial statements prepared using IFRS, often comparing and contrasting those attributes of statements prepared under U.S. GAAP. s are grouped in parts according to various sections of the textbook. Part A: Financial Statements, Income Measurement, and Current Assets A1. What amounts did AF report for the following items for the fiscal year ended December 31, 2019? a. Total revenues b. Income from current operations c. Net income or net loss (Group part) d. Total assets e. Total equity A2. What was AF’s basic earnings or loss per share for the year ended December 31, 2019? A3. What amount did AF report for total assets, total liabilities, and total equity in the balance sheet? Show that the basic accounting equation remains in balance. A4. Find sales revenue (labeled “Sales”) in the income statement. Using this amount: (a) Prepare the journal entry for the sale of tickets, assuming all tickets are sold for cash and before the day of the flight. (b) Prepare the journal entry on the day of the flight. A5. Among the items listed under “External expenses” in the income statement is aircraft fuel (see Note 7). Using this amount: (a) Prepare the journal entry for the prepayment of aircraft fuel in advance of flights. (b) Prepare the journal entry on the day of the flight. A6. The statement of cash flows lists the purchase of property, plant, and equipment. Assuming this full amount was for the purchase of flight equipment, prepare the journal entry. A7. Describe the similarities and differences in the order of presentation of the components of the balance sheet between IFRS as applied by Air France–KLM (AF) and a typical balance sheet prepared in accordance with U.S. GAAP. A8. What amounts did Air France-KLM (AF) report for the following items: (a) Current assets (b) Long-term assets (c) Total assets (d) Current liabilities (e) Long-term liabilities (f) Total liabilities (g) Total shareholders’ equity on December 31, 2019? A9. What was Air France-KLM’s (AF) largest current asset other than “Other current liabilities”? A10. Compute Air France-KLM’s (AF) current ratio and debt to equity ratio in 2019. A11. Assuming Air France-KLM’s (AF) industry had an average current ratio of 1.0 and an average debt to equity ratio of 2.5, comment on AF’s liquidity and long-term solvency. A12. What amount does AF report in the income statement for: (a) Sales and for external expenses related to. (b) Aircraft fuel (c) Aircraft maintenance (see Note 7)? A13. What amount does AF report for amortization, depreciation, and provisions in the income statement? How is this amount listed in the statement of cash flows? A14. Under which account title in the income statement does AF include interest expense and interest revenue? A15. Under which activities in the statement of cash flows are interest paid and interest received included? Under IFRS, what other classifications for these items are allowed? A16. Under which activities in the statement of cash flows are dividends paid and dividends received included? Under IFRS, what other classifications for these items are allowed? A17. Refer to AF’s Note 29.2 “Description of the actuarial assumptions and related sensitivities.” a. What are the average discount rates used to measure AF’s (a) 10–15 year and (b) 15-year and more pension obligations in the “euro” geographic zone in 2019? b. If the rate used had been 1% (100 basis points) higher, what change would have occurred in the pension obligation in 2019? What if the rate had been 1% lower? A18. In Note 4.6, AF indicates that “Sales related to air transportation, which consist of passenger and freight transportation, are recognized when the transportation service is provided, so passenger and freight tickets are consequently recorded as ‘Deferred revenue upon issuance.’” a. Examine AF’s balance sheet. What is the total amount of deferred revenue on ticket sales as of December 31, 2019? b. When transportation services are provided with respect to the deferred revenue on ticket sales, what journal entry would AF make to reduce deferred revenue? c. Does AF’s treatment of deferred revenue under IFRS appear consistent with how these transactions would be handled under U.S. GAAP? Explain. A19. Assume that AF is forced to cancel a flight due to mechanical trouble, requiring it to promise €50,000 of compensation to affected passengers. Prepare the journal entry that AF would make to record this event. A20. AF has a frequent flyer program (also called a “loyalty program”), “Flying Blue,” which allows members to acquire “miles” as they fly on Air France or partner airlines that are redeemable for free flights or other benefits. a. Does AF treat “Miles” as a separate performance obligation? b. Does AF report any liability associated with these miles as of December 31, 2019? c. Is AF’s accounting for its frequent flier program consistent with IFRS 15? A21. In Note 4.11, AF describes how it values trade receivables. Is this approach consistent with U.S. GAAP? A22. In Note 25, AF reconciles the beginning and ending balances of its valuation allowance for trade accounts receivable. Prepare a T-account for the valuation allowance and include entries for the beginning and ending balances and any reconciling items that affected the account during 2019. A23. Examine Note 27. Does AF have any bank overdrafts? If so, are the overdrafts shown in the balance sheet the same way they would be shown under U.S. GAAP? A24. What method does the company use to value its inventory? What other alternatives are available under IFRS? Under U.S. GAAP? A25. AF’s inventories are valued at the lower of cost or net realizable value. Does this approach differ from U.S. GAAP? Part B: Property, Plant, and Equipment and Intangible Assets B1. How does AF account for information technology (IT) development costs before and during its development phase? B2. AF does not report any research and development expenditures. If it did, its approach to accounting for research and development would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for research and development expenditures. B3. AF does not report the receipt of any government grants. If it did, its approach to accounting for government grants would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for government grants. If AF received a grant for the purchase of assets, what alternative accounting treatments are available under IFRS? B4. AF’s property, plant, and equipment is reported at cost. The company has a policy of not revaluing property, plant, and equipment. Suppose AF decided to revalue its flight equipment on December 31, 2019, and that the fair value of the equipment on that date was €14,000 million. Prepare the journal entry to record the revaluation, assuming the journal entry to record annual depreciation had already been recorded. (Hint: You will need to locate the original cost and accumulated depreciation of the equipment at the end of the year in the appropriate disclosure note.) B5. Under U.S. GAAP, what alternatives do companies have to value their property, plant, and equipment? B6. AF calculates depreciation of plant and equipment on a straight-line basis, over the useful life of the asset. Describe any differences between IFRS and U.S. GAAP in the calculation of depreciation. B7. When does AF test for the possible impairment of fixed assets? How does this approach differ from U.S. GAAP? B8. Describe the approach AF uses to determine fixed asset impairment losses. (Hint: See Note 4.16.) How does this approach differ from U.S. GAAP? B9. The following is included in AF’s Disclosure Note 4.13: “Intangible assets are recorded at initial cost less accumulated amortization and any accumulated impairment losses.” Assume that on December 31, 2019, AF decided to revalue its Other intangible assets (see Note 16), and that the fair value on that date was determined to be €500 million. Amortization expense for the year already has been recorded. Prepare the journal entry to record the revaluation. Part C: Investments C1. Read Notes 23 and 36.4. Focusing on debt investments accounted for at fair value through profit loss (FVPL): a. As of December 31, 2019, what is the total balance of those investments in the balance sheet? b. How much of that balance is classified as current and how much as noncurrent? c. How much of the fair value of those investments is accounted for using level 1, level 2, and level 3 inputs of the fair value hierarchy? Given that information, assess the reliability (representational faithfulness) of this fair value estimate. C2. Complete C1 again, but for equity investments accounted for as either FVPL or FVOVI. C3. Read Notes 4.3. And 21. a. When AF can exercise significant influence over an investee, what accounting approach does it use to account for the investment? How does AF determine if it can exercise significant influence? b. If AF is involved in a joint venture, what accounting approach does it use to account for the investment? c. What is the carrying value of AF’s equity-method investments in its December 31, 2019, balance sheet? d. How did AF’s equity-method investments affect AF’s 2019 net income from continuing operations? Part D: Liabilities D1. Read Notes 4.6 and the Consolidated Balance Sheet. What do you think gave rise to total deferred income of €3,289 as of the end of fiscal 2019? Would transactions of this type be handled similarly under U.S. GAAP? D2. Is the threshold for recognizing a provision under IFRS different than it is under U.S. GAAP? Explain. D3. Note 30 lists “Return obligation liability and provision for leased aircraft and other provisions” (hereafter, “other provisions”). a. Do the beginning and ending balances of total provisions shown in Note 30 for fiscal 2019 tie to the balance sheet? By how much has the total amount of AF’s “other provisions” increased or decreased during fiscal 2019? b. Write journal entries for the following changes in the litigation provision that occurred during fiscal 2019, 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 journal entry is capturing. i. New provision. ii. Use of provision. iii. Reversal of unnecessary provisions c. Is AF’s treatment of its litigation provision under IFRS similar to how it would be treated under U.S. GAAP? D4. Note 30.2 lists a number of contingent liabilities. Are amounts for those items recognized as a liability on AF’s balance sheet? Explain. D5. Examine the long-term borrowings described in AF’s Note 31.3. Note that AF has convertible bonds outstanding that it issued in 2019 (Ou d’Echange En Actions Novellas ou Existents—OCEANE). Prepare the journal entry AF would use to record the issue of convertible bonds. Prepare the journal entry AF would use to record the issue of the convertible bonds if AF used U.S. GAAP. D6. AF does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 36.3, “Market value of financial instruments.” If the company had elected the FVO for all of its debt measured at amortized cost, what would be the balance at December 31, 2019, in the fair value adjustment account? Part E: Leases, Income Taxes, and Pensions E1. In Note 4.15: Lease contracts, AF states that “leases recorded in the balance sheet and lead to the recognition of: - an asset representing a right of use of the asset leased during the lease term of the contract and - a liability related to the payment obligation.” Is this policy generally consistent with U.S. GAAP? E2. From your reading of Note 4.15, “Lease Contracts,” what would you say is the primary difference between IFRS 16 and U.S. GAAP in the way lessees account for leases? E3. What amounts are shown in AF’s December 31, 2019, balance sheet for deferred taxes? E4. Here’s an excerpt from one of AF’s notes to its financial statements:
Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements According to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2019, are available under the Finance link at the company’s website (www.airfranceklm.com). This case addresses a variety of characteristics of financial statements prepared using IFRS, often comparing and contrasting those attributes of statements prepared under U.S. GAAP. s are grouped in parts according to various sections of the textbook. Part A: Financial Statements, Income Measurement, and Current Assets A1. What amounts did AF report for the following items for the fiscal year ended December 31, 2019? a. Total revenues b. Income from current operations c. Net income or net loss (Group part) d. Total assets e. Total equity A2. What was AF’s basic earnings or loss per share for the year ended December 31, 2019? A3. What amount did AF report for total assets, total liabilities, and total equity in the balance sheet? Show that the basic accounting equation remains in balance. A4. Find sales revenue (labeled “Sales”) in the income statement. Using this amount: (a) Prepare the journal entry for the sale of tickets, assuming all tickets are sold for cash and before the day of the flight. (b) Prepare the journal entry on the day of the flight. A5. Among the items listed under “External expenses” in the income statement is aircraft fuel (see Note 7). Using this amount: (a) Prepare the journal entry for the prepayment of aircraft fuel in advance of flights. (b) Prepare the journal entry on the day of the flight. A6. The statement of cash flows lists the purchase of property, plant, and equipment. Assuming this full amount was for the purchase of flight equipment, prepare the journal entry. A7. Describe the similarities and differences in the order of presentation of the components of the balance sheet between IFRS as applied by Air France–KLM (AF) and a typical balance sheet prepared in accordance with U.S. GAAP. A8. What amounts did Air France-KLM (AF) report for the following items: (a) Current assets (b) Long-term assets (c) Total assets (d) Current liabilities (e) Long-term liabilities (f) Total liabilities (g) Total shareholders’ equity on December 31, 2019? A9. What was Air France-KLM’s (AF) largest current asset other than “Other current liabilities”? A10. Compute Air France-KLM’s (AF) current ratio and debt to equity ratio in 2019. A11. Assuming Air France-KLM’s (AF) industry had an average current ratio of 1.0 and an average debt to equity ratio of 2.5, comment on AF’s liquidity and long-term solvency. A12. What amount does AF report in the income statement for: (a) Sales and for external expenses related to. (b) Aircraft fuel (c) Aircraft maintenance (see Note 7)? A13. What amount does AF report for amortization, depreciation, and provisions in the income statement? How is this amount listed in the statement of cash flows? A14. Under which account title in the income statement does AF include interest expense and interest revenue? A15. Under which activities in the statement of cash flows are interest paid and interest received included? Under IFRS, what other classifications for these items are allowed? A16. Under which activities in the statement of cash flows are dividends paid and dividends received included? Under IFRS, what other classifications for these items are allowed? A17. Refer to AF’s Note 29.2 “Description of the actuarial assumptions and related sensitivities.” a. What are the average discount rates used to measure AF’s (a) 10–15 year and (b) 15-year and more pension obligations in the “euro” geographic zone in 2019? b. If the rate used had been 1% (100 basis points) higher, what change would have occurred in the pension obligation in 2019? What if the rate had been 1% lower? A18. In Note 4.6, AF indicates that “Sales related to air transportation, which consist of passenger and freight transportation, are recognized when the transportation service is provided, so passenger and freight tickets are consequently recorded as ‘Deferred revenue upon issuance.’” a. Examine AF’s balance sheet. What is the total amount of deferred revenue on ticket sales as of December 31, 2019? b. When transportation services are provided with respect to the deferred revenue on ticket sales, what journal entry would AF make to reduce deferred revenue? c. Does AF’s treatment of deferred revenue under IFRS appear consistent with how these transactions would be handled under U.S. GAAP? Explain. A19. Assume that AF is forced to cancel a flight due to mechanical trouble, requiring it to promise €50,000 of compensation to affected passengers. Prepare the journal entry that AF would make to record this event. A20. AF has a frequent flyer program (also called a “loyalty program”), “Flying Blue,” which allows members to acquire “miles” as they fly on Air France or partner airlines that are redeemable for free flights or other benefits. a. Does AF treat “Miles” as a separate performance obligation? b. Does AF report any liability associated with these miles as of December 31, 2019? c. Is AF’s accounting for its frequent flier program consistent with IFRS 15? A21. In Note 4.11, AF describes how it values trade receivables. Is this approach consistent with U.S. GAAP? A22. In Note 25, AF reconciles the beginning and ending balances of its valuation allowance for trade accounts receivable. Prepare a T-account for the valuation allowance and include entries for the beginning and ending balances and any reconciling items that affected the account during 2019. A23. Examine Note 27. Does AF have any bank overdrafts? If so, are the overdrafts shown in the balance sheet the same way they would be shown under U.S. GAAP? A24. What method does the company use to value its inventory? What other alternatives are available under IFRS? Under U.S. GAAP? A25. AF’s inventories are valued at the lower of cost or net realizable value. Does this approach differ from U.S. GAAP? Part B: Property, Plant, and Equipment and Intangible Assets B1. How does AF account for information technology (IT) development costs before and during its development phase? B2. AF does not report any research and development expenditures. If it did, its approach to accounting for research and development would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for research and development expenditures. B3. AF does not report the receipt of any government grants. If it did, its approach to accounting for government grants would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for government grants. If AF received a grant for the purchase of assets, what alternative accounting treatments are available under IFRS? B4. AF’s property, plant, and equipment is reported at cost. The company has a policy of not revaluing property, plant, and equipment. Suppose AF decided to revalue its flight equipment on December 31, 2019, and that the fair value of the equipment on that date was €14,000 million. Prepare the journal entry to record the revaluation, assuming the journal entry to record annual depreciation had already been recorded. (Hint: You will need to locate the original cost and accumulated depreciation of the equipment at the end of the year in the appropriate disclosure note.) B5. Under U.S. GAAP, what alternatives do companies have to value their property, plant, and equipment? B6. AF calculates depreciation of plant and equipment on a straight-line basis, over the useful life of the asset. Describe any differences between IFRS and U.S. GAAP in the calculation of depreciation. B7. When does AF test for the possible impairment of fixed assets? How does this approach differ from U.S. GAAP? B8. Describe the approach AF uses to determine fixed asset impairment losses. (Hint: See Note 4.16.) How does this approach differ from U.S. GAAP? B9. The following is included in AF’s Disclosure Note 4.13: “Intangible assets are recorded at initial cost less accumulated amortization and any accumulated impairment losses.” Assume that on December 31, 2019, AF decided to revalue its Other intangible assets (see Note 16), and that the fair value on that date was determined to be €500 million. Amortization expense for the year already has been recorded. Prepare the journal entry to record the revaluation. Part C: Investments C1. Read Notes 23 and 36.4. Focusing on debt investments accounted for at fair value through profit loss (FVPL): a. As of December 31, 2019, what is the total balance of those investments in the balance sheet? b. How much of that balance is classified as current and how much as noncurrent? c. How much of the fair value of those investments is accounted for using level 1, level 2, and level 3 inputs of the fair value hierarchy? Given that information, assess the reliability (representational faithfulness) of this fair value estimate. C2. Complete C1 again, but for equity investments accounted for as either FVPL or FVOVI. C3. Read Notes 4.3. And 21. a. When AF can exercise significant influence over an investee, what accounting approach does it use to account for the investment? How does AF determine if it can exercise significant influence? b. If AF is involved in a joint venture, what accounting approach does it use to account for the investment? c. What is the carrying value of AF’s equity-method investments in its December 31, 2019, balance sheet? d. How did AF’s equity-method investments affect AF’s 2019 net income from continuing operations? Part D: Liabilities D1. Read Notes 4.6 and the Consolidated Balance Sheet. What do you think gave rise to total deferred income of €3,289 as of the end of fiscal 2019? Would transactions of this type be handled similarly under U.S. GAAP? D2. Is the threshold for recognizing a provision under IFRS different than it is under U.S. GAAP? Explain. D3. Note 30 lists “Return obligation liability and provision for leased aircraft and other provisions” (hereafter, “other provisions”). a. Do the beginning and ending balances of total provisions shown in Note 30 for fiscal 2019 tie to the balance sheet? By how much has the total amount of AF’s “other provisions” increased or decreased during fiscal 2019? b. Write journal entries for the following changes in the litigation provision that occurred during fiscal 2019, 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 journal entry is capturing. i. New provision. ii. Use of provision. iii. Reversal of unnecessary provisions c. Is AF’s treatment of its litigation provision under IFRS similar to how it would be treated under U.S. GAAP? D4. Note 30.2 lists a number of contingent liabilities. Are amounts for those items recognized as a liability on AF’s balance sheet? Explain. D5. Examine the long-term borrowings described in AF’s Note 31.3. Note that AF has convertible bonds outstanding that it issued in 2019 (Ou d’Echange En Actions Novellas ou Existents—OCEANE). Prepare the journal entry AF would use to record the issue of convertible bonds. Prepare the journal entry AF would use to record the issue of the convertible bonds if AF used U.S. GAAP. D6. AF does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 36.3, “Market value of financial instruments.” If the company had elected the FVO for all of its debt measured at amortized cost, what would be the balance at December 31, 2019, in the fair value adjustment account? Part E: Leases, Income Taxes, and Pensions E1. In Note 4.15: Lease contracts, AF states that “leases recorded in the balance sheet and lead to the recognition of: - an asset representing a right of use of the asset leased during the lease term of the contract and - a liability related to the payment obligation.” Is this policy generally consistent with U.S. GAAP? E2. From your reading of Note 4.15, “Lease Contracts,” what would you say is the primary difference between IFRS 16 and U.S. GAAP in the way lessees account for leases? E3. What amounts are shown in AF’s December 31, 2019, balance sheet for deferred taxes? E4. Here’s an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E5. Below is an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E6. AF reported past service cost (called prior service cost under U.S. GAAP) in its income statement as part of net periodic pension cost. How does that reporting method compare with the way we report prior service cost under U.S. GAAP? E7. Look at AF’s balance sheet. How does the way that AF reports Pension assets and Pension liabilities (provisions) compare with the way we report those amounts under U.S. GAAP? E8. See Note 29.3, “Evolution of Commitments.” For its Netherlands operations, did AF report (a) Net interest cost (b) Net interest income in 2019? Part F: Shareholders’ Equity and Additional Financial Reporting Issues F1. Locate Note 28.5 in AF’s financial statements. What items comprise “Reserves and retained earnings,” as reported in the balance sheet? F2. In its presentation of the components of the balance sheet, which is listed first, current assets or non-current assets? Does this approach differ from U.S. GAAP? F3. In its presentation of the components of the balance sheet, which are listed first, current liabilities or non-current liabilities? Does this approach differ from U.S. GAAP? F4. In its presentation of the components of the balance sheet, which is listed first, liabilities or shareholders’ equity? Does this approach differ from U.S. GAAP? F5. Note 14 in the financial statements provides information on the calculation of earnings per share: a. Based on the information provided, what was diluted earnings per share for 2019? b. Using the information provided by the note, infer the reason for the €6 million “Consequence of potential ordinary shares on net income.” F6. Refer to AF’s disclosure notes, in particular Note 2, “Restatement of Accounts 2018.” Was the first of the two changes described in the note a change in estimate, a change in principle, a change in reporting entity, or an error correction? F7. Is this the same approach AF would follow if using U.S. GAAP? F8. In its statement of cash flows, what are the three primary classifications into which AF’s cash inflows and cash outflows are separated? F9. Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP? F10. In which classification are cash inflows from dividends included in AF’s cash flow statements? F11. Is this classification different from cash flow statements prepared in accordance with U.S. GAAP? F12. In Note 36.1, “Risk Management,” and Note 36.2, “Derivative Instruments,” AF discusses its various risk exposures and strategies to reduce its exposure to such risks. Based on the detailed disclosures in Note 36.2, what are the three largest risk exposures (based on the fair value of its derivative instruments)? For each risk exposure, list one derivative instrument it uses to hedge that risk. F13. Per Note 36.2, what is the fair value of AF’s derivative instruments on the balance sheet? (Hint: This information is also provided in Notes 26 and 35.
Is this policy consistent with U.S. GAAP? Explain. E5. Below is an excerpt from one of AF’s notes to its financial statements:
Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements According to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2019, are available under the Finance link at the company’s website (www.airfranceklm.com). This case addresses a variety of characteristics of financial statements prepared using IFRS, often comparing and contrasting those attributes of statements prepared under U.S. GAAP. s are grouped in parts according to various sections of the textbook. Part A: Financial Statements, Income Measurement, and Current Assets A1. What amounts did AF report for the following items for the fiscal year ended December 31, 2019? a. Total revenues b. Income from current operations c. Net income or net loss (Group part) d. Total assets e. Total equity A2. What was AF’s basic earnings or loss per share for the year ended December 31, 2019? A3. What amount did AF report for total assets, total liabilities, and total equity in the balance sheet? Show that the basic accounting equation remains in balance. A4. Find sales revenue (labeled “Sales”) in the income statement. Using this amount: (a) Prepare the journal entry for the sale of tickets, assuming all tickets are sold for cash and before the day of the flight. (b) Prepare the journal entry on the day of the flight. A5. Among the items listed under “External expenses” in the income statement is aircraft fuel (see Note 7). Using this amount: (a) Prepare the journal entry for the prepayment of aircraft fuel in advance of flights. (b) Prepare the journal entry on the day of the flight. A6. The statement of cash flows lists the purchase of property, plant, and equipment. Assuming this full amount was for the purchase of flight equipment, prepare the journal entry. A7. Describe the similarities and differences in the order of presentation of the components of the balance sheet between IFRS as applied by Air France–KLM (AF) and a typical balance sheet prepared in accordance with U.S. GAAP. A8. What amounts did Air France-KLM (AF) report for the following items: (a) Current assets (b) Long-term assets (c) Total assets (d) Current liabilities (e) Long-term liabilities (f) Total liabilities (g) Total shareholders’ equity on December 31, 2019? A9. What was Air France-KLM’s (AF) largest current asset other than “Other current liabilities”? A10. Compute Air France-KLM’s (AF) current ratio and debt to equity ratio in 2019. A11. Assuming Air France-KLM’s (AF) industry had an average current ratio of 1.0 and an average debt to equity ratio of 2.5, comment on AF’s liquidity and long-term solvency. A12. What amount does AF report in the income statement for: (a) Sales and for external expenses related to. (b) Aircraft fuel (c) Aircraft maintenance (see Note 7)? A13. What amount does AF report for amortization, depreciation, and provisions in the income statement? How is this amount listed in the statement of cash flows? A14. Under which account title in the income statement does AF include interest expense and interest revenue? A15. Under which activities in the statement of cash flows are interest paid and interest received included? Under IFRS, what other classifications for these items are allowed? A16. Under which activities in the statement of cash flows are dividends paid and dividends received included? Under IFRS, what other classifications for these items are allowed? A17. Refer to AF’s Note 29.2 “Description of the actuarial assumptions and related sensitivities.” a. What are the average discount rates used to measure AF’s (a) 10–15 year and (b) 15-year and more pension obligations in the “euro” geographic zone in 2019? b. If the rate used had been 1% (100 basis points) higher, what change would have occurred in the pension obligation in 2019? What if the rate had been 1% lower? A18. In Note 4.6, AF indicates that “Sales related to air transportation, which consist of passenger and freight transportation, are recognized when the transportation service is provided, so passenger and freight tickets are consequently recorded as ‘Deferred revenue upon issuance.’” a. Examine AF’s balance sheet. What is the total amount of deferred revenue on ticket sales as of December 31, 2019? b. When transportation services are provided with respect to the deferred revenue on ticket sales, what journal entry would AF make to reduce deferred revenue? c. Does AF’s treatment of deferred revenue under IFRS appear consistent with how these transactions would be handled under U.S. GAAP? Explain. A19. Assume that AF is forced to cancel a flight due to mechanical trouble, requiring it to promise €50,000 of compensation to affected passengers. Prepare the journal entry that AF would make to record this event. A20. AF has a frequent flyer program (also called a “loyalty program”), “Flying Blue,” which allows members to acquire “miles” as they fly on Air France or partner airlines that are redeemable for free flights or other benefits. a. Does AF treat “Miles” as a separate performance obligation? b. Does AF report any liability associated with these miles as of December 31, 2019? c. Is AF’s accounting for its frequent flier program consistent with IFRS 15? A21. In Note 4.11, AF describes how it values trade receivables. Is this approach consistent with U.S. GAAP? A22. In Note 25, AF reconciles the beginning and ending balances of its valuation allowance for trade accounts receivable. Prepare a T-account for the valuation allowance and include entries for the beginning and ending balances and any reconciling items that affected the account during 2019. A23. Examine Note 27. Does AF have any bank overdrafts? If so, are the overdrafts shown in the balance sheet the same way they would be shown under U.S. GAAP? A24. What method does the company use to value its inventory? What other alternatives are available under IFRS? Under U.S. GAAP? A25. AF’s inventories are valued at the lower of cost or net realizable value. Does this approach differ from U.S. GAAP? Part B: Property, Plant, and Equipment and Intangible Assets B1. How does AF account for information technology (IT) development costs before and during its development phase? B2. AF does not report any research and development expenditures. If it did, its approach to accounting for research and development would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for research and development expenditures. B3. AF does not report the receipt of any government grants. If it did, its approach to accounting for government grants would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for government grants. If AF received a grant for the purchase of assets, what alternative accounting treatments are available under IFRS? B4. AF’s property, plant, and equipment is reported at cost. The company has a policy of not revaluing property, plant, and equipment. Suppose AF decided to revalue its flight equipment on December 31, 2019, and that the fair value of the equipment on that date was €14,000 million. Prepare the journal entry to record the revaluation, assuming the journal entry to record annual depreciation had already been recorded. (Hint: You will need to locate the original cost and accumulated depreciation of the equipment at the end of the year in the appropriate disclosure note.) B5. Under U.S. GAAP, what alternatives do companies have to value their property, plant, and equipment? B6. AF calculates depreciation of plant and equipment on a straight-line basis, over the useful life of the asset. Describe any differences between IFRS and U.S. GAAP in the calculation of depreciation. B7. When does AF test for the possible impairment of fixed assets? How does this approach differ from U.S. GAAP? B8. Describe the approach AF uses to determine fixed asset impairment losses. (Hint: See Note 4.16.) How does this approach differ from U.S. GAAP? B9. The following is included in AF’s Disclosure Note 4.13: “Intangible assets are recorded at initial cost less accumulated amortization and any accumulated impairment losses.” Assume that on December 31, 2019, AF decided to revalue its Other intangible assets (see Note 16), and that the fair value on that date was determined to be €500 million. Amortization expense for the year already has been recorded. Prepare the journal entry to record the revaluation. Part C: Investments C1. Read Notes 23 and 36.4. Focusing on debt investments accounted for at fair value through profit loss (FVPL): a. As of December 31, 2019, what is the total balance of those investments in the balance sheet? b. How much of that balance is classified as current and how much as noncurrent? c. How much of the fair value of those investments is accounted for using level 1, level 2, and level 3 inputs of the fair value hierarchy? Given that information, assess the reliability (representational faithfulness) of this fair value estimate. C2. Complete C1 again, but for equity investments accounted for as either FVPL or FVOVI. C3. Read Notes 4.3. And 21. a. When AF can exercise significant influence over an investee, what accounting approach does it use to account for the investment? How does AF determine if it can exercise significant influence? b. If AF is involved in a joint venture, what accounting approach does it use to account for the investment? c. What is the carrying value of AF’s equity-method investments in its December 31, 2019, balance sheet? d. How did AF’s equity-method investments affect AF’s 2019 net income from continuing operations? Part D: Liabilities D1. Read Notes 4.6 and the Consolidated Balance Sheet. What do you think gave rise to total deferred income of €3,289 as of the end of fiscal 2019? Would transactions of this type be handled similarly under U.S. GAAP? D2. Is the threshold for recognizing a provision under IFRS different than it is under U.S. GAAP? Explain. D3. Note 30 lists “Return obligation liability and provision for leased aircraft and other provisions” (hereafter, “other provisions”). a. Do the beginning and ending balances of total provisions shown in Note 30 for fiscal 2019 tie to the balance sheet? By how much has the total amount of AF’s “other provisions” increased or decreased during fiscal 2019? b. Write journal entries for the following changes in the litigation provision that occurred during fiscal 2019, 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 journal entry is capturing. i. New provision. ii. Use of provision. iii. Reversal of unnecessary provisions c. Is AF’s treatment of its litigation provision under IFRS similar to how it would be treated under U.S. GAAP? D4. Note 30.2 lists a number of contingent liabilities. Are amounts for those items recognized as a liability on AF’s balance sheet? Explain. D5. Examine the long-term borrowings described in AF’s Note 31.3. Note that AF has convertible bonds outstanding that it issued in 2019 (Ou d’Echange En Actions Novellas ou Existents—OCEANE). Prepare the journal entry AF would use to record the issue of convertible bonds. Prepare the journal entry AF would use to record the issue of the convertible bonds if AF used U.S. GAAP. D6. AF does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 36.3, “Market value of financial instruments.” If the company had elected the FVO for all of its debt measured at amortized cost, what would be the balance at December 31, 2019, in the fair value adjustment account? Part E: Leases, Income Taxes, and Pensions E1. In Note 4.15: Lease contracts, AF states that “leases recorded in the balance sheet and lead to the recognition of: - an asset representing a right of use of the asset leased during the lease term of the contract and - a liability related to the payment obligation.” Is this policy generally consistent with U.S. GAAP? E2. From your reading of Note 4.15, “Lease Contracts,” what would you say is the primary difference between IFRS 16 and U.S. GAAP in the way lessees account for leases? E3. What amounts are shown in AF’s December 31, 2019, balance sheet for deferred taxes? E4. Here’s an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E5. Below is an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E6. AF reported past service cost (called prior service cost under U.S. GAAP) in its income statement as part of net periodic pension cost. How does that reporting method compare with the way we report prior service cost under U.S. GAAP? E7. Look at AF’s balance sheet. How does the way that AF reports Pension assets and Pension liabilities (provisions) compare with the way we report those amounts under U.S. GAAP? E8. See Note 29.3, “Evolution of Commitments.” For its Netherlands operations, did AF report (a) Net interest cost (b) Net interest income in 2019? Part F: Shareholders’ Equity and Additional Financial Reporting Issues F1. Locate Note 28.5 in AF’s financial statements. What items comprise “Reserves and retained earnings,” as reported in the balance sheet? F2. In its presentation of the components of the balance sheet, which is listed first, current assets or non-current assets? Does this approach differ from U.S. GAAP? F3. In its presentation of the components of the balance sheet, which are listed first, current liabilities or non-current liabilities? Does this approach differ from U.S. GAAP? F4. In its presentation of the components of the balance sheet, which is listed first, liabilities or shareholders’ equity? Does this approach differ from U.S. GAAP? F5. Note 14 in the financial statements provides information on the calculation of earnings per share: a. Based on the information provided, what was diluted earnings per share for 2019? b. Using the information provided by the note, infer the reason for the €6 million “Consequence of potential ordinary shares on net income.” F6. Refer to AF’s disclosure notes, in particular Note 2, “Restatement of Accounts 2018.” Was the first of the two changes described in the note a change in estimate, a change in principle, a change in reporting entity, or an error correction? F7. Is this the same approach AF would follow if using U.S. GAAP? F8. In its statement of cash flows, what are the three primary classifications into which AF’s cash inflows and cash outflows are separated? F9. Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP? F10. In which classification are cash inflows from dividends included in AF’s cash flow statements? F11. Is this classification different from cash flow statements prepared in accordance with U.S. GAAP? F12. In Note 36.1, “Risk Management,” and Note 36.2, “Derivative Instruments,” AF discusses its various risk exposures and strategies to reduce its exposure to such risks. Based on the detailed disclosures in Note 36.2, what are the three largest risk exposures (based on the fair value of its derivative instruments)? For each risk exposure, list one derivative instrument it uses to hedge that risk. F13. Per Note 36.2, what is the fair value of AF’s derivative instruments on the balance sheet? (Hint: This information is also provided in Notes 26 and 35.
Is this policy consistent with U.S. GAAP? Explain. E6. AF reported past service cost (called prior service cost under U.S. GAAP) in its income statement as part of net periodic pension cost. How does that reporting method compare with the way we report prior service cost under U.S. GAAP? E7. Look at AF’s balance sheet. How does the way that AF reports Pension assets and Pension liabilities (provisions) compare with the way we report those amounts under U.S. GAAP? E8. See Note 29.3, “Evolution of Commitments.” For its Netherlands operations, did AF report (a) Net interest cost (b) Net interest income in 2019? Part F: Shareholders’ Equity and Additional Financial Reporting Issues F1. Locate Note 28.5 in AF’s financial statements. What items comprise “Reserves and retained earnings,” as reported in the balance sheet? F2. In its presentation of the components of the balance sheet, which is listed first, current assets or non-current assets? Does this approach differ from U.S. GAAP? F3. In its presentation of the components of the balance sheet, which are listed first, current liabilities or non-current liabilities? Does this approach differ from U.S. GAAP? F4. In its presentation of the components of the balance sheet, which is listed first, liabilities or shareholders’ equity? Does this approach differ from U.S. GAAP? F5. Note 14 in the financial statements provides information on the calculation of earnings per share:
Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements According to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2019, are available under the Finance link at the company’s website (www.airfranceklm.com). This case addresses a variety of characteristics of financial statements prepared using IFRS, often comparing and contrasting those attributes of statements prepared under U.S. GAAP. s are grouped in parts according to various sections of the textbook. Part A: Financial Statements, Income Measurement, and Current Assets A1. What amounts did AF report for the following items for the fiscal year ended December 31, 2019? a. Total revenues b. Income from current operations c. Net income or net loss (Group part) d. Total assets e. Total equity A2. What was AF’s basic earnings or loss per share for the year ended December 31, 2019? A3. What amount did AF report for total assets, total liabilities, and total equity in the balance sheet? Show that the basic accounting equation remains in balance. A4. Find sales revenue (labeled “Sales”) in the income statement. Using this amount: (a) Prepare the journal entry for the sale of tickets, assuming all tickets are sold for cash and before the day of the flight. (b) Prepare the journal entry on the day of the flight. A5. Among the items listed under “External expenses” in the income statement is aircraft fuel (see Note 7). Using this amount: (a) Prepare the journal entry for the prepayment of aircraft fuel in advance of flights. (b) Prepare the journal entry on the day of the flight. A6. The statement of cash flows lists the purchase of property, plant, and equipment. Assuming this full amount was for the purchase of flight equipment, prepare the journal entry. A7. Describe the similarities and differences in the order of presentation of the components of the balance sheet between IFRS as applied by Air France–KLM (AF) and a typical balance sheet prepared in accordance with U.S. GAAP. A8. What amounts did Air France-KLM (AF) report for the following items: (a) Current assets (b) Long-term assets (c) Total assets (d) Current liabilities (e) Long-term liabilities (f) Total liabilities (g) Total shareholders’ equity on December 31, 2019? A9. What was Air France-KLM’s (AF) largest current asset other than “Other current liabilities”? A10. Compute Air France-KLM’s (AF) current ratio and debt to equity ratio in 2019. A11. Assuming Air France-KLM’s (AF) industry had an average current ratio of 1.0 and an average debt to equity ratio of 2.5, comment on AF’s liquidity and long-term solvency. A12. What amount does AF report in the income statement for: (a) Sales and for external expenses related to. (b) Aircraft fuel (c) Aircraft maintenance (see Note 7)? A13. What amount does AF report for amortization, depreciation, and provisions in the income statement? How is this amount listed in the statement of cash flows? A14. Under which account title in the income statement does AF include interest expense and interest revenue? A15. Under which activities in the statement of cash flows are interest paid and interest received included? Under IFRS, what other classifications for these items are allowed? A16. Under which activities in the statement of cash flows are dividends paid and dividends received included? Under IFRS, what other classifications for these items are allowed? A17. Refer to AF’s Note 29.2 “Description of the actuarial assumptions and related sensitivities.” a. What are the average discount rates used to measure AF’s (a) 10–15 year and (b) 15-year and more pension obligations in the “euro” geographic zone in 2019? b. If the rate used had been 1% (100 basis points) higher, what change would have occurred in the pension obligation in 2019? What if the rate had been 1% lower? A18. In Note 4.6, AF indicates that “Sales related to air transportation, which consist of passenger and freight transportation, are recognized when the transportation service is provided, so passenger and freight tickets are consequently recorded as ‘Deferred revenue upon issuance.’” a. Examine AF’s balance sheet. What is the total amount of deferred revenue on ticket sales as of December 31, 2019? b. When transportation services are provided with respect to the deferred revenue on ticket sales, what journal entry would AF make to reduce deferred revenue? c. Does AF’s treatment of deferred revenue under IFRS appear consistent with how these transactions would be handled under U.S. GAAP? Explain. A19. Assume that AF is forced to cancel a flight due to mechanical trouble, requiring it to promise €50,000 of compensation to affected passengers. Prepare the journal entry that AF would make to record this event. A20. AF has a frequent flyer program (also called a “loyalty program”), “Flying Blue,” which allows members to acquire “miles” as they fly on Air France or partner airlines that are redeemable for free flights or other benefits. a. Does AF treat “Miles” as a separate performance obligation? b. Does AF report any liability associated with these miles as of December 31, 2019? c. Is AF’s accounting for its frequent flier program consistent with IFRS 15? A21. In Note 4.11, AF describes how it values trade receivables. Is this approach consistent with U.S. GAAP? A22. In Note 25, AF reconciles the beginning and ending balances of its valuation allowance for trade accounts receivable. Prepare a T-account for the valuation allowance and include entries for the beginning and ending balances and any reconciling items that affected the account during 2019. A23. Examine Note 27. Does AF have any bank overdrafts? If so, are the overdrafts shown in the balance sheet the same way they would be shown under U.S. GAAP? A24. What method does the company use to value its inventory? What other alternatives are available under IFRS? Under U.S. GAAP? A25. AF’s inventories are valued at the lower of cost or net realizable value. Does this approach differ from U.S. GAAP? Part B: Property, Plant, and Equipment and Intangible Assets B1. How does AF account for information technology (IT) development costs before and during its development phase? B2. AF does not report any research and development expenditures. If it did, its approach to accounting for research and development would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for research and development expenditures. B3. AF does not report the receipt of any government grants. If it did, its approach to accounting for government grants would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for government grants. If AF received a grant for the purchase of assets, what alternative accounting treatments are available under IFRS? B4. AF’s property, plant, and equipment is reported at cost. The company has a policy of not revaluing property, plant, and equipment. Suppose AF decided to revalue its flight equipment on December 31, 2019, and that the fair value of the equipment on that date was €14,000 million. Prepare the journal entry to record the revaluation, assuming the journal entry to record annual depreciation had already been recorded. (Hint: You will need to locate the original cost and accumulated depreciation of the equipment at the end of the year in the appropriate disclosure note.) B5. Under U.S. GAAP, what alternatives do companies have to value their property, plant, and equipment? B6. AF calculates depreciation of plant and equipment on a straight-line basis, over the useful life of the asset. Describe any differences between IFRS and U.S. GAAP in the calculation of depreciation. B7. When does AF test for the possible impairment of fixed assets? How does this approach differ from U.S. GAAP? B8. Describe the approach AF uses to determine fixed asset impairment losses. (Hint: See Note 4.16.) How does this approach differ from U.S. GAAP? B9. The following is included in AF’s Disclosure Note 4.13: “Intangible assets are recorded at initial cost less accumulated amortization and any accumulated impairment losses.” Assume that on December 31, 2019, AF decided to revalue its Other intangible assets (see Note 16), and that the fair value on that date was determined to be €500 million. Amortization expense for the year already has been recorded. Prepare the journal entry to record the revaluation. Part C: Investments C1. Read Notes 23 and 36.4. Focusing on debt investments accounted for at fair value through profit loss (FVPL): a. As of December 31, 2019, what is the total balance of those investments in the balance sheet? b. How much of that balance is classified as current and how much as noncurrent? c. How much of the fair value of those investments is accounted for using level 1, level 2, and level 3 inputs of the fair value hierarchy? Given that information, assess the reliability (representational faithfulness) of this fair value estimate. C2. Complete C1 again, but for equity investments accounted for as either FVPL or FVOVI. C3. Read Notes 4.3. And 21. a. When AF can exercise significant influence over an investee, what accounting approach does it use to account for the investment? How does AF determine if it can exercise significant influence? b. If AF is involved in a joint venture, what accounting approach does it use to account for the investment? c. What is the carrying value of AF’s equity-method investments in its December 31, 2019, balance sheet? d. How did AF’s equity-method investments affect AF’s 2019 net income from continuing operations? Part D: Liabilities D1. Read Notes 4.6 and the Consolidated Balance Sheet. What do you think gave rise to total deferred income of €3,289 as of the end of fiscal 2019? Would transactions of this type be handled similarly under U.S. GAAP? D2. Is the threshold for recognizing a provision under IFRS different than it is under U.S. GAAP? Explain. D3. Note 30 lists “Return obligation liability and provision for leased aircraft and other provisions” (hereafter, “other provisions”). a. Do the beginning and ending balances of total provisions shown in Note 30 for fiscal 2019 tie to the balance sheet? By how much has the total amount of AF’s “other provisions” increased or decreased during fiscal 2019? b. Write journal entries for the following changes in the litigation provision that occurred during fiscal 2019, 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 journal entry is capturing. i. New provision. ii. Use of provision. iii. Reversal of unnecessary provisions c. Is AF’s treatment of its litigation provision under IFRS similar to how it would be treated under U.S. GAAP? D4. Note 30.2 lists a number of contingent liabilities. Are amounts for those items recognized as a liability on AF’s balance sheet? Explain. D5. Examine the long-term borrowings described in AF’s Note 31.3. Note that AF has convertible bonds outstanding that it issued in 2019 (Ou d’Echange En Actions Novellas ou Existents—OCEANE). Prepare the journal entry AF would use to record the issue of convertible bonds. Prepare the journal entry AF would use to record the issue of the convertible bonds if AF used U.S. GAAP. D6. AF does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 36.3, “Market value of financial instruments.” If the company had elected the FVO for all of its debt measured at amortized cost, what would be the balance at December 31, 2019, in the fair value adjustment account? Part E: Leases, Income Taxes, and Pensions E1. In Note 4.15: Lease contracts, AF states that “leases recorded in the balance sheet and lead to the recognition of: - an asset representing a right of use of the asset leased during the lease term of the contract and - a liability related to the payment obligation.” Is this policy generally consistent with U.S. GAAP? E2. From your reading of Note 4.15, “Lease Contracts,” what would you say is the primary difference between IFRS 16 and U.S. GAAP in the way lessees account for leases? E3. What amounts are shown in AF’s December 31, 2019, balance sheet for deferred taxes? E4. Here’s an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E5. Below is an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E6. AF reported past service cost (called prior service cost under U.S. GAAP) in its income statement as part of net periodic pension cost. How does that reporting method compare with the way we report prior service cost under U.S. GAAP? E7. Look at AF’s balance sheet. How does the way that AF reports Pension assets and Pension liabilities (provisions) compare with the way we report those amounts under U.S. GAAP? E8. See Note 29.3, “Evolution of Commitments.” For its Netherlands operations, did AF report (a) Net interest cost (b) Net interest income in 2019? Part F: Shareholders’ Equity and Additional Financial Reporting Issues F1. Locate Note 28.5 in AF’s financial statements. What items comprise “Reserves and retained earnings,” as reported in the balance sheet? F2. In its presentation of the components of the balance sheet, which is listed first, current assets or non-current assets? Does this approach differ from U.S. GAAP? F3. In its presentation of the components of the balance sheet, which are listed first, current liabilities or non-current liabilities? Does this approach differ from U.S. GAAP? F4. In its presentation of the components of the balance sheet, which is listed first, liabilities or shareholders’ equity? Does this approach differ from U.S. GAAP? F5. Note 14 in the financial statements provides information on the calculation of earnings per share: a. Based on the information provided, what was diluted earnings per share for 2019? b. Using the information provided by the note, infer the reason for the €6 million “Consequence of potential ordinary shares on net income.” F6. Refer to AF’s disclosure notes, in particular Note 2, “Restatement of Accounts 2018.” Was the first of the two changes described in the note a change in estimate, a change in principle, a change in reporting entity, or an error correction? F7. Is this the same approach AF would follow if using U.S. GAAP? F8. In its statement of cash flows, what are the three primary classifications into which AF’s cash inflows and cash outflows are separated? F9. Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP? F10. In which classification are cash inflows from dividends included in AF’s cash flow statements? F11. Is this classification different from cash flow statements prepared in accordance with U.S. GAAP? F12. In Note 36.1, “Risk Management,” and Note 36.2, “Derivative Instruments,” AF discusses its various risk exposures and strategies to reduce its exposure to such risks. Based on the detailed disclosures in Note 36.2, what are the three largest risk exposures (based on the fair value of its derivative instruments)? For each risk exposure, list one derivative instrument it uses to hedge that risk. F13. Per Note 36.2, what is the fair value of AF’s derivative instruments on the balance sheet? (Hint: This information is also provided in Notes 26 and 35.

Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements According to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2019, are available under the Finance link at the company’s website (www.airfranceklm.com). This case addresses a variety of characteristics of financial statements prepared using IFRS, often comparing and contrasting those attributes of statements prepared under U.S. GAAP. s are grouped in parts according to various sections of the textbook. Part A: Financial Statements, Income Measurement, and Current Assets A1. What amounts did AF report for the following items for the fiscal year ended December 31, 2019? a. Total revenues b. Income from current operations c. Net income or net loss (Group part) d. Total assets e. Total equity A2. What was AF’s basic earnings or loss per share for the year ended December 31, 2019? A3. What amount did AF report for total assets, total liabilities, and total equity in the balance sheet? Show that the basic accounting equation remains in balance. A4. Find sales revenue (labeled “Sales”) in the income statement. Using this amount: (a) Prepare the journal entry for the sale of tickets, assuming all tickets are sold for cash and before the day of the flight. (b) Prepare the journal entry on the day of the flight. A5. Among the items listed under “External expenses” in the income statement is aircraft fuel (see Note 7). Using this amount: (a) Prepare the journal entry for the prepayment of aircraft fuel in advance of flights. (b) Prepare the journal entry on the day of the flight. A6. The statement of cash flows lists the purchase of property, plant, and equipment. Assuming this full amount was for the purchase of flight equipment, prepare the journal entry. A7. Describe the similarities and differences in the order of presentation of the components of the balance sheet between IFRS as applied by Air France–KLM (AF) and a typical balance sheet prepared in accordance with U.S. GAAP. A8. What amounts did Air France-KLM (AF) report for the following items: (a) Current assets (b) Long-term assets (c) Total assets (d) Current liabilities (e) Long-term liabilities (f) Total liabilities (g) Total shareholders’ equity on December 31, 2019? A9. What was Air France-KLM’s (AF) largest current asset other than “Other current liabilities”? A10. Compute Air France-KLM’s (AF) current ratio and debt to equity ratio in 2019. A11. Assuming Air France-KLM’s (AF) industry had an average current ratio of 1.0 and an average debt to equity ratio of 2.5, comment on AF’s liquidity and long-term solvency. A12. What amount does AF report in the income statement for: (a) Sales and for external expenses related to. (b) Aircraft fuel (c) Aircraft maintenance (see Note 7)? A13. What amount does AF report for amortization, depreciation, and provisions in the income statement? How is this amount listed in the statement of cash flows? A14. Under which account title in the income statement does AF include interest expense and interest revenue? A15. Under which activities in the statement of cash flows are interest paid and interest received included? Under IFRS, what other classifications for these items are allowed? A16. Under which activities in the statement of cash flows are dividends paid and dividends received included? Under IFRS, what other classifications for these items are allowed? A17. Refer to AF’s Note 29.2 “Description of the actuarial assumptions and related sensitivities.” a. What are the average discount rates used to measure AF’s (a) 10–15 year and (b) 15-year and more pension obligations in the “euro” geographic zone in 2019? b. If the rate used had been 1% (100 basis points) higher, what change would have occurred in the pension obligation in 2019? What if the rate had been 1% lower? A18. In Note 4.6, AF indicates that “Sales related to air transportation, which consist of passenger and freight transportation, are recognized when the transportation service is provided, so passenger and freight tickets are consequently recorded as ‘Deferred revenue upon issuance.’” a. Examine AF’s balance sheet. What is the total amount of deferred revenue on ticket sales as of December 31, 2019? b. When transportation services are provided with respect to the deferred revenue on ticket sales, what journal entry would AF make to reduce deferred revenue? c. Does AF’s treatment of deferred revenue under IFRS appear consistent with how these transactions would be handled under U.S. GAAP? Explain. A19. Assume that AF is forced to cancel a flight due to mechanical trouble, requiring it to promise €50,000 of compensation to affected passengers. Prepare the journal entry that AF would make to record this event. A20. AF has a frequent flyer program (also called a “loyalty program”), “Flying Blue,” which allows members to acquire “miles” as they fly on Air France or partner airlines that are redeemable for free flights or other benefits. a. Does AF treat “Miles” as a separate performance obligation? b. Does AF report any liability associated with these miles as of December 31, 2019? c. Is AF’s accounting for its frequent flier program consistent with IFRS 15? A21. In Note 4.11, AF describes how it values trade receivables. Is this approach consistent with U.S. GAAP? A22. In Note 25, AF reconciles the beginning and ending balances of its valuation allowance for trade accounts receivable. Prepare a T-account for the valuation allowance and include entries for the beginning and ending balances and any reconciling items that affected the account during 2019. A23. Examine Note 27. Does AF have any bank overdrafts? If so, are the overdrafts shown in the balance sheet the same way they would be shown under U.S. GAAP? A24. What method does the company use to value its inventory? What other alternatives are available under IFRS? Under U.S. GAAP? A25. AF’s inventories are valued at the lower of cost or net realizable value. Does this approach differ from U.S. GAAP? Part B: Property, Plant, and Equipment and Intangible Assets B1. How does AF account for information technology (IT) development costs before and during its development phase? B2. AF does not report any research and development expenditures. If it did, its approach to accounting for research and development would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for research and development expenditures. B3. AF does not report the receipt of any government grants. If it did, its approach to accounting for government grants would be significantly different from U.S. GAAP. Describe the differences between IFRS and U.S. GAAP in accounting for government grants. If AF received a grant for the purchase of assets, what alternative accounting treatments are available under IFRS? B4. AF’s property, plant, and equipment is reported at cost. The company has a policy of not revaluing property, plant, and equipment. Suppose AF decided to revalue its flight equipment on December 31, 2019, and that the fair value of the equipment on that date was €14,000 million. Prepare the journal entry to record the revaluation, assuming the journal entry to record annual depreciation had already been recorded. (Hint: You will need to locate the original cost and accumulated depreciation of the equipment at the end of the year in the appropriate disclosure note.) B5. Under U.S. GAAP, what alternatives do companies have to value their property, plant, and equipment? B6. AF calculates depreciation of plant and equipment on a straight-line basis, over the useful life of the asset. Describe any differences between IFRS and U.S. GAAP in the calculation of depreciation. B7. When does AF test for the possible impairment of fixed assets? How does this approach differ from U.S. GAAP? B8. Describe the approach AF uses to determine fixed asset impairment losses. (Hint: See Note 4.16.) How does this approach differ from U.S. GAAP? B9. The following is included in AF’s Disclosure Note 4.13: “Intangible assets are recorded at initial cost less accumulated amortization and any accumulated impairment losses.” Assume that on December 31, 2019, AF decided to revalue its Other intangible assets (see Note 16), and that the fair value on that date was determined to be €500 million. Amortization expense for the year already has been recorded. Prepare the journal entry to record the revaluation. Part C: Investments C1. Read Notes 23 and 36.4. Focusing on debt investments accounted for at fair value through profit loss (FVPL): a. As of December 31, 2019, what is the total balance of those investments in the balance sheet? b. How much of that balance is classified as current and how much as noncurrent? c. How much of the fair value of those investments is accounted for using level 1, level 2, and level 3 inputs of the fair value hierarchy? Given that information, assess the reliability (representational faithfulness) of this fair value estimate. C2. Complete C1 again, but for equity investments accounted for as either FVPL or FVOVI. C3. Read Notes 4.3. And 21. a. When AF can exercise significant influence over an investee, what accounting approach does it use to account for the investment? How does AF determine if it can exercise significant influence? b. If AF is involved in a joint venture, what accounting approach does it use to account for the investment? c. What is the carrying value of AF’s equity-method investments in its December 31, 2019, balance sheet? d. How did AF’s equity-method investments affect AF’s 2019 net income from continuing operations? Part D: Liabilities D1. Read Notes 4.6 and the Consolidated Balance Sheet. What do you think gave rise to total deferred income of €3,289 as of the end of fiscal 2019? Would transactions of this type be handled similarly under U.S. GAAP? D2. Is the threshold for recognizing a provision under IFRS different than it is under U.S. GAAP? Explain. D3. Note 30 lists “Return obligation liability and provision for leased aircraft and other provisions” (hereafter, “other provisions”). a. Do the beginning and ending balances of total provisions shown in Note 30 for fiscal 2019 tie to the balance sheet? By how much has the total amount of AF’s “other provisions” increased or decreased during fiscal 2019? b. Write journal entries for the following changes in the litigation provision that occurred during fiscal 2019, 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 journal entry is capturing. i. New provision. ii. Use of provision. iii. Reversal of unnecessary provisions c. Is AF’s treatment of its litigation provision under IFRS similar to how it would be treated under U.S. GAAP? D4. Note 30.2 lists a number of contingent liabilities. Are amounts for those items recognized as a liability on AF’s balance sheet? Explain. D5. Examine the long-term borrowings described in AF’s Note 31.3. Note that AF has convertible bonds outstanding that it issued in 2019 (Ou d’Echange En Actions Novellas ou Existents—OCEANE). Prepare the journal entry AF would use to record the issue of convertible bonds. Prepare the journal entry AF would use to record the issue of the convertible bonds if AF used U.S. GAAP. D6. AF does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 36.3, “Market value of financial instruments.” If the company had elected the FVO for all of its debt measured at amortized cost, what would be the balance at December 31, 2019, in the fair value adjustment account? Part E: Leases, Income Taxes, and Pensions E1. In Note 4.15: Lease contracts, AF states that “leases recorded in the balance sheet and lead to the recognition of: - an asset representing a right of use of the asset leased during the lease term of the contract and - a liability related to the payment obligation.” Is this policy generally consistent with U.S. GAAP? E2. From your reading of Note 4.15, “Lease Contracts,” what would you say is the primary difference between IFRS 16 and U.S. GAAP in the way lessees account for leases? E3. What amounts are shown in AF’s December 31, 2019, balance sheet for deferred taxes? E4. Here’s an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E5. Below is an excerpt from one of AF’s notes to its financial statements: Is this policy consistent with U.S. GAAP? Explain. E6. AF reported past service cost (called prior service cost under U.S. GAAP) in its income statement as part of net periodic pension cost. How does that reporting method compare with the way we report prior service cost under U.S. GAAP? E7. Look at AF’s balance sheet. How does the way that AF reports Pension assets and Pension liabilities (provisions) compare with the way we report those amounts under U.S. GAAP? E8. See Note 29.3, “Evolution of Commitments.” For its Netherlands operations, did AF report (a) Net interest cost (b) Net interest income in 2019? Part F: Shareholders’ Equity and Additional Financial Reporting Issues F1. Locate Note 28.5 in AF’s financial statements. What items comprise “Reserves and retained earnings,” as reported in the balance sheet? F2. In its presentation of the components of the balance sheet, which is listed first, current assets or non-current assets? Does this approach differ from U.S. GAAP? F3. In its presentation of the components of the balance sheet, which are listed first, current liabilities or non-current liabilities? Does this approach differ from U.S. GAAP? F4. In its presentation of the components of the balance sheet, which is listed first, liabilities or shareholders’ equity? Does this approach differ from U.S. GAAP? F5. Note 14 in the financial statements provides information on the calculation of earnings per share: a. Based on the information provided, what was diluted earnings per share for 2019? b. Using the information provided by the note, infer the reason for the €6 million “Consequence of potential ordinary shares on net income.” F6. Refer to AF’s disclosure notes, in particular Note 2, “Restatement of Accounts 2018.” Was the first of the two changes described in the note a change in estimate, a change in principle, a change in reporting entity, or an error correction? F7. Is this the same approach AF would follow if using U.S. GAAP? F8. In its statement of cash flows, what are the three primary classifications into which AF’s cash inflows and cash outflows are separated? F9. Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP? F10. In which classification are cash inflows from dividends included in AF’s cash flow statements? F11. Is this classification different from cash flow statements prepared in accordance with U.S. GAAP? F12. In Note 36.1, “Risk Management,” and Note 36.2, “Derivative Instruments,” AF discusses its various risk exposures and strategies to reduce its exposure to such risks. Based on the detailed disclosures in Note 36.2, what are the three largest risk exposures (based on the fair value of its derivative instruments)? For each risk exposure, list one derivative instrument it uses to hedge that risk. F13. Per Note 36.2, what is the fair value of AF’s derivative instruments on the balance sheet? (Hint: This information is also provided in Notes 26 and 35.
a. Based on the information provided, what was diluted earnings per share for 2019? b. Using the information provided by the note, infer the reason for the €6 million “Consequence of potential ordinary shares on net income.” F6. Refer to AF’s disclosure notes, in particular Note 2, “Restatement of Accounts 2018.” Was the first of the two changes described in the note a change in estimate, a change in principle, a change in reporting entity, or an error correction? F7. Is this the same approach AF would follow if using U.S. GAAP? F8. In its statement of cash flows, what are the three primary classifications into which AF’s cash inflows and cash outflows are separated? F9. Is this classification the same as or different from cash flow statements prepared in accordance with U.S. GAAP? F10. In which classification are cash inflows from dividends included in AF’s cash flow statements? F11. Is this classification different from cash flow statements prepared in accordance with U.S. GAAP? F12. In Note 36.1, “Risk Management,” and Note 36.2, “Derivative Instruments,” AF discusses its various risk exposures and strategies to reduce its exposure to such risks. Based on the detailed disclosures in Note 36.2, what are the three largest risk exposures (based on the fair value of its derivative instruments)? For each risk exposure, list one derivative instrument it uses to hedge that risk. F13. Per Note 36.2, what is the fair value of AF’s derivative instruments on the balance sheet? (Hint: This information is also provided in Notes 26 and 35.

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> Refer to the situation described in BE 4–1. Using the account balances, prepare a multiple-step income statement. An example of a multiple-step income statement can be found in Illustration 4–4 of this chapter.

> Refer to the situation described in BE 4–1. If the company’s accountant prepared a multiple-step income statement, what amount would appear in that statement for (a) operating income and (b) no operating income?

> Refer to the situation described in BE 4–11. Prepare the cash flows from investing and financing activities sections of HHC’s statement of cash flows

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> If the adjusting entries prepared in BE 2–11 were not recorded, would net income be higher or lower and by how much?

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> Prepare journal entries for each of the transactions listed in BE 2–7.

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> Post the following transactions to the Cash T-account and calculate the ending balance. The beginning balance in the Cash T-account is $5,000. 1. Receive cash from customers, $15,000. 2. Pay cash for employee salaries, $9,000. 3. Pay cash for rent, $3,00

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> For each situation, determine the date for which the company recognizes the expense under (a) accrual-basis accounting and (b) cash-basis accounting. 1. American Airlines operates a flight from Dallas to Los Angeles on August 16. The pilots’ salaries ass

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