Global Perspective Case

Italian Tunnel Digger (ITD) is a company located in Milano Italy. It is one of the few companies worldwide that specialize in digging deep under-water tunnels for transportation purposes.The company gained a good reputation from digging a 22 Kilometer tunnel that connected two Scandinavian countries.More recently, representatives from Greece and Turkey met with the CEO of ITD and discussed a proposal to dig an underground tunnel that would connect the two countries. They explained that trade between the two countries would increase significantly if goods can be transported safely and expeditiously. However, one issue that was of concern to all parties was the sea floor of the Aegean Sea (the sea between Greece and Turkey), which requires special machinery that is different from what use previously used in the Scandinavian project. The only company that leases these specialized machinery is Continental Leasing Company, which is a leasing company located in Switzerland. On January 1, 2015, ITDdecided to leasethetunnel machinery from Continental Leasing Company. The two companies decided that the lease term is8 years with yearly lease payments of $300,000 starting on January 1, 2015 and then each December 31 thereafter. The details of the agreement indicate that the interest rate agreed upon by the two companies is 6%. Additional details suggest that the useful life of thetunnelmachinery is 15 years with no residual value. It is important to note that Continental Leasing Company had just recently purchased the machinery for $4,113,987.5. On the date of signing the contract between the two companies, the directing manager of Continental Leasing Company told the representative from ITD the following:

“It is interesting that you would want to lease these machines at this time. As you know these are specialized machinery that only a few companies worldwide can use. However, an American company called Washington Tunnels leased the exact same machinery today. Their lease term agreements are the same as yours. The only difference is thatITD is located in the Switzerland, while Washington Tunnels is located in the United States.”

Required:

1. Discuss some of the challenges that face accountants worldwide when conducting international transactions.

2. Discuss the major difference between GAAP and IFRS.

3. With respect to leasing machinery, describe the amount and nature of expense that Italian Tunnel Digger (ITD)and Washington Tunnels will record for the year 2015.

4. If Italian Tunnel Digger (ITD)and Washington Tunnels had the choice to select accounting standards to use for this lease transaction, which standards would provide the most benefit to each company? Your discussion should focus only on how choosing a set of standards would affect the leasing situation that ismentioned above.