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NEW QUESTION: 2 Tom Vadney, CFA, is president and CEO of Vadney Research and Advisors (VRA), a large equity research firm that specializes in providing international investment and advisory services to global portfolio managers. He has a staff of five junior analysts and three senior analysts covering industries and firms across the Americas, Europe, and Asia-Pacific regions. In a recent meeting with an institutional portfolio manager, Vadney is asked to review the differences between U.S. GAAP and International Financial Reporting Standards (IFRS) as well as provide a comprehensive industry analysis for the telecommunications sector in Europe and the Asia-Pacific region. Vadney asks Maria Mnoyan, a senior analyst covering the sector, to research the requested information for the client meeting. Prior to the meeting, Vadney and Mnoyan meet to prepare for the client presentation. They first discuss differences between U.S. GAAP and IFRS. Mnoyan states that although there will be increasing convergence between the two accounting standards, one major difference currently is that IFRS permits either the "partial goodwill" or "full goodwill" method to value the goodwill and the noncontrolling interest under the acquisition method. U.S. GAAP requires the full goodwill method. Vadney adds that U.S. GAAP requires equity method accounting for joint ventures, while under IFRS, proportionate consolidation is preferred, but the equity method is permitted. Vadney then asks Mnoyan to share her findings on the telecommunications sector. Mnoyan first presents an overview of the competitive forces that characterize the sector in the two regions. In particular, she notes that the sector in both regions is characterized by high switching costs. Vadney asks how high switching costs would affect the bargaining power of buyers and suppliers. Mnoyan firmly believes that investing in companies located in developing countries provides strong growth potential through technological change and increases in capital, labor, and savings that contribute to higher dividend levels, even if the dividend growth rate is unaffected. In her research report Mnoyan identifies several countries and industries with attractive investment potential. She notices that the telecommunications sector in one of the countries is characterized by a duopoly. The $50 billion telecom industry in another country in her analysis is dominated by h\e firms with market shares of $10 billion each. Finally, Vadney and Mnoyan discuss investment opportunities in specific firms. Mnoyan values firms using both the discounted cash flow model and the franchise value method. She makes the following statements on the franchise value method: Statement 1: A higher asset turnover ratio increases the franchise P/E ratio, one of the components of the intrinsic P/E value. Statement 2: When firms pay out profits as dividends at a higher rate, a firm's intrinsic P/E value decreases. Are Mnoyan and Vadney correct about differences between U.S. GAAP and IFRS? A. Only Vadney is correct. B. Both are correct. C. Only Mnoyan is correct. Answer: B Explanation: Explanation/Reference: Explanation: Both statements arc correct. IFRS permits either the partial goodwill or full goodwill method to value goodwill and the noncontrolling interest under the acquisition method. U.S. GAAP requires the full goodwill method. U.S. GAAP requires equity method accounting for joint ventures. Under IFRS, proportionate consolidation is preferred, but the equity method is permitted. (Study Session 11, LOS 36.a)