Air France–KLM (AF), a French company, prepares its financial statements according to International Financial Reporting Standards. AF’s annual report for the year ended March 31, 2011, which includes financial statements and disclosure notes, is provided with all new textbooks. This material also is included in AF’s “Registration Document 2010–11,” dated June 15, 2011 and is available at

1. Sealy Corporation reported the following line items in its statement of cash flows for the three months ended February 27, 2011:
Amortization of discount on secured notes ........ 382,000
Amortization of debt issuance costs and other ....... 1,175,000
In AF’s financial statements, Note 30: “Financial Debt” describes the company’s long-term debt. Neither of the two items above is reported in the financial statements of Air France, and neither is likely to appear there in the future. Why?
2. Examine the long-term borrowings in AF’s balance sheet and the related note. Note that AF has convertible bonds outstanding that it issued in 2005. 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.
3. AF does not elect the fair value option (FVO) to report its financial liabilities. Examine Note 32:3. “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 March 31, 2011, in the fair value adjustment account?
4. Is IFRS or U.S. GAAP more restrictive for determining when firms are allowed to elect the fair value option for financial assets and liabilities? Explain.

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