International Reporting Case Sepracor, Inc., a U.S. drug company, reported the following information in a recent annual report (amounts in thousands). The company prepares its financial statements in accordance with U.S. GAAP

Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under IFRS. Under IAS 32, “Financial Instruments,” convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.
Instructions

(a) Compute the following ratios for Sepracor, Inc. (Assume that year-end balances approximate annual averages.)
(1) Return on assets.
(2) Return on shareholders’ equity.
(3) Debt to assets ratio.

(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios were ROA 3.5%, return on equity 16%, and debt to assets 75%. Based on this analysis, would you make an investment in the company’s 5% convertible bonds? Explain.

(c) Assume you want to compare Sepracor to a company like Bayer (DEU), which prepares its financial statements in accordance with IFRS. Assuming that the fair value of the liability component of Sepracor’s convertible bonds is $398,020, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer?

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Current liabilities Convertible subordinated debt Total liabilities Stockholders' equity Net income $ 554,114 648,020 1,228,313 176,413 58,333