Case 4-1 Bessrawl Corporation res its consolidated fi- Bessrawl Corporation is a

Question

Case 4-1 Bessrawl Corporation res its consolidated fi- Bessrawl Corporation is a U.S-based company that prepar nancial statements in accordance with U.S. GAAP. The company reported income in 2014 of $1,000,000 and stockholders' equity at December 31, 2014, of $8,000,000 The CFO of Bessrawl has learned that the U.S. Securities and Exchange Com mission is considering requiring US. companies to use I solidated financial statements. The company wishes to determine the impact that a switch to IFRS would have on its financial statements and has engaged you to prepare a reconciliation of income and stockholders' equity from U.S. GAAP to IFRS. You have identified the following five areas in which Bessrawl's accounting FRS in preparing con principles based on U.S. GAAP differ from IFRS. 1. Inventory 2. Property, plant, and equipment 3. Intangible assets 4. Research and development costs 5. Sale-and-leaseback transaction Bessrawl provides the following information with respect to each of these ac- counting differences. Inventory At year-end 2014, inventory had a historical cost of $250,000, a replacement cost of $180,000, a net realizable value of $190,000, and a normal profit margin of 20 percent. Property, Plant, and Equipment The company acquired a building at the beginning of 2013 at a cost of $2,750,000. The building has an estimated useful life of 25 years, an estimated residual value of $250,000, and is being depreciated on a straight-line basis. At the beginning of 2014, the building was appraised and determined to have a fair value of $3,250,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition. Intangible Assets As part of a business combination in 2011, the company acquired a brand with a fair value of $40,000. The brand is classified as an intangible asset with an in- definite life. At year-end 2014, the brand is determined to have a selling price of $35,000 with zero cost to sell. Expected future cash flows from continued use of the brand are $42,000, and the present value of the expected future cash flows is $34,000 Research and Development Costs The company incurred research and development costs of $200,000 in 2014. Of this amount, 40 percent related to development activities subsequent to the point

Explanation / Answer

Reconciliation from U.S. GAAP to IFRS 2014 Income from U.S. GAAP 1000000 Adjustments : Inventory 10000 Accumulated depreciation on the Building -25000 Impairement loss on Intangible -5000 Reversal of Deferred development cost (to be capitalised) 80000 Reversal of amortization of deferred gain on sale and leaseback -30000 Income Under IFRS 1030000 Stockholder's equity under U.S. GAAP Adjustments : 8000000 Add: Adjustments to inventory 10000 Revaluation of Building 600000 Accumulated depreciation on the Building -25000 Impairement loss on Intangible -5000 Recognition of deferred development costs 80000 Recognition of gain on sale and leaseback 150000 Reversal of accumulated depreciation(30000*3) -90000 Stockholder's equity under IFRS 8720000 Explanation of adjustments : 1) Under U.S. GAAP inventory, company reports inventory at lower of cost or market Cost 250000 Market 180000 Lower of above 180000 Under IFRS it is lower of cost or NRV Cost 2500000 NRV 190000 Lower of above 190000 2) Building 2750000 2013 25 yrs Residual 250000 Depreciation as per U.S. GAAP 100000 2014 FMV of Building 3250000 500000 Depreciation based on FMV (3250000-250000)/24 Depreciation as per IFRS 125000 -25000 Revaluation 3250000-2650000 600000 3) Brand Value $40,000 2011 Selling price 35000 2014 Expected future cash flows 42000 Present value of expected cash flows 34000 Impairment loss on intangible asset 40000-35000 5000 4) Reseach and Development Costs Reseach and Development Costs 200000 2014 In U.S. GAAP the research and development costs are generally expenses and in IFRS they are to be capitalised 40% of 200000 80000 The above cost will now be capitalised 5) Sale and lease back Gain realised on sale and lease back 150000 30000 As per U.S GAAP the gain is amortized for the period of lease In IFRS the gain is capitalised

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