International Accounting (4th Edition) Chapter 4, Problem 1C1 (5 Bookmarks) Show

Question

International Accounting (4th Edition) Chapter 4, Problem 1C1 (5 Bookmarks) Show all steps: ON Problem Bessrawl Corporation Bessrawl Corporation is a U.S.-based company that prepares its consolidated financial 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 Commission is considering requiring U.S. companies to use IFRS in preparing consolidated 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 fi ve areas in which Bessrawl's accounting 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 accounting differences

Explanation / Answer

SOLUTION

Working Notes-

1. Inventory

Under US GAAP- Lower of cost or market

Inventory value is lower of $250,000 and $180,000

Thus, the value of inventory under US GAAP is $180,000

Under IFRS - Lower of cost or net realizable value

Inventory is lower of $250,000 and $190,000

Thus, the value of inventroy under IFRS is $190,000

2. Property, Plant and Equipment

Under US GAAP- Revaluation is not allowed

Depreciation = (Asset value - salvage value) / useful life

Depreciation = ($2,750,000 - $250,000) / 25 years

= $100,000

Thus, the amount of depreciation under US GAAP is $100,000 and no revaluation reserve.

Under IFRS - Option to adopt for revaluation model

Depreciation = $100,000

Revaluation reserve-

Thus, the amount of depreciation as per IFRS is $100,000 and revaluation reserve is $600,000

3. Intangible assets

Under US GAAP-

Under IFRS

4. Research and development costs

Under US GAAP-

Considered as an expense and dispensed off.

Under IFRS-

If the specified criteria are met then the amount is capitalized.

Thus, the amount to be capitalized is $80,000 ($200,000*40%)

5. Sales and Lease back

Under US GAAP-

Gain is realised over the lease period

Thus, the amount of gain considered is $30,000 ($150,000/5)

Under IFRS-

The total gain has to be considered immediately.

Thus, the amount of gain will be $150,000.

Prepare the reconciliation for Income statement-

Prepare the reconciliation for stockholder's equity-

Particulars Amount ($) Aseet purchase 2,750,000 Depreciation for 2013 100,000 Value as on 2014 2,650,000 Fair value 3,250,000 Revaluation reserve 600,000

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