Case: 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 five 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.
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 indefinite 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.
Guidelines
This case asks you to prepare a reconciliation schedule to convert 2014 income and stockholders' equity from a U.S. GAAP basis to IFRS.
Your work should address the following critical elements:
- Convert the inventory figures from U.S. GAAP to IFRS and discuss the impact that a switch to IFRS would have on its financial statement.
- Convert the property, plant, and equipment figures from U.S. GAAP to IFRS and discuss the impact that a switch to IFRS would have on its financial statement.
- Convert the intangible assets figures from U.S. GAAP to IFRS and discuss the impact that a switch to IFRS would have on its financial statement.
- Convert the research and development costs figures from U.S. GAAP to IFRS and discuss the impact that a switch to IFRS would have on its financial statement.
- Convert the sale-and-leaseback transaction figures from U.S. GAAP to IFRS and discuss the impact that a switch to IFRS would have on its financial statement.
- Present your findings in a clear and understandable fashion.
Guidelines for Submission: Your case study submission does not need follow APA formatting. You can submit your reconciliation in Word or Excel, with the key goal being to present your work in a clear and understandable fashion.