Case 4-1 Bessrawl Corporation
Bessrawl Corporation is a U. S.- based company that prepares itsconsolidated financial statements in accordance with U. S. GAAP.The company reported income in 2011 of $1,000,000 and stockholdersâequity at December 31, 2014, of $8,000,000. The CFO of Bessrawl haslearned that the U. S. Securities and Exchange Commission isconsidering giving U. S. companies the option of using either U. S.GAAP or IFRS in preparing consolidated financial statements. Thecompany wishes to determine the impact that a switch to IFRS wouldhave on its financial statements and has engaged you to prepare areconciliation of income and stockholdersâ equity from U. S. GAAPto IFRS. You have identified the following six areas in whichBessrawlâs accounting principles based on U. S. GAAP differ fromIFRS. 1. Inventory 2. Property, plant and equipment 3. Intangibleassets 4. Research and development costs 5. Sale and leasebacktransaction Bessrawl provides the following information withrespect to each of these accounting differences.
Inventory: at year-end 2014, inventory had a historical cost$250,000, a replacement cost of $180,000, a net realizable value of$190,000, and a normal profit margin of 20%.
Property, plant and equipment: the company acquired a buildingat the beginning of 2013 at a cost of $2,750,000. The building hasan estimated useful life of 25 years, an estimated residual valueof $250,000 and is being depreciated on straight-line basis. At thebeginning of 2014, the building was appraised and determined tohave a fair value of $3,250,000. There is no change in estimateduseful life or residual value. In a switch to IFRS, the companywould use the revaluation model in IAS 16 to determine the carryingvalue of property, plant, and equipment subsequent toacquisition.
Intangible assets: As part of a business combination in 2011,the company acquired a brand with a fair value of $40,000. Thebrand is classified as an intangible asset with an indefinite life.At year-end 2014, the brand is determined to have a selling priceof $35,000 with zero cost sell. Expected future cash flows fromcontinued use of the brand are $42,000 and the present value of theexpected future cash flows is $34,000.
Research and development costs: the company incurred researchand development costs of $200,000 in 2014. Of this amount, 40%related to development activities subsequent to the point at whichcriteria had been met indicating that an intangible asset existed.As of the end of 2014, development of the new product had not beencompleted.
Sale and leaseback transaction: in January 2012, the companyrealized a gain on the sale-and-leaseback of an office building inthe amount of $150,000. The lease is accounted for as an operatinglease, and the term of the lease is five years.
Required: prepare reconciliation schedule to convert2014 income and December 31, 2014 stockholdersâ equity from a U.S.GAAP basis to IFRS. Ignore taxes. Prepare a note to explain eachadjustment made in the reconciliation schedule.
Case 4-1 Bessrawl Corporation
Bessrawl Corporation is a U. S.- based company that prepares itsconsolidated financial statements in accordance with U. S. GAAP.The company reported income in 2011 of $1,000,000 and stockholdersâequity at December 31, 2014, of $8,000,000. The CFO of Bessrawl haslearned that the U. S. Securities and Exchange Commission isconsidering giving U. S. companies the option of using either U. S.GAAP or IFRS in preparing consolidated financial statements. Thecompany wishes to determine the impact that a switch to IFRS wouldhave on its financial statements and has engaged you to prepare areconciliation of income and stockholdersâ equity from U. S. GAAPto IFRS. You have identified the following six areas in whichBessrawlâs accounting principles based on U. S. GAAP differ fromIFRS. 1. Inventory 2. Property, plant and equipment 3. Intangibleassets 4. Research and development costs 5. Sale and leasebacktransaction Bessrawl provides the following information withrespect to each of these accounting differences.
Inventory: at year-end 2014, inventory had a historical cost$250,000, a replacement cost of $180,000, a net realizable value of$190,000, and a normal profit margin of 20%.
Property, plant and equipment: the company acquired a buildingat the beginning of 2013 at a cost of $2,750,000. The building hasan estimated useful life of 25 years, an estimated residual valueof $250,000 and is being depreciated on straight-line basis. At thebeginning of 2014, the building was appraised and determined tohave a fair value of $3,250,000. There is no change in estimateduseful life or residual value. In a switch to IFRS, the companywould use the revaluation model in IAS 16 to determine the carryingvalue of property, plant, and equipment subsequent toacquisition.
Intangible assets: As part of a business combination in 2011,the company acquired a brand with a fair value of $40,000. Thebrand is classified as an intangible asset with an indefinite life.At year-end 2014, the brand is determined to have a selling priceof $35,000 with zero cost sell. Expected future cash flows fromcontinued use of the brand are $42,000 and the present value of theexpected future cash flows is $34,000.
Research and development costs: the company incurred researchand development costs of $200,000 in 2014. Of this amount, 40%related to development activities subsequent to the point at whichcriteria had been met indicating that an intangible asset existed.As of the end of 2014, development of the new product had not beencompleted.
Sale and leaseback transaction: in January 2012, the companyrealized a gain on the sale-and-leaseback of an office building inthe amount of $150,000. The lease is accounted for as an operatinglease, and the term of the lease is five years.
Required: prepare reconciliation schedule to convert2014 income and December 31, 2014 stockholdersâ equity from a U.S.GAAP basis to IFRS. Ignore taxes. Prepare a note to explain eachadjustment made in the reconciliation schedule.
Related questions
Case 10-1
Swisscom AG, the principal provider of telecommunications inSwitzerland, prepares consolidated financial statements inaccordance with IFRS. Until 2007, Swisscom also reconciled its netincome and stockholdersâ equity to US GAAP. Swisscom consolidatedfinancial statements from a recent annual report are presented intheir original format in Column 1 of the following worksheet. Note27, Differences between IFRS and GAAP, which includes Swisscomâs USGAAP reconciliation, also is provided.
Required
Use the information in Note 27 to restate Swisscomâsconsolidated financial statements in accordance with US GAAP. Beginby constructing debit/credit entries for each reconciliation item,and then post these entries to columns 2 and 3 in the worksheetsprovided.
Calculate each of the following ratios under both IFRS and GAAPand determine the percentage differences between them, using IFRSratios as the base:
Net income/net revenue
Operating income/net revenues
Operating income/total assets
Net income/shareholdersâ equity
Operating income/total shareholdersâ equity
Current assets/current liabilities
Total liabilities/total shareholdersâ equity
Which of these ratios is most (least) affected by the accountingstandards used?
| Worksheet for theRestatement of Swisscom's Financial Statements from IFRS to USGAAP | ||||
| Reconciling | Adjustment | |||
| IFRS | DR | CR | US GAAP | |
| Consolidated Statement of Operations | ||||
| Net revenue | 9,842 | |||
| Capitalized cost and changes ininventory | 277 | |||
| Total | 10,119 | |||
| Goods and services purchased | 1,666 | |||
| Personnel expenses | 2,584 | |||
| Other operating expenses | 2,090 | |||
| Depreciation and amortization | 1,739 | |||
| Restructuring charges | 1,726 | |||
| Total operating expenses | 9,805 | |||
| Operating income | 314 | |||
| Interest expense | (428) | |||
| Financial income | 25 | |||
| Income(loss) before incometaxes and equity in net loss of affiliated companies | (89) | |||
| Income tax expense | 1 | |||
| Income(loss) before equity innet loss of affiliated companies | (90) | |||
| Equity in net loss of affiliatedcompanies | (325) | |||
| Net income(loss) | (415) | |||
| Consolidated Retained EarningsStatement | ||||
| Retained earnings, 1/1 | (151) | |||
| Net loss | (415) | |||
| Profit distribution declared | (1,282) | |||
| Conversion of loan payable to equity | 3,200 | |||
| Retained earnings, 12/31 | 1,352 | |||
| Assets | ||||
| Current assets | ||||
| Cash and equivalents | 256 | |||
| Securities available for sale | 51 | |||
| Trade accounts receivable | 2,052 | |||
| Inventories | 169 | |||
| Other current assets | 34 | |||
| Total current assets | 2,562 | |||
| Noncurrent assets | ||||
| Property, plant and equipment | 11,453 | |||
| Investments | 1,238 | |||
| Other noncurrent assets | 220 | |||
| Total noncurrent assets | 12,911 | |||
| Total assets | 15,473 | |||
| Current liabilities | ||||
| Short-term debt | 1,178 | |||
| Trade accounts payable | 889 | |||
| Accrued pension cost | 789 | |||
| Other current liabilities | 2,213 | |||
| Total current liabilities | 5,069 | |||
| Long-term liabilities | ||||
| Long-term debt | 6,200 | |||
| Finance lease obligation | 439 | |||
| Accrued pension cost | 1,488 | |||
| Accrued liabilities | 709 | |||
| Other long-term liabilities | 338 | |||
| Total long-term liabilities | 9,174 | |||
| Total liabilities | 14,243 | |||
| Shareholders' equity | ||||
| Retained earnings | 1,352 | |||
| Unrealized market valueadjustment on securities available for sale | 39 | |||
| Cumulative translation adjustment | (161) | |||
| Total shareholders' equity | 1,230 | |||
| Total liabilities and shareholders'equity | 15,473 | |||
27. Differences between IFRS and GAAP
The consolidated financial statements of Swisscom have beenprepared in accordance with IFRS, which differ in certain respectsfrom GAAP in the US. Application of US GAAP would have affected thebalance sheet and net income (loss) to the extent described below.A description of the material differences between IFRS and GAAP asthey relate to Swisscom are discussed in further detail below.
Reconciliation of net income (loss) from IFRS toGAAP
The following schedule illustrates the significant adjustmentsto reconcile net income (loss) in accordance with US GAAP to theamounts determined under IFRS, for the current year ended December31.
| (CHF in millions) | ||
| Net income (loss) according toIFRS | (415) | |
| US GAAP adjustments: | ||
| Capitalization of interest cost | 8 | |
| Restructuring charges | 205 | |
| Depreciation expense | -5 | |
| Capitalization of software | 182 | |
| Restructuring charges byaffiliates | 50 | |
| Net income according to GAAP | 25 | |
Reconciliation of shareholdersâ equity from IFRS toGAAP
The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholdersâ equity in accordance with USGAAP to the amounts determined under IFRS as at December 31 of thecurrent year.
| (CHF in millions) | ||
| Shareholders' equity accordingto IFRS | 1230 | |
| US GAAP adjustments: | ||
| Capitalization of interest cost | 54 | |
| Restructuring charges | 205 | |
| Depreciation expense | -5 | |
| Capitalization of software | 475 | |
| Restructuring charges byaffiliates | 50 | |
| Shareholders' equity accordingto GAAP | 2009 | |
Capitalization of interest cost
Swisscom expenses all interest costs as incurred. US GAAPrequires interest costs incurred during the construction ofproperty, plant and equipment to be capitalized. Under US GAAP,Swisscom would have capitalized CHF 13 million and amortized CHF 5million for the current year.
Restructuring charges
During the current year, Swisscom recognized under IFRSrestructuring charges totaling CHF 1726 million. The followingschedule illustrates adjustments necessary to reconcile thesecharges to amounts determined under US GAAP.
| Restructuringcharges in accordance with IFRS | ||
| Personnel restructuringcharges | 1326 | |
| Write-down of long-livedassets | 316 | |
| Misc. restructuring charges | 84 | |
| Total in accordance with IFRS | 1726 | |
| Adjustments to restructuringcharges to accord with GAAP | (205) | |
| Restructuring charges inaccordance with GAAP | 1521 | |
Reconciliation of restructuring charges | ||
| Restructuring chargesaccording to US GAAP consist of the following: | ||
| Personnel restructuringcharges | 1228 | |
| Write-down of long-livedassets | 209 | |
| Misc. restructuring charges | 84 | |
| Restructuring charges inaccordance with GAAP | 1521 | |
Depreciation expense
Due to the difference in carrying value of long-lived assetsafter write-downs describe in (b), there is a difference in theamount of depreciation expense taken under IFRS and GAAP. Anadjustment is made for the current year to record an additional CHF5 million of depreciation under US GAAP.
Capitalization of software
Swisscom has expensed software costs as incurred. For US GAAPpurposes, external consultant costs incurred I the development ofsoftware for internal use has been capitalized. These costs arebeing amortized over a 3 year period. The capitalization ofsoftware costs accords with common practice in the UStelecommunications industry.
Swisscom has capitalized, as disclosed in the reconciliation ofnet income (loss) and shareholdersâ equity to US GAAP, CHF 220million and amortized CHF 37 million in the previous year andcapitalized CHF 370 million and amortized CHF 188 million in thecurrent year.
Restructuring charges of affiliates
During the current year, Swisscomâs share of personnel and otherrestructuring charges recorded by affiliates amounted to CHF 50million. These restructuring charges do not meet all therecognition criteria contained in EITF 94-3 and therefore cannot beexpensed in the current year, under US GAAP.
