Bessrawl Corporation is a U.S.-based company that prepares its consolidated financialstatements in
accordance with U.S. GAAP. The company reported income in 2020 of $1,000,000 and
stockholders’ equity at December 31, 2020, 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 is 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 2020, 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 2019 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 2020, 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 reevaluation 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 2017, 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 2020, 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 2020. Of this amount, 40
percent related to development activities subsequent to the point at which criteria had been met
indicating that an intangible asset existed. As of the end of the 2020, development of the new
product had not been completed.

3

Sale-and-Leaseback
In January 2018, the company realized a gain of the sale-and-leaseback of an office building in the
amount of $150,000. The lease is accounted for as an operating lease, and the term of the lease is
five years.

Required
a) Prepare a reconciliation schedule to convert 2020 income, and December 31, 2020, stockholders’
equity from a U.S. GAAP basis to IFRS. Ignore income taxes. Prepare a note to explain each
adjustment made in the reconciliation schedule.
b) Discuss each relevant accounting standards with references to journal article(s) by using
disclosure examples of companies.

What are consolidated financial statements? When mustconsolidated financial statements be prepared by the investorcompany? On the investor company's consolidated balance sheet, instockholders' equity, what does the account balance of the"Noncontrolling Interest" account balance represent?

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 stockholders’ 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 Swisscom’s USGAAP reconciliation, also is provided.

Required

Use the information in Note 27 to restate Swisscom’sconsolidated 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/shareholders’ equity

Operating income/total shareholders’ equity

Current assets/current liabilities

Total liabilities/total shareholders’ equity

Which of these ratios is most (least) affected by the accountingstandards used?

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.

Reconciliation of shareholders’ equity from IFRS toGAAP

The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholders’ equity in accordance with USGAAP to the amounts determined under IFRS as at December 31 of thecurrent year.

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.

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 shareholders’ 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, Swisscom’s 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.

Access the financial statements from the most recent annualreport of a foreign company and a domestic company with which youare familiar to and

a. Determine the accounting principles (GAAP) the foreign anddomestic companies use to prepare financial statements.
b. Determine whether the foreign and domestic companies provide aset of financial statements that includes the same components(e.g., consolidated balance sheet, consolidated income statement,and consolidated cash flows statement).
c. List five format differences in the companies’ incomestatements.
d. List five format differences in the companies’ balancesheets.
e. Note any terminology differences that exist between the twocompanies’ income statements and balance sheets.
f. Assess whether the scope and content of the information providedin the notes to the financial statements is similar between the twocompanies.
g. Compare the overall presentation of the financial statements andnotes to the financial statements between the two companies. Thankyou