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 stockholders’equity 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 stockholders’ equity from U. S. GAAPto IFRS. You have identified the following six areas in whichBessrawl’s 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 stockholders’ equity from a U.S.GAAP basis to IFRS. Ignore taxes. Prepare a note to explain eachadjustment made in the reconciliation schedule.
