Question

Problem 11-22 (LO 11-9)

Mikkeli OY acquired a brand name with an indefinite life in 2015 for 45,400 markkas. At December 31, 2017, the brand name could be sold for 36,100 markkas, with zero costs to sell. Expected cash flows from the continued use of the brand are 47,600 markkas, and the present value of this amount is 35,100 markkas.

Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes.

Required:

1. Prepare journal entries for this brand name for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP.
2. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017 and December 31, 2018 conversion worksheet to convert IFRS balances to U.S. GAAP.

Answer 1

Intangible asset impairment under IFRS

a

According to IAS 36 on "Impairment of Assets" the assets is termed to have been impaired if the carrying amount is more than recoverable amount.

This happens when recoverable amount of an asset is more than (a) its fair value less disposable costs and (b) its value in use

The "value in use" mean that the future cash flows expected from an asset present values and for the given case, the value in use is 35,100, fair value is 36,100 and the impairment loss would be 45,400 markkas less 36,100 markkas and the journal entry is given below.

                       Particulars                                          DR                              CR

31 dec 17 Impairment Loss A/C 9,300

                       To Brand 9,300

(to recognize the impairment of a brand)

Intangible Asset impairment under U.S GAAP

According to the U.S GAAP, an asset is said to be impaired when the carrying amount is more than the future expected cashflows undiscounted to present. And in this question the expected cash flow to be generated by the brand is 47,600 markkas which exceeds the carrying amount of 45,400 markkas and hence brand is not impaired Under the US GAAP and hence no journal entry would be prepared

Explanation:

(b)

Conversion from IFRS to US GAAP -2017

To convert IFRS to GAAP the impairment value recognized by the company must be reversed an dthe carrying amount of the brand increased by 9,300 markkas, and the conversion entry is given as,

Date                          particulars                                           debit amount               credit amount

31-Dec-17                    Brand A/C 9300                           

                                   To impairment loss A/C 9300

Because there is no impairment loss under the US GAAP, entry is reversed by debiting the brand accounting and crediting the impairment loss account. With such entry, there is an increase in assets, net income and the retained earnings by 9,300 markkas.

Conversion from IFRS to US GAAP -2018

Date                          particulars                                           debit amount               credit amount

31-Dec-18                    Brand A/C 9300                           

                                   To impairment loss A/C 9300

Because there is no impairment loss under the US GAAP, entry is reversed by debiting the brand accounting and crediting the Retained Earnings Account.