Question

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 2017 of $1,000,000 andstockholders’ equity at December 31, 2017, 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 financialstatements 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’saccounting 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 2017, 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 2016 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 2017, 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 2014, 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 2017, 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.

2

Research and Development Costs
The company incurred research and development costs of $200,000 in 2017. 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 2017, development of the new product had not been completed.

Sale-and-Leaseback
In January 2015, 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

Prepare a reconciliation schedule to convert 2017 income and December 31, 2017, 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