Question

Fast Ltd. is a public company that prepares its consolidated financial statements in accordance with IFRS. Its net income in Year 2 was $200,000, and shareholders' equity at December 31, Year 2, was $1,800,000. Mr. Lombardi, the major shareholder, has made an offer to buy out the other shareholders, delist the company, and take it private. Thereafter, the company will report under ASPE. You have identified the following two areas in which Fast's accounting principles differ between IFRS and ASPE. 1. Fast incurred research and development costs of $500,000 in Year 1. Thirty percent of these costs were related to development activities that met the criteria for capitalization as an intangible asset. The newly developed product was brought to market in January, Year 2 and is expected to generate sales revenue for 10 years. 2. Fast acquired equipment at the beginning of Year 1 at a cost of $100,000. The equipment has a five-year life with no expected residual value and is depreciated on a straight-line basis. At December 31, Year 1, Fast compiled the following information related to this equipment: Expected future cash flows from use of the equipment Present value of expected future cash flows from use of the equipment Net realizable value $85,000 75,000 72,000

Answer 1

(a)

(i)   IFRS1 ASPE2

Development costs @ Dec 31, Yr 2 $135,000 $0

1$500,000*.30 - ($500,000*.30)/10 = $135,000 – only development costs are capitalized. (IAS 38.57)

2R&D costs are expensed in Year 1 under ASPE in order to minimize net income.

(ii) IFRS3 ASPE4

Equipment @ Dec 31, Yr 2 $56,250 $60,000

3Under IFRS (IAS 36), an asset is impaired at the end of Year 1 if the carrying amount of $80,000 ($100,000 – $100,000/5 years) exceeds the higher of assets value in use (discounted cash flows = $75,000 at Dec 31, Yr 1) and its FV less costs to dispose ($72,000). If impaired, the asset is written down to its value in use. The balance at Dec 31, Yr 2 is therefore determined using the $75,000 value in use at Dec 31, Yr 1 less one year of depreciation ($75,000/4 = $18,750).

4Under ASPE, there is no indicator of impairment if the undiscounted cash flows from its use ($85,000) are greater than the carrying amount, $80,000, at Dec 31, Yr 1. The balance under ASPE at Dec 31, Yr 2 is therefore $100,000 less two years of depreciation ($20,000 per year).

(b)

Net Income Year 2 under IFRS Less: additional depreciation under ASPE (20,000 - 18,750) Add: development cost amortization, not recognized under ASPE Net Income Year 2 under ASPE $200,000 (1,250) 15,000 $213.750 S/E Dec 31 Year 2 under IFRS Less development cost not capitalized under ASPE additional depreciation under ASPE (20,000 - 18,750) Add: impairment on equipment not recognized in Year 1 under ASPE S/E @ Dec 31, Year 2 under ASPE $1,800,000 (135,000) (1,250) 5,000 $1.668.750