International Accounting Case
XYZ Corporation is a Swiss-based company that prepares its consolidated financial statements in accordance with IFRS. The company reported income in 2018 of $1,000,000 and stockholders’ equity at December 31, 2018, of $7,000,000.
The CFO of XYZ has learned that the U.S. Securities and Exchange Commission is accepting financial statements of non-US firms using either US GAAP or IFRS in preparing consolidated financial statements. The CFO is curious to determine the impact that switch from IFRS to U.S. GAAP would have on its financial statements and has engaged you to prepare a reconciliation of income and stockholders’ equity from IFRS to U.S. GAAP. You have identified the following five areas in which XYZ’s accounting principles based on IFRS differ from U.S. GAAP.
XYZ provides the following information with respect to each of these accounting differences.
Inventory
At year-end 2018, inventory had a historical cost of $613,000, Information, such as replacement cost, selling value, sales commission, and profit margin for each individual product is provided below (XYZ company is conservative and calculating based on item-by-item of inventory):
Product |
Cost |
Replacement Cost ( Fair Value) |
Selling Value |
Sales commission |
Normal Profit Margin |
Television |
$160,000 |
$130,000 |
$170,000 |
10% |
20% |
Camera |
164,000 |
165,000 |
$180,000 |
10% |
15% |
Laptop |
110,000 |
91,000 |
$120,000 |
10% |
8% |
Computer |
$179,000 |
181,000 |
200,000 |
10% |
18% |
Total |
$613,000 |
Property, Plant, and Equipment
The company acquired a building at the beginning of 2014 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 straight-line basis. At the beginning of 2017 the building was appraised and the following information was available for this building with the same residual value :
Replacement (fair market value) $2,370,000
Undiscounted future cash-flow from use of this building $2,400,000
Discounted future cash-flow from use of this building $2,200,000
Net realizable value of the building if it is sold $2,100,000
At the beginning of 2018 the fair market value of the building was $2,500,000 and the firm decided to change the building to its fair value. Assuming the residual value is still $250,000.
Intangible Assets
As part of a business combination in 2012, the company acquired a brand with a fair value of $41,000. The brand is classified as an intangible asset with an indefinite life. At year-end 2018, the brand is determined to have a selling price of $37,000 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 2018. 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 2018, development of the new product had not been completed.
Sale-and-Leaseback
In January 2018, the company has a gain (sales value – cost) on the sale-and-leaseback of an office building in the amount of $180,000. The lease is accounted for as an operating lease, and the term of the lease is 5-years.
Required:
Prepare a reconciliation schedule to convert 2018 income and December 31, 2018 stockholders’ equity from IFRS basis to U.S. GAAP. Ignore income taxes. Prepare a note to explain each adjustment made in the reconciliation schedule.
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