Question

SaulGroup, Inc., a U.S.-based corporation, currently uses U.S. GAAP to prepare its consolidated financial statements. SaulGroup is considering switching to IFRS and asking for your help in assessing the impact this change will have on its financial statements. SaulGroup’s accounting principles differ from IFRS in the following areas– restructuring, pension plan, stock options, revenue recognition, and bonds payable. Instructions: Please respond to the following questions in each scenario:

1. Restructuring Provision

On December 1, 2017 the management of SaulGroup, Inc. announced its plan to close a technical support division in California and move it to Vietnam. All the jobs in this division will be eliminated by the end of 2018. To compensate the employees who would stay with the company until the last day of their position, the company offered a termination bonus of $15,000 to each employee. SaulGroup estimates it will pay the termination bonuses at the end of 2018 for a total of $450,000. The present value of the estimate termination bonus is $400,000.

a. How is the restructuring treated under (1) U.S. GAAP and (2) IFRS in 2017?

b. Prepare the necessary journal entries.

2. Pension Plan

In 2017, SaulGroup, Inc. made amendments to its pension plan. As a result, the company incurred $300,000 past service costs. Under the pension plan, there are 200 active employees with an average expected remaining working life of 10 years and no retirees.

a. How is the amount of past service costs treated in 2017 and subsequent years under (1) U.S. GAAP and (2) IFRS?

b. Prepare the necessary journal entries.

3. Stock Options

On January 1, 2017, SaulGroup, Inc. granted 2,000 stock options to its senior employees. The options vest in equal installments over three years with 1/3 vest in 2017, 1/3 in 2018, and 1/3 in 2019. The company is experiencing the cost of the options on a straight-line basis over the three-year period at $20,000 per year (2,000 options x $30 / 3 = $20,000)

a. How is the amount of compensation expense treated in 2017 and subsequent years under (1) U.S. GAAP and (2) IFRS?

b. Prepare the necessary journal entries.

4. Revenue Recognition

In 2017, SaulGroup, Inc. signed a fixed-fee contract to provide network security services which requires on premise server to Goodman LLC. for $120,000 in one year. The company has performed similar services in he past and estimated with a high degree of reliability that he project is 40% complete at the end of 2017.

a. How is the revenue on this service contract recognized in year 2017 under (1) U.S. GAAP and (2) IFRS 15?

b. Prepare the necessary journal entries.

5. Bonds Payable

On January 2018, SaulGroup Inc. issued $5,000,000 of 4% bonds at par value. The bonds will mature in five years on December 31, 2022. The costs of issuing the bonds were $300,000. Interest is paid on the bonds annually.

a. How will the expense be recognized in 2018 and 2019 under (1) U.S. GAAP and (2) IFRS?

b. Prepare the necessary journal entries.

Answer 1

Answer 1(a) - Treatment of Restructuring cost under US GAAP -

Various companies undergo restructuring due to various reasons. The reasons may vary from the acquisition of a new company, selling off subsidiary etc. A restructure is needed by a company to make financial adjustments to the present assets and liabilities. Many times a restructuring of cost is done to improve the business and recover financial losses. Restructuring charges may cost the company immediately but are beneficial in the long run. This cost is shown as a line item on the income statement and is used for calculation of net income. A restructuring charge will be written in financial analysis as decreasing a company's operating income and diluted earnings. The restructuring charge is purposely magnified or elaborated to create an expense reserve that can be used to offset ongoing operating expenses.

Treatment of Restructuring cost under IFRS 2017 -

Items that are clearly of an operating nature, for example - inventory write offs, restructuring or relocation expenses must not be included in operating profit simply because they appear infrequently or unusually. Hence they should be a part of "other expenses" and operating profit would be a subtotal after considering other expenses in the Profit and loss account.

Answer 2(a) - Treatment of Past service cost under US GAAP -

ASC 715-35-15 requires past service cost, including costs related to vested benefits, to be initially recognized in Other Comprehensive Income (OCI) with subsequent charging to the net periodic post-retirement benefit cost.This subsequent charge to the net periodic benefit cost should be determined, at a minimum, by assigning an equal amount of past service cost to each remaining year of service to full eligibility date of each plan participant active at the date of the amendment who was not yet fully eligible for benefits at that date. The portion of prior service cost to be recognized in net periodic postretirement benefit cost in each of those future years is weighted based on the number of those plan participants expected to render service in each of those future years. It should be noted that the above is only the minimum amount of Past Service Cost that should be charged to the Net Periodic Benefit Cost.

Treatment of Past service cost under IFRS -

As per IAS 19, Past service cost should be recognised immediately as an expense in the statement of profit and loss. An entity shall recognise past service cost as an expense at the earlier of the following dates -

- when the plan amendment or curtailment occurs; and

- when the entity recognizes related restructuring costs or termination benefits.

Answer 3(a) - Treatment of Stock option under US GAAP -

Shares in leveraged ESOPs are measured at the fair value as of the dates the shares are committed to be released to participant accounts.Shares in non-leveraged ESOPs are measured at fair value as of the dates the shares are contributed to or committed to be contributed to the ESOP. Vesting of the shares is not taken into consideration in the recognition of compensation cost.ASC 718-40-45-3 provides specific guidance on how leveraged and nonleveraged ESOP shares should be accounted for in the earnings per share calculation.

Treatment of Stock option under IFRS -

ESOP shares are measured at fair value as of the grant date.Vesting is important in determining the period over which compensation cost is recognized.No specific guidance is provided on the treatment of shares held by an ESOP. Treatment for calculating earnings per share is consistent with other share-based payment plans

Answer 4(a) - Treatment of revenue recognition under service contract (US GAAP)

Revenue from service arrangements should not be recognized until earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:

• There is persuasive evidence of an arrangement.
• Service has been rendered.
• The sales price is fixed or determinable.
• Collectability is reasonably assured.

Service revenue is usually recognized on the basis of the proportional performance as of the balance sheet date, but other methods may be more appropriate depending on the specific facts and circumstances of the arrangement

Treatment of revenue from services under IFRS -

Under IFRSs, when the outcome of a service arrangement can be estimated reliably, revenue is recognized by reference to the stage (percentage) of completion of the transaction as of each balance sheet date. That is, revenue is recognized on the basis of the percentage of work completed as of the reporting date.