1). Inventory: – Under U. S. GAAP, Bessrawl Corporation is allowed to report inventory on its balance sheet at lower of cost or market. Market in this case is defined as replacement cost ($180,000) with net realizable value ($190,000) as ceiling and net realizable value minus a normal profit ($190,000 – $38,000 = $152,000) as a floor. Cost of inventory is $250,000. Since market is lower than cost, inventory is written down to replacement cost of $180,000 and reported on the company’s balance sheet at December 31, 2011. This also led to a loss of $70,000 reported on the company’s income statement for December 31, 2011.
However, under IFRS, Bessrawl Corporation had the option to report inventory on its December 31, 2011 balance sheet at lower of cost of $250,000 and net realizable value of $190,000. Since the net realizable value is lower than the cost, the company would have reported $190,000 on its balance sheet for December 31, 2011 and a loss of $60,000 on its income statement for the same period. Thus, under IFRS, Bessrawl Corporation income would be $10,000 larger than reporting under U. S. GAAP, stockholder equity will also be $10,000 larger under IFRS than under U. S.
GAAP. 2). Building: – Under U. S. GAAP, Bessrawl Corporation reported depreciation expense of $100,000 each on 2010 and 2011 financial statements. Depreciation expense = ($2,750,000 – $250,000)/25 yrs = $100,000/yr. Under IFRS revaluation model, the depreciation expense on the building was $100,000 in 2010 and the carrying value was $2,650,000 beginning 2011. The building was then revalued to $3,250,000, at the beginning of 2011 resulting in revaluation surplus of $600,000. The depreciation expense for 2011 would be ($3,250,000 – $250,000)/24 yrs = $125,000.
So, under IFRS, Bessrawl Corporation would incur additional depreciation expense of $25,000 in 2011, leading to smaller income than under U. S. GAAP. Stockholders’ equity in 2011 will be $575,000 larger under IFRS than under U. S. GAAP. This is equal to the revaluation surplus of $600,000 less the additional depreciation expense of $25,000 in 2011 under IFRS, which will reduce retained earnings. 3). Intangible Assets: – Under U. S. GAAP, an asset is impaired when its carrying amount exceeds the future cash flows (undiscounted) expected to arise from its continued use and disposal of the asset.
The brand acquired in 2011 has a carrying amount of $40,000 and future expected cash flows are $42,000, so it is not impaired under U. S. GAAP. Under IFRS, an asset is impaired when its carrying amount exceeds its recoverable amount, which is the greater of net selling price and value in use. The brand’s recoverable amount is $35,000; the greater of net selling price of $35,000 and value in use (present value of future cash flows) of $34,000. As a result, an impairment loss of $5,000 would be recognized under IFRS. IFRS income and retained earnings would be $5,000 less than U.
S. GAAP income and retained earnings. 4). Research and Development Costs: – Under U. S. GAAP, research and development costs in the amount of $200,000 would be expense and recognized in determining 2011 income. Under IFRS, $120,000 (60% of $200,000) of research and development costs would be expensed in 2011, and $80,000 (40% of $200,000) of research and development costs would be capitalized as an intangible asset (deferred research and development costs). So the IFRS-based income at December 31, 2011would be $80,000 larger than under U. S. GAAP income.
And since the new product has not been brought to market, there is no amortization of the deferred research and development costs under IFRS in 2011. 5). Sale-and-Leaseback: – Under U. S. GAAP, the gain on the sale-and-leaseback (operating lease) is deferred and amortized in income over the life of the lease. With a lease term of five years, $30,000 of the $150,000 gain would be recognized at December 31, 2011 and $30,000 each would be recognized in 2009 and 2010, resulting in a cumulative amount of $90,000 retained earnings at December 31, 2011.
Meanwhile, under IFRS, the entire gain on the sale-and-leaseback of $150,000 accounted as an operating lease was recognized immediately in income in 2009. This will result in an increase in retained earnings of $150,000 in that year. No gain would be recognized in 2011. As a result, IFRS income at December 31, 2011 would be $30,000 smaller than under U. S. GAAP income, but stockholders’ equity at December 31, 2011 under IFRS would be $60,000 larger than under U. S. GAAP.