Question

2. Plant, Property and Equipment

On January 2, 2016, SaulGroup purchased equipment at a cost of $5 million. The equipment has a five-year life, no residual value, and is depreciated on a straight- line basis. On January 2, 2018, the fair value of the equipment (net of any accumulated depreciation) is determined as $6 million.

a. If the revaluation model is applied for measurement subsequent to initialrecognition under IFRS, what is the impact the equipment has on SaulGroup’s

income in Years 2016 – 2020 using (1) IFRS and (2) U.S. GAAP?
b. How would you explain the difference in income, total assets, and total

stockholders’ equity using IFRS and U.S. GAAP over the period of Years2016 to 2020?

3. Research and Development

In 2016, SaulGroup spent $1 million in developing Product Y. Of this amount, 30% related to development cost (IAS 38 criteria had been met for recognition of the development costs as an intangible asset). The development of Product Y was complete, and the product was available for sale on January 2, 2017. Sales of the product are expected to continue for five years. Straight-line method is used.

a. What is the impact the research and development costs have on SaulGroup’sin 2016 and 2017 income under (1) IFRS and (2) U.S. GAAP?

b. How would you explain the difference in income, total assets, and totalstockholders’ equity related to Product Y using IFRS and U.S. GAAP over the year 2016 and 2017?

Answer 1

2 a) Revaluation model is only allowed under IFRS and not under US GAAP

(i) Under US GAAP ASC 360, the value of a fixed asset cannot be increased even if the fair value of the asset goes up, so there will be no change as the asset will still be carried at the historical value. The asset will continue to charge depreciation expense in all the five years.

(ii) Under IFRS, according to IAS 16 a company may choose to opt for revaluation of their fixed asset and increase the value of their asset to their fair value. The revaluation gain would be recognized in the comprehensive income statement and the revaluation reserve would be added to the equity the gain on revaluation equal to 3 million (net fair value - net carrying value) will be recognized in other comprehensive income so the other comprehensive income will increase but the net income will be unchanged in the year of gain.

The net income under both will be the same under both for 2016, 2017, 2018 but in 2019 and 2020 the depreciation expense will be higher as it will be charged on the new higher fair value, so the depreciation expense for 2019 and 2020 under IFRS will be 3 million compared to 1 million under US GAAP so the net income under IFRS will be 2 million lower than US GAAP

(b) Till 2016 and 2017 it will be the same but in 2018 and 2019 equity and total assets will be higher under IFRS as the revaluation surplus will be added to equity and the equipment's value will also be increased. In 2020 as the carrying value of the equipment becomes 0 and due to the change in depreciation expense and ultimately income, the equity and assets will become same again(ignoring any tax effects).

2(a) Research costs are expensed under both IFRS and US GAAP. Development cost are capitalised under IFRS though but not under US GAAP.

According to ASC 730 under US GAAP,, research cost are expensed as incurred and so are most of the development costs(unless the costs are associated with the development of a software for internal use)

According to IAS 38 under IFRS, research cost are expensed as incurred. Development cost though are capitalised but only after the technological feasibility of the project has been established.

So $300,000 will be capitalised under IFRS and $700,000 will expensed while complete $1,000,000 willbe expensed under US GAAP

(b) In 2016 IFRS's net income will be higher than that under US GAAP by $300,000 as full develpomental costs are expensed under US GAAP but not under IFRS. The assets and equity will also be more under IFRS than under US GAAP.

In 2017 under IFRS depreciation will be charged on the product capitalised the net income will be lower under it than under US GAAP. The assets and stockholders equity will be higher under IFRS though.

Please like the solution if satisfied and drop a comment in case of any doubts=.

Thankyou