Question

Mikkeli OY acquired a brand name with an indefinite life in 2015 for 43,200 markkas. At December 31, 2017, the brand name could be sold for 35,200 markkas, with zero costs to sell. Expected cash flows from the continued use of the brand are 45,500 markkas, and the present value of this amount is 34,200 markkas. Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes. Required: Prepare journal entries for this brand name for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017 and December 31, 2018 conversion worksheet to convert IFRS balances to U.S. GAAP.

A)

1. Record the entry for the loss on impairment of brand as per IFRS.

2. Record the entry for the loss on impairment of brand as per U.S. GAAP.

B)

1. Record the conversion entry needed for 12/31/17.

2. Record the conversion entry needed for 12/31/18.

Answer 1

A.

1. Under IFRS,

• Impairment losses need to be recognized when the asset’s Book Value > asset’s Recoverable amount.

43,200 markkas-35200 markkas= 8000 markkas

Book value of Mikkeli OY is 43,200 markkas

Asset’s Recoverable Amount = higher of (Fair value – Selling costs) OR value in use.

Fair value=35,200 markkas

Value in use=34200 markkas

Higher is Fair value=35,200 markkas

The value in use is calculated by discounting future cash flows expected from the continued use of the asset.

2. Under U.S. GAAP,

Impairment loss = asset’s book value – asset’s fair value (or the present value of the future cash flows expected).

asset’s book value=43200 markkas

asset’s fair value=34200 markkas

Impairment loss=43200 markkas-=34200 markkas=9000 markkas

B.conversion entry needed for 12/31/17

Impairment loss a/c dr.

To Goodwill A/c

conversion entry needed for 12/31/18

Impairment loss a/c dr.

To Goodwill A/c