Question

CASE ONE, KIKI CORPORATION

Kiki Corporation, a US company, prepares its financial statements under US GAAP. For 2014, the company reported $1,000,000 income and stockholders’ equity balance of $8,000,000 on December 31, 2014. In preparation for a possible adoption of IFRS by the US companies, the management wishes to explore possible impacts of the move. You are engaged to prepare a reconciliation schedule to convert 2014 income as well as stockholders’ equity on December 31, 2014 from US GAAP basis to IFRS. The following information is provided by the company’s accounting department:

In 2010, the company acquired a brand with a fair value of $50,000. The brand was booked as an intangible asset with an indefinite life. At the end of 2014, the brand had a selling value of $46,000 with zero selling expense. Expected future cash flows from continued use of the brand are $52,000 and the present value of the expected future cash flows is $43,000.

In 2014, Kiki Corporation incurred research and development costs of $200,000. Of this amount, 45% 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 2014, development of the new product had not been completed.

At the end of 2014, Kiki Corporation had an inventory item with a historical cost of $250,000, a replacement cost of $170,000, a net realizable value of $190,000, and a normal profit margin of 20 percent.

In January 2012, the company realized a gain on the sale-and-leaseback of an office building in the amount of $150,000. The lease is accounted for as an operating lease, and the term of the lease is five years.

The company acquired a building at the beginning of 2013 at a cost of $2,750,000. The building has an estimated useful life of 25 years, an estimated residual value of $500,000, and is being depreciated on a straight-line basis. At the beginning of 2014, the building was appraised and determined to have a fair value of $3,250,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.

Make sure your reconciliation statement is accompanied by an adequate explanation and reference for every one of your adjustments. Ignore income taxes.

Answer 1

	Reconciliation from U.S. GAAP to IFRS
					2014
	Income from U.S. GAAP				1000000
	Adjustments :
	Impairement loss on Intangible				-4000
	Reversal of Deferred development cost (to be capitalised)				90000
	Inventory				20000
	Reversal of amortization of deferred gain on sale and leaseback				-30000
	Accumulated depreciation on the Building				-24583
	Income Under IFRS				1051417
	Stockholder's equity under U.S. GAAP
	Adjustments :				8000000
	Impairement loss on Intangible				-4000
	Recognition of deferred development costs				90000
	Adjustments to inventory				20000
	Recognition of gain on sale and leaseback				150000
	Reversal of accumulated depreciation(30000*3)				-90000
	Revaluation of Building				590000
	Accumulated depreciation on the Building				-24583
	Stockholder's equity under IFRS				8731417
	Explanation of adjustments :
1)	Brand Value	50000	2010
	Selling price	46000	2014
	Expected future cash flows	52000
	Present value of expected cash flows	43000
	Impairment loss on intangible asset	50000-46000	4000
2)	Reseach and Development Costs
	Reseach and Development Costs	200000	2014
	In U.S. GAAP the research and development costs are generally expenses and in IFRS they are to be capitalised
	45% of 200000	90000
	The above cost will now be capitalised
3)	Under U.S. GAAP inventory, company reports inventory at lower of cost or market
	Cost	250000
	Market	170000
	Lower of above	170000
	Under IFRS it is lower of cost or NRV
	Cost	250000
	NRV	190000
	Lower of above	190000
4)	Sale and lease back
	Gain realised on sale and lease back	150000
		30000
	As per U.S GAAP the gain is amortized for the period of lease
	In IFRS the gain is capitalised
5)	Building	2750000	2013
		25 yrs
	Residual	500000
	Depreciation as per U.S. GAAP	90000
	2014
	FMV of Building	3250000	500000
	Depreciation based on FMV	(3250000-500000)/24
	Depreciation as per IFRS	114583.3333
		-24583.33333
	Revaluation	3250000-2660000
		590000