China Eastern Airlines (CEA) Corporation Limited presents two sets of financial statements in its annual report; one set is prepared in accordance with Chinese (PRC) accounting regulations, and one set is prepared in accordance with International Financial Reporting Standards (IFRS). The company also provides a reconciliation of consolidated profit/(loss) and consolidated net assets from PRC GAAP to IFRS. The following excerpt was taken from a recent annual report:
Significant differences between International Financial Reporting Standards ("IFRS") and PRC Accounting Regulations
(a) Under IFRS, other flight equipment is accounted for as fixed assets and depreciation charges are calculated over the expected useful lives of 20 years to residual value of 5% of cost/revalued amounts. Under PRC Accounting Regulations, such flight equipment is classified as current assets and the costs are amortized on a straight-line basis over a period of 5 years.
(b) This represents the difference on gain on disposal arising from different useful lives adopted on depreciation under IFRS and PRC Accounting Regulations.
Consolidated profit attributable to shareholders RMB'000
As stated in accordance with PRC audited statutory accounts……. 132,919
Impact of IFRS and other adjustments:
Adjustment (1) …………… 150,794
Adjustment (2) …………… (13,296)
Other adjustments …………… 271,296
As stated in accordance with IFRS …………… 541,713
Required:
a. Determine which adjustment, (1) or (2), relates to which item, (a) or (b), described in the excerpt. Explain your answer.
b. What impact would items (a) and (b) have on the reconciliation of net assets (stockholders' equity) from PRC GAAP to IFRS?