ABCDE Corporation is a US based company that prepares its consolidated financial statements in accordance with US GAAP. The company reported income in 2016 of $2,100,000 and stockholders equity at December 31, 2016, of $8,800,000.

The CFO of ABCDE has learned that the US Securities and Exchange Commission is considering requiring US companies to use IFRS in preparing consolidated financial statements. The company wishes to determine the impact that a switch to IFRS would have on its financial statements and has engaged you to prepare a reconciliation of income and stockholders equity from US GAAP to IFRS. You have identified the following five areas in which BU 5525 Corporations accounting principles based on US GAAP differ from IFRS.

Inventory

Property, Plant and Equipment

Intangible assets

Research and development costs

Revenue Recognition

BU 5525 provides the following information with respect to each of these accounting differences.

Inventory

At year-end 2016, inventory had a historical cost of $440,000 and a replacement cost of $398,000. A selling price of $430,000, selling expenses of $12,000, and a normal profit margin of 10 percent.

Property, Plant and Equipment

The company acquired equipment on January 2, 2014 at a cost of $4.5 million. The equipment has a fifteen year life, no residual value, and is depreciated on a straight-line basis. On January 1, 2016, ABCDE determines the fair value of the asset (net of any accumulated depreciation) to be $4.2 million. In a switch to IFRS the company would use the revaluation model to determine the carrying value of property, plant and equipment.

Intangibles

As part of a business combination in 2011, the company acquired a brand with a fair value of $950,000. The brand is classified as an intangible asset with an indefinite life. At year- end 2016, the brand is determined to have a selling price of $680,000 with $35,000 in selling expenses. Expected future cash flows from continued use of the brand are $685,000 with a present value of $611,000.

Research and Development Costs

In a project to develop a new product the company incurred research and development costs totaling $1,350,000. BU 5525 is able to clearly distinguish the research phase from the development phase of the project. Research phase costs are $800,000, and development phase costs are $550,000. All of the IAS 38 criteria have been met for recognition of the development costs as an asset. This product was successfully brought to market in 2016 and is expected to be marketable for 6 years.

Revenue Recognition

The company entered into a contract in 2016 to provide management services to a long-term customer over a 48-month period. The fixed price is $900,000, and the company estimates that the project is 35 percent complete at the end of 2016.

Required: Prepare a reconciliation schedule to convert 2016 Income and December 31, 2016 stockholders equity from a US GAAP basis to IFRS using attached template. Ignore income taxes. For each item listed above and posted to the reconciliation schedule, prepare a brief note (similar to a financial statement footnote) explaining the adjustment, including supporting calculations.

TEMPLATE

Reconciliation from U.S. GAAP to FRS 2016 Income under U.S. GAAP Adjustments $2,100,00 Income under IFRS 2016 Stockholders' equity under U.S. GAAP Adjustments: $8,800,000 Stockholders' equity under IFRS Reconciliation from U.S. GAAP to FRS 2016 Income under U.S. GAAP Adjustments $2,100,00 Income under IFRS 2016 Stockholders' equity under U.S. GAAP Adjustments: $8,800,000 Stockholders' equity under IFRS