Overview

Almirall, S.A. is a publicly-held manufacturer and distributor of medical supplies and related equipment. The company is based in Barcelona, Spain and is listed on the Bolsa de Madrid exchange. In February 2021, S. Snell Inc., a U.S.-based pharmaceutical company listed on the New York Stock Exchange, announced a tender offer to purchase 100% of the outstanding shares of Almirall.

Almirall prepares its consolidated financial statements in accordance with IFRS. However, the CFO of Snell has asked management of Almirall for an Income Statement for the year ended December 31, 2020 prepared in accordance with U.S. GAAP. As Director of Accounting Policy at Snell with expertise in global accounting standards and practices, you have been asked to assist the Controller at Almirall in preparing the US GAAP Income Statement.

After detailed discussions with the Controller at Almirall, you identify the key differences between IFRS and U.S. GAAP for 2020. Your summary is below:

IAS 2: Inventories

Almiralls ending inventory at December 31, 2020 was $200,000, which represents historical cost using the Average Cost Method. Further analysis indicates the following: (1) replacement cost of $150,000, (2) net realizable value of $175,000, and (3) normal profit margin is 20 percent of NRV. For U.S. GAAP purposes, Snell uses the Lower of Cost or NRV (LCNRV) method to measure its inventories. (As noted in the text, the inventory items are related to similar product lines and, accordingly, the tests can be prepared at the Group level, rather than an item-by-item basis).

IAS 16: PP&E

Almirall uses the straight-line method to depreciate its property, plant & equipment. Almirall has four PP&E categories: (1) land, (2) buildings, (3) machinery & equipment, and (4) furniture & fixtures. The buildings were purchased on January 3, 2019 for $4,000,000, have an estimated useful life of 25 years and an estimated residual value of $500,000. The company elected the revaluation model under IAS 16 to determine the carrying value of its buildings subsequent to acquisition.

In January 2020, the building was appraised, and was determined to have a fair value of $4,628,000. There was no change in the estimated useful life or residual value of the building. Almirall determined that a new appraisal was not warranted at December 31, 2020. Almirall uses the historical cost method for all other categories of PP&E.

IAS 36: Impairment

In 2014, Almirall acquired a trademark at a cost of $145,000. The trademark is classified as an intangible asset with an indefinite life. Using outside consultants, the trademark is determined to have a selling price (net of costs to sell) of $125,000 at December 31, 2020. Expected future cash flows from continued use of the trademark are $137,000 and the present value of the expected future cash flows is $110,000. (The fair value of the trademark is also estimated to be $110,000 based on a consultants report). Almirall is required to perform an annual impairment test on this trademark.

IAS 38: Development Costs

During 2020, Almirall incurred research and development costs on a new product of $400,000, of which 60% were related to development activities that occurred subsequent to reaching the technical feasibility of the project. As of the end of 2020, the development phase of the new product had not yet been completed.

IAS 23: Borrowing Costs

On January 1, 2020, Almirall borrowed $2,000,000 at an interest rate of 4 percent to finance the construction of a new office building expected to cost $2,000,000. Almirall temporarily invested the proceeds until the cash was needed for construction purposes. Interest income earned during 2020 was $4,500. During 2020, expenditures of $1,500,000 were incurred and the weighted-average expenditures were $1,000,000. The project will be completed and the loan will be paid in late 2021. A foreign exchange gain of $5,000 was also recognized on the borrowing as a result of the movement of exchange rates during the period between the US Dollar and the Euro. (Use US dollars as presented; no foreign exchange calculations are required). Also note that interest expense, related interest income and exchange gain/loss have already been recorded in the income statement.

IFRS 2: Stock Options

Stock options were granted to key employees on January 1, 2019. The fair value per option was $12 on the grant date, and a total of 30,000 options were granted. The options vest in equal installments (i.e., graded vesting) over three years: one-third at the end of 2019, one-third at the end of 2020, and one-third at the end of 2021.

For U.S. GAAP purposes, the Controller has asked you to use the straight-line method to recognize compensation expense related to the stock options.

Required

Using the information provided, prepare Amiralls Income Statements for 2020 under IFRS and US GAAP. You are to assume that Amiralls Net Income for IFRS and US GAAP purposes is $9,500,000 before consideration of the above items. For each adjustment, you must include a footnote that explains the adjustment and shows the related calculations. Ignore income taxes. All numbers are in U.S. dollars.

Almirall, S.A.

Comparative Income Statements under IFRS and U.S. GAAP

For the year ended December 31, 2020

	IFRS	US GAAP
Net Income under IFRS and US GAAP before accounting differences	$9,500,000	$9,500,000
Add (Subtract) Adjustments:
Adjusted Net Income under IFRS and U.S. GAAP	XXXXXX	XXXXXX