Polycom Corporation is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. The company reported after-tax income in 2022 of $700,000 and stockholders equity at December 31, 2022, of $8,000,000. Polycoms marginal tax rate for 2022 is 21%. The CFO of Polycom has learned that the U.S. Securities and Exchange Commission is considering givingU.S. companies the option of using either U.S. GAAP or 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 GAAP to IFRS. You have identified the following five areas in which Polycoms accounting principles based on U.S. GAAP differ from IFRS.

1. Inventory
2. Property, plant and equipment
3. Purchased intangible assets
4. Research and development costs

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

1. Inventory

At year-end 2022, inventory had a historical cost of $250,000, a replacement cost of $180,000, a net realizable value of $190,000, and the normal profit margin was 20 percent. Polycom uses FIFO method of accounting for inventory.

1. Property, Plant, and Equipment

The company acquired a building at the beginning of 2022 at a cost of $2,750,000. The building has an estimated useful life of 25 years, an estimated residual value of $250,000, and is being depreciated on a straight-line basis. At the end of 2022 the building was appraised and determined to have a fair value of $2,700,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use the revaluation model (Fair Market Value) in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.

1. Purchased Intangible Assets

As part of a business combination in 2022, the company acquired a brand with a fair value of

$40,000. The brand is classified as an intangible asset with an indefinite life. At year-end 2022, the brand is determined to have a selling price of $35,000 with zero cost to sell. Expected future cash flows from continued use of the brand are $42,000 and the present value of the expected future cash flows is $36,000.

1. Research and Development Costs

The company incurred research and development costs of $200,000 in 2022. Of this amount, 40% related to development activities. As of the end of the 2022, development of the new product had not been completed.

Required:

1. Prepare a reconciliation schedule (use the templates on the following pages) to convert 2022 after-tax income and December 31, 2022, stockholders equity from a U. S. GAAP basis to IFRS. Prepare a note to explain each adjustment made in the reconciliation schedule.
2. Compare the return on equity based on US GAAP to the return on equity based on IFRS.

Item	Adjustment	Explanation (including relevant IFRS/IAS standard)
After-tax Operating Income (U.S. GAAP)	$700,000
Inventory
PP&E
Purchased Intangible Assets
R&D
After-tax Operating Income (IFRS)

Item	Adjustment	Explanation (including relevant IFRS/IAS standard)
Shareholders Equity (U.S. GAAP)	$8,000,000
Inventory
PP&E
Purchased Intangible Assets
R&D
Shareholders Equity (IFRS)

Return on Equity (ROE) Comparison: