Question 2

Top Company (TC) is a U.S.based company that prepares its consolidated financial statements in accordancewith U.S. GAAP. The company reported income of $1.2 million in 2011 andshareholders equity as at 31 December 2011 of $9 million. The CFO wishes to evaluatethe impact and implication of such a switch to IFRS on financial statements. Hehas engaged you to prepare a reconciliation of income and shareholders equityfrom U.S. GAAP to IFRS. You have identified the areas in which Rich Companysaccounting principles based on U.S. GAAP differs from that of IFRS: Inventory,Property, Plant and Equipment, Intangible assets, Research and developmentcost, Sales and Lease back transaction. TC provides the following informationwith respect to each of these accounting differences.

Sales & Leaseback: InJanuary 2009, the company realized a gain on the sale and leaseback of anoffice building in the amount of $150,000. The lease is accounted for as anoperating lease and the term of lease is 5 years.

Intangible Assets: As part of abusiness combination in 2008, the company acquired a brand with a fair value of$40,000. The brand is classified as an intangible asset with an indefinitelife. At year end 2011, the brand is determined to have a selling price of $35,000with zero cost to sell. Expected future cash flows from continued use of thebrand are $42,000 and the present value of the expected future cash flows is$34.000.

Inventory: At year ended 2011,inventory has a historical cost of $250,000, a replacement cost of $180,000, anet realizable value of $190,000, and a normal profit margin of 20%.

Property, Plant and Equipment:The company acquired a building at beginning of 2010 at a cost of $2,750,000.The building has an estimated useful life of 25 years, an estimated residualvalue of $250,000, and is being depreciated on a straight line basis. At thebeginning of 2011, the building was appraised and determined to have a fair

valueof $3,250,000. There is no change in estimated useful life or residual value.In a switch to IFRS, the company would use the revaluation model in IAS 16 todetermine the carrying value of Property, plant and equipment subsequent toacquisition.

Research and Development Costs:The company incurred research and development costs of $200,000 in 2011. Ofthis amount, 40% related to development activities subsequent to the point atwhich criteria have been met indicating that an intangible asset existed. As ofthe end of the 2011, the development of the new product has not been completed.

Required:

Compare the differences betweenIFRS and U.S. GAAP and prepare a reconciliation schedule to convert 2011 incomeand 31 December 2011 shareholders equity from US GAAP basis to IFRS. Ignoreincome taxes.

Show the calculation andexplanation for each item in the schedule.

(25 marks)