A1 Systems Inc. A1 Systems Inc. is a U.S.-based company that prepares its consol
ID: 2341641 • Letter: A
Question
A1 Systems Inc.
A1 Systems Inc. is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. The company reported income of $8,000,000 in 2014 and stockholders’ equity of $30,000,000 as of December 31, 2014.
The CFO of A1 Systems has learned that the U.S. Securities and Exchange Commission (SEC) is considering requiring U.S. public firms 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 your team to prepare a reconciliation of income and stockholders’ equity from U.S. GAAP to IFRS. Your team has identified the following five major areas in which accounting principles based on U.S. GAAP differ from those of IFRS.
Inventory
Revaluation of property, plant, and equipment
Impairment of assets
Research and development costs
Sale-and-leaseback transaction
A1 Systems provided the following information with respect to each of these areas.
Inventory
At year-end 2014, inventory had a historical cost of $5,000,000, a replacement cost of 4,750,000, a net realizable value of $4,800,000, and a normal profit margin of $900,000.
Property, plant, and equipment
The company acquired a building on 1/1/2012 at a cost of $10,000,000. The building has an estimated useful life of 30 years, an estimated residual value of $1,000,000, and is being depreciated on a straight-line basis. On 1/1/2013, the building was appraised and determined to have a fair value of $11,150,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use the revaluation model to determine the carrying value of PP&E subsequent to acquisition.
Impairment of Assets
The company purchased a piece of equipment on 1/1/2014 at a cost of $1,000,000. The equipment is expected to have a useful life of 10 years and no residual value. The straight-line method of depreciation is used. Technological innovations took place in the industry during 2014. At year-end 2014, the equipment is determined to have a selling price of $800,000 with zero-cost to sell. Expected future cash flows from continued use of the equipment are $950,000, and the present value of the expected future cash flows is $825,000.
Research and Development Costs
The company incurred research and development costs of $1,000,000 in 2014. Of this amount, 30 percent were related to development activities subsequent to the point at which criteria had been met indicating that an intangible asset existed. As of the end of the 2014, development of the new product had not been completed.
Sale-and-leaseback
On 12/31/2014, the company sold and leased back an office building whose carrying value was $2 million. The company received a payment of $2.4 million, which was the fair value of the building. The transfer of the building is considered a sale, and the term of the lease is 18 years. The PV value of future lease payments was $1.5 million.
Required:
Using the template attached to this case, prepare a reconciliation schedule to convert 2014 income and December 31, 2014 stockholder’s equity from a U.S. GAAP basis to IFRS. Ignore income taxes. Prepare a note to explain each adjustment made in the reconciliation schedule.
A1 Systems Inc. - Reconciliation from U.S. GAAP to IFRS
2014
Income under U.S. GAAP
$X,XXX
Adjustments:
Reversal of writedown of inventory to replacement cost
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
Income under IFRS
$X,XXX
2014
Stockholders’ equity under U.S. GAAP
$X,XXX
Adjustments:
Reversal of writedown of inventory to replacement cost
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
Stockholders’ equity under IFRS
$X,XXX
Explanation of Adjustments
Inventory. Under U.S. GAAP, the company reports inventory on the balance sheet at the lower …In accordance with IFRS, the company would report inventory on the balance sheet at the lower ... Due to the differences noted above, IFRS income would be $X,XXX smaller/larger than U.S. GAAP net income.
Revaluation of PPE. …
Impairment of assets. …
Research and development costs. …
Sale-and-leaseback transaction. …
2014
Income under U.S. GAAP
$X,XXX
Adjustments:
Reversal of writedown of inventory to replacement cost
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
…
$X,XXX
Income under IFRS
$X,XXX
Explanation / Answer
Particulars:::::::::::::::::::::::Television::::::::Camera::::::::Laptop
Selling value::::::::::::::::::::$170,000:::::::::$180,000::::::$120,000
Less:
Profit Margin ::::::::::::::::$34,000::::::::::::::$18,000::::::$12,000
______________________________________________________
Net realizable :::::::::::::::::$136,000::::::::::$162,000:::::$108,000
Profit Margin Calculation
Television:::::::$170,000*20/100=$34000
:Camera::::::::$180,000*10/100=$18,000
Laptop:::::::::::$120,000*10/100=$12,000
Net realizable or cost which ever is lower should be taken, according to the IFRS
Television and Laptop can take Net realizable value which is lower from the cost.
Camera was valued under cost which is lower than Net realizable value
Building:
Cost of Building =$2,750,000
Less:
Accumulated Depreciation=$300,000
Value of the Building=$2,450,000
Depreciation:
=$2,750,000-$250,000/25
=$100,000 per year *3 years(2012 to 2014)=$300,000
_____________________________________________
Machinery Cost
Machine=$200,000
Less
ACC. Depreciation=$20,000
Machinery=$180,000
Motor=$40,000
Less:
ACC. Dep=$16,000
Motor=$24,000
Value of the machinery=$180,000+$24,000
=$204,000
Dep Calculation:
200,000 /20=$10,000*2 years=$20,000
40,000/5=$8,000*2years=$16,000
_______________________________________________________
Intangible Assets are valued with purchase cost = $41,000.
_______________________________________________________
Research and Development Costs
The company incurred research and development costs of $200,000 *65/100=$130,000
__________________________________________________________________________
Sale-and-Leaseback=$200,000 recognized gain
________________________________________________________________________
Reconciliation schedules :
Inventory=$399,000
Building=$2,450,000
Machinery Cost=$204,000
Intangible Assets=$41,000
Research and Development Costs=$130,000
Sale-and-Leaseback=$200,000
___________________________________________
Assets Valued =$3,424,000
__________________________________________
stockholders’ equity = $8,000,000.
Add:
Operating income=$980,000(1,000,000-$20,000)
_____________________________
Share holder equity=$8,980,000
______________________________________
Loss of a losses on conversion=$20,000
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