CASE ONE, KIKI CORPORATION Kiki Corporation, a US company, prepares its financia

Question

CASE ONE, KIKI CORPORATION

Kiki Corporation, a US company, prepares its financial statements under US GAAP. For 2014, the company reported $1,000,000 income and stockholders’ equity balance of $8,000,000 on December 31, 2014. In preparation for a possible adoption of IFRS by the US companies, the management wishes to explore possible impacts of the move. You are engaged to prepare a reconciliation schedule to convert 2014 income as well as stockholders’ equity on December 31, 2014 from US GAAP basis to IFRS. The following information is provided by the company’s accounting department:

In 2010, the company acquired a brand with a fair value of $50,000. The brand was booked as an intangible asset with an indefinite life. At the end of 2014, the brand had a selling value of $46,000 with zero selling expense. Expected future cash flows from continued use of the brand are $52,000 and the present value of the expected future cash flows is $43,000.

In 2014, Kiki Corporation incurred research and development costs of $200,000. Of this amount, 45% 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 2014, development of the new product had not been completed.

At the end of 2014, Kiki Corporation had an inventory item with a historical cost of $250,000, a replacement cost of $170,000, a net realizable value of $190,000, and a normal profit margin of 20 percent.

In January 2012, the company realized a gain on the sale-and-leaseback of an office building in the amount of $150,000. The lease is accounted for as an operating lease, and the term of the lease is five years.

The company acquired a building at the beginning of 2013 at a cost of $2,750,000. The building has an estimated useful life of 25 years, an estimated residual value of $500,000, and is being depreciated on a straight-line basis. At the beginning of 2014, the building was appraised and determined to have a fair value of $3,250,000. There is no change in estimated useful life or residual value. In a switch to IFRS, the company would use revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.

Make sure your reconciliation statement is accompanied by an adequate explanation and reference for every one of your adjustments. Ignore income taxes.

Explanation / Answer

Reconciliation from U.S. GAAP to IFRS 2014 Income from U.S. GAAP 1000000 Adjustments : Impairement loss on Intangible -4000 Reversal of Deferred development cost (to be capitalised) 90000 Inventory 20000 Reversal of amortization of deferred gain on sale and leaseback -30000 Accumulated depreciation on the Building -24583 Income Under IFRS 1051417 Stockholder's equity under U.S. GAAP Adjustments : 8000000 Impairement loss on Intangible -4000 Recognition of deferred development costs 90000 Adjustments to inventory 20000 Recognition of gain on sale and leaseback 150000 Reversal of accumulated depreciation(30000*3) -90000 Revaluation of Building 590000 Accumulated depreciation on the Building -24583 Stockholder's equity under IFRS 8731417 Explanation of adjustments : 1) Brand Value 50000 2010 Selling price 46000 2014 Expected future cash flows 52000 Present value of expected cash flows 43000 Impairment loss on intangible asset 50000-46000 4000 2) Reseach and Development Costs Reseach and Development Costs 200000 2014 In U.S. GAAP the research and development costs are generally expenses and in IFRS they are to be capitalised 45% of 200000 90000 The above cost will now be capitalised 3) Under U.S. GAAP inventory, company reports inventory at lower of cost or market Cost 250000 Market 170000 Lower of above 170000 Under IFRS it is lower of cost or NRV Cost 250000 NRV 190000 Lower of above 190000 4) Sale and lease back Gain realised on sale and lease back 150000 30000 As per U.S GAAP the gain is amortized for the period of lease In IFRS the gain is capitalised 5) Building 2750000 2013 25 yrs Residual 500000 Depreciation as per U.S. GAAP 90000 2014 FMV of Building 3250000 500000 Depreciation based on FMV (3250000-500000)/24 Depreciation as per IFRS 114583.3333 -24583.33333 Revaluation 3250000-2660000 590000

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