About this project The goal of this research project is to allow you to investig

Question

About this project

The goal of this research project is to allow you to investigate differences and similarities between reporting requirements under current U.S. GAAP and IFRS. Two topics in particular, reporting extraordinary items and reporting R&D, may have significant impact on the reported earnings of a company. You will have the opportunity to discuss how each regulatory body requires these items to be reported.  

General information

Wooded Makers Company, a lumber and forest company, specializes in the extraction of timber, creation of wood products, and production of cellulose-based products. The company owns nearly 7 million of acres of land across the U.S. (Washington, Oregon, North Carolina, Texas and Oklahoma).

Problem 1:

In 1980 a volcano erupted with catastrophic results. It has been documented that before 1980, the volcano had been dormant for 130 years. Subsequently, the volcano erupted again in 2014. As a result of the recent eruption, Wooded Makers incurred a $36 million loss. The eruption destroyed standing timber, logs, buildings, equipment, and transportation systems, over 68,000 acres.

Problem 2:

The company began to research new ways to incorporate cellulose fibers into absorbent products such as diapers. The researchers were attempting to devise a more efficient way to utilize the cellulose fibers by integrating a new weaving and bunching technique. Researching and exploring various alternatives continued for 26 months and cost nearly $1.5 million. Finally, after months of experimentation, a conceptual solution was designed. With the assistance of design engineers, the research findings were tested using prototypes. The development activities continued for 9 months at a cost of $758,000.

Required:

1.Under U.S. GAAP, how would Wooded Makers Co. account for the losses resulting from the volcanic activities? Explain. Support your response with an appropriate citation from the Codification.

2.Under U.S. GAAP, how would Wooded Makers Co. account for the costs associated with the research and development of cellulose? Explain. Support your response with an appropriate citation from the Codification.

3.Under IFRS, how would Wooded Makers Co. account for the losses resulting from the volcanic activities? Explain. Support your response with an appropriate citation from IFRS.

4.Under IFRS, how would Wooded Makers Co. account for the costs associated with the research and development of cellulose? Explain. Support your response with an appropriate citation from IFRS.

Explanation / Answer

1. As per US GAAP Extraordinary item can be presented seperately in Income statement. It is always disclosed after disclosure of ordinary activity.
   So here Wooded Makers Co. will disclose $36 million loss as loss from extraordinary items.

2. There are two phases. One is Research phase and second is development phase. As per US GAAP Research and development cost incurred are charged as expense. It is charged as an expense in Profit & loss account. It does not takes into account the chances of success of research and development.
So $1.5 million and $758000 total $2258000 will be charged as Research and development cost in Profit & loss account.

3.As per IFRS Extraordinary item disclosure is strictly prohibited (as per IAS1). Any item should never be disclosed as extraordinary.
   So here Wooded Makers Co. will not disclose $36 million loss as loss from extraordinary items.

4.There are two phases. One is Research phase and second is developmengt phase. As per IFRS(IAS 38) Research cost are expensesd as incurred. It is charged as an expense in Profit & loss account. Development cost are capitalised if it meets some criteria. These are:-
   a) Technicial feasibility of products,
b) Use or sale of the products
  
So $1.5 million Research cost will charge in Profit & loss account and $758,000 development cost will be capitalised as finally a conceptual solution was designed so it meets the criteria of capitalisation.

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