International Accounting Case Yazd Corporation is a U.S.-Based company that prep
ID: 2475276 • Letter: I
Question
International Accounting Case
Yazd Corporation is a U.S.-Based company that prepares its consolidated financial statements in accordance with U.S. GAAP. The company reported income in 2014 of $1,000,000 and stockholders’ equity at December 31, 2014, of $8,000,000.
The CFO of Yazd has learned that the U.S. Securities and Exchange Commission is considering requiring U.S. companies to use IFRS in preparing consolidated financial statements. The company wishes to determine the impact that switch to IFRS would have on its financial statements and has engaged you to prepare a reconciliation of income and stockholders’ equity from U.S. GAAP to IFRS. You have identified the following seven areas in which Yazd’s accounting principles based on U.S. GAAP differ from IFRS.
1. Inventory
2. Building
3.Machinery
4.Intangible assets
5. Research and development costs
6.Sale-and-leaseback transaction
7.Foreign Currency Translation
Yazd provides the following information with respect to each of these accounting differences.
Inventory
At year-end 2014, inventory had a historical cost of $430,000, Information, such as replacement cost (fair market value), selling value, sales commission, and profit margin for each individual product is provided below (Yazd company is conservative and calculating based on item-by-item of inventory):
Product
Cost
Replacement Cost ( Fair Value)
Selling Value
Sales commission
Normal Profit Margin
Television
$165,000
$140,000
$170,000
10%
20%
Camera
155,000
165,000
$180,000
10%
15%
Laptop
110,000
91,000
$120,000
10%
8%
Total
$430,000
Property, Plant, and Equipment
Building:
The company acquired a building at the beginning of 2012 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 straight-line basis. At the end of 2014 (before calculating depreciation), the building was appraised and the following information was available for this building:
Replacement (fair market value) $2,370,000
Undiscounted future cash-flow from use of this building $2,600,000
Discounted future cash-flow from use of this building $2,200,000
Net realizable value of the building if it is sold $2,100,000
Machinery:
The company acquired a new machine, on January 1, 2013, with an estimated useful life of 20 years for $200,000. The machine has an electrical motor that must be replaced every 5-years at an estimated cost of $40,000. Continued operation of the machine requires an inspection every 4-years after purchase; the inspection cost is $20,000. The company uses the strait-line non-component method of depreciation
Intangible Assets
As part of a business combination in 2009, the company acquired a brand with a fair value of $41,000. The brand is classified as an intangible asset with an indefinite life. At year-end 2014, the brand is determined to have a selling price of $37,000 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 $35,000.
Research and Development Costs
The company incurred research and development costs of $200,000 in 2014. Of this amount, 65 percent 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
In January 2012, the company realized a gain on the sale-and-leaseback of an office building in the amount of $200,000. The lease is accounted for as an operating lease, and the term of the lease is 5-years.
Foreign Currency Translation
Yazd Company is located in a highly inflationary country (with last three years consecutive inflation rate of 115%). Management of Yazd Company has complete autonomy and does transactions mainly in local currency.
Assume:
-The losses on conversion of financial statements from local currency to US$ is $80,000.
-The losses on conversion of financial statements (after adjusting for the level of inflation) from local currency to US$ is $20,000.
Required:
Prepare a complete and professional report (in MS Word) where you should provide reconciliation schedules to convert 2014 income and December 31, 2014 stockholders’ equity from U.S. GAAP bases to IFRS. Ignore income taxes. Prepare appropriate notes to explain each adjustment made in the reconciliation schedules.
Product
Cost
Replacement Cost ( Fair Value)
Selling Value
Sales commission
Normal Profit Margin
Television
$165,000
$140,000
$170,000
10%
20%
Camera
155,000
165,000
$180,000
10%
15%
Laptop
110,000
91,000
$120,000
10%
8%
Total
$430,000
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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