International Accounting and Taxation Case Study Project
The Case Study project entails five parts and it will be based on situation and examples from the textbook. This project will test your ability to determine the differences between U.S. GAAP and IFRS including the adjustments and explanation of the differences and adjustments, to prepare reconciliation schedules, analyze the need to hedge the foreign exchange risk, to determine the foreign exchange gains and losses, to compute the tax liability and foreign tax credit, and to write memo to executives.
The project will follow CLA Limited, a technology, U.S. - based company. The CLA Limited will undergo several scenarios on the international business scale performing transactions and trades outside of their country of origin. The company will be using the GAAP as well IFRS accounting rules and taxation in foreign countries.
Students will be required to answer the question at the end of each part. The information to address each question are in the description of the parts; however, students are encouraged to utilize the textbook information as well as web resources for better understanding and comprehensive answers to the part's questions. Students are encouraged to read the each part before answering the questions.
Introduction of the Company
CLA Limited has been established in 1989 by Steven Clarke. The company focuses on parts and components that are being utilized in major digital and analog wireless devices ranging in use from communications systems to test equipment, wireless application and military systems. The company conducts business in four continents and has subsidiaries and partnerships in more than 20 countries.
CLA Limited is a U.S based company and taxpayer. The company prepares consolidated financial statements in accordance with U.S. GAAP. CLA operates in several foreign countries across the globe and must report under the foreign accounting rules as well under the U.S. GAAP. CLA Limited fiscal year ends December 31.
Steven Clark is the company's CFO and he is also the majority shareholder of this multinational company. CLA Limited has various governmental and business contracts with local governments and mid-sized companies creating competitive position among its main rivals. The company has established solid 20% market share in this division and has been actively seeking for new opportunities across the world.
Case Study Project Part II
CLA Limited reported income in 2014 of $1,000,000 and stockholder's equity at December 31, 2014, of $8,000,000. The CFO of CLA Limited has learned that the U.S. Securities and Exchange Commission (SEC) is considering requiring U.S. companies 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 you to prepare a reconciliation of income and stockholders' equity from U.S. GAAP to IFRS. You have identifies the following five areas in which CLA Limited accounting principles based on U.S. GAAP differ from IFRS.
1. Inventory
2. Property, Plant and Equipment
3. Intangible Assets
4. Research and Development Costs
5. Sale-and-Leaseback transactions
CLA Limited provides the following information with respect to each of these accounting differences.
Inventory - at year-end 2014, inventory had a historical cost of $250,000, a replacement cost of $180,000, a net realizable value of $190,000, and a normal profit margin of 20 percent.
Property, Plant and Equipment - CLA Limited 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, and estimated residual value of $250,000, 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 the revaluation model in IAS 16 to determine the carrying value of property, plant and equipment subsequent to acquisition.
Intangible Asset - as a part of a business combination in 2011, the company acquired a brand with a fair value of $40,000. The brand is classified as an intangible asset with an indefinite life. At year-end 2014, the band is determined to have a selling price of $35,000 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 $34,000.
Research and Development Costs - the company incurred research and development costs of $200,000 in 2014. Of this amount, 40 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 $150,000. The lease is accounted for as an operating lease, and the term of the lease is five years.
Required: Prepare a reconciliation schedule to convert 2014 income and December 31, 2014, stockholders' equity from a U.S. GAAP basis to IFRS. Ignore income taxes. Prepare a note to explain each adjustment made in the reconciliation schedule. A template for the reconciliation schedule is provided below. Be sure to explain each adjustment below this template.