Prepare a reconciliation schedule to convert income

Question

All Star Corporation is a US based company that prepares its consolidated financial statements in accordance with US GAAP. The company reported income in 2014 of $1,250,000 and stockholders' equity at December 31, 2014, of $4,800,000.

The CFO of All Star has learned that the US Securities and Exchange Commission is considering requiring US 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 US GAAP to IFRS. You have identified the following seven areas in which All Star's accounting principles based on US GAAP differ from IFRS.

1. Inventory

2. Property, Plant and Equipment

3. Intangible assets

4. Research and development costs

5. Sale and leaseback transactions

6. Stock Options

7. Revenue Recognition

All Star provides the following information with respect to each of these accounting differences.

Inventory

At year-end 2014, inventory had a historical cost of $410,000 and a replacement cost of $385,000. A selling price of $399,000, selling expenses of $10,000, and a normal profit margin of 15 percent.

Property, Plant and Equipment

The company acquired equipment on January 2, 2013 at a cost of $2.5 million. The equipment has a ten year life, no residual value, and is depreciated on a straight-line basis. On January 1, 2014, All Star determines the fair value of the asset (net of any accumulated depreciation) to be $2.7 million. In a switch to IFRS the company would use the revaluation model to determine the carrying value of property, plant and equipment.

Intangibles

As part of a business combination in 2009, the company acquired a brand with a fair value of $800,000. 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 $680,000 with $15,000 in selling expenses. Expected future cash flows from continued use of the brand are $685,000 with a present value of $662,000.

Research and Development Costs

In a project to develop a new product the company incurred research and development costs totaling $750,000. All Star is able to clearly distinguish the research phase from the development phase of the project. Research phase costs are $450,000, and development phase costs are $300,000. All of the IAS 38 criteria have been met for recognition of the development costs as an asset. This product was successfully brought to market in 2015 and is expected to be marketable for 5 years.

Sale and Leaseback

At the beginning of 2013 All Star sold a building to Old Westbury for $1,000,000, which exceeded its fair value of $950,000. The carrying amount is $800,000. All Star then leased the building back from Old Westbury under an operating lease for a period of five years.

Stock Options

Stock options were granted to key employees on January 1, 2014. The fair value per option on the grant date was $12, the fair market value of the stock on grant date was $20, and a total of 20,000 options were granted. The options vest in equal installments over four years: 1/4 in 2014, 1/4 in 2015,1/4 in 2016 and 1/4 in 2017. The company uses a straight-line method to recognize compensation expense related to stock options and no forfeitures are anticipated.

Revenue Recognition

The company entered into a contract in 2014 to provide architectural services to a long-term customer over a 36-month period. The fixed price is $800,000, and the company estimates that the project is 35 percent complete at the end of 2014.

Required:

1. Prepare a reconciliation schedule to convert 2014 Income and December 31, 2014 stockholder's equity from a US GAAP basis to IFRS.Ignore income taxes.An excel template has been provided to assist you in preparing the reconciliation. Not all lines on this spreadsheet need to be used.

2. For each item listed above prepare a brief note to explain each adjustment made in the reconciliation schedule. You must include your supporting calculations as well as a reference to the related IFRS pronouncements.