US GAAP ASSESSMENT- NOV 2018
US GAAP Assessment Assignment November 2018
You are the Financial Controller of an Irish services company, Top Notch Consultancy Ltd., which does a great deal of business in the USA and as a result prepares its financial statements using US GAAP. A new Financial Director has just arrived and is in the process of overseeing the preparation of the financial statements for 2017. They have no previous exposure to US GAAP though they are very familiar with IFRS.
Requirement:
You are required to prepare the financial statements for Top Notch for the year ended 31 December 2017 in compliance with US GAAP (a Statement of Financial Position and Income Statement only). This should include both the basic and diluted EPS calculation. You should assume that retained earnings brought-forward is a balancing figure in your calculations. (90 marks)
You are required to also write a short memo to the FD to address the following:
a) The FD wishes to know what is authoritative guidance in the context of US GAAP, giving examples of both authoritative and non-authoritative GAAP b) The company has incurred significant losses due to a serious fire which destroyed part of its premises in the new financial year i.e. after the reporting date for the current financial statements. The financial statements for the previous year have not yet been authorised for issue. The FD fears that due to shortfalls on insurance monies there will be a serious loss and is concerned that this may affect the viability of the company on an ongoing basis so wishes to consider whether or not the going concern basis is appropriate. There is however no sign of impending liquidation of the company at the current moment. c) If the company manages to survive it is expected to incur substantial losses in the next year’s financial statements. It expects to return to profit in the next financial year but it will probably be several more years before it can earn enough profit to expunge the loss. What are the deferred tax implications of this under GAAP? (10 marks)
Note: All workings should be shown
Data and policies used (all in Euros)
Sales:
Included in sales for the year, you have the following information:
- There are a number of small pieces of work that the company has supplied during the year. At the beginning of the year, 250,000 remained unpaid from the previous year. During the year, 68,000 was written off as unlikely to be recovered: a provision for 50,000 had been made for this at the previous year-end. The rest was paid except for 25,000 that remained outstanding and was expected to be paid early in the next year. - During the year, new small pieces of work were undertaken to the value of 4.5 million, of which 600,000 remained unpaid at the end of the year. Based on past experience, 4% of amounts unpaid are expected not to be subsequently collected. - The company has a long-term contract which was 70% complete by the time the year-ended. Costs to date (all incurred in the financial year just ended) amount to 1.4 million, with another 500,000 to complete. Total revenue for the contract as a whole is 2.5 million. The FD has asked that you use the percentage of completion method for the recognition of revenue for the year on this contract. Stage payments of 300,000 have been invoiced for the work done to date but have not yet been paid. - There is another long-term contract underway. It has a total revenue of 800,000. Costs to date by the end of the year are 500,000 (all in the financial year just ended) with another 600,000 to complete. In terms of the work done, it is estimated that it is 60% completed. Again the FD wishes you to use the percentage of completion method. All costs to date have been invoiced and paid.
Advertising
The company spent 85,000 on general advertising during the year. It also spent another 50,000 on directly-targeted advertising. This has been very successful in the company’s view and is expected to lead to significant increased sales over the next five years.
Website development
During the year, the company spent 85,000 on a website which was aborted as being technically too complicated. The company later started work on another less complex website design. By the end of the year, 20,000 had been spent on the planning stage of the work. The work was then successfully completed by the end of the year for a further 40,000. Another 20,000 running costs were incurred for the website.
Property, plant and equipment
The company until recently rented premises on a short-term basis. However, in January 2017 they moved into new premises which they acquired for 800,000. The area in which it is located then became very popular as a result of which prices have rocketed and the premises are now estimated to have a market value of 1.3 million. The FD wants to use the revaluation basis for this property. The company
charges depreciation from the quarter after which the property was acquired. It is to be depreciated over 50 years.
The company has plant carried at NBV of 280,000 at the start of the year. Depreciation is charged on a reducing balance basis at 25% per annum.
In addition to the above, the company had an item of plant that was deemed to be impaired at the previous financial-year end. It had at the time a NBV before impairment of 120,000 but was deemed to be only worth only 60,000 and this was the NBV included for this asset at the time. Now an alternative use has been found for the asset and the value is now assessed to be 90,000. The FD wishes to reverse the impairment to this extent in the financial statements. Depreciation on this asset is also calculated using the reducing balance method at 25% p.a.
Equipment is depreciated on the units of production method. The value of equipment at the start of the year was 75,000. The equipment had 8,000 units of production left at the start of the year, of which 3,500 units were consumed during the year.
Inventory
The company bought some books for resale as part of its wider consultancy business. It has decided to keep these as inventory as it will become part of an ongoing business operation. The book in question is from a specialist supplier and prices have fluctuated across the year. The following transactions took place during the year:
30 March 2017 150 x 60 euros 17 June 2017 225 x 45 euros 29 October 2017 175 x 50 euros
At the year-end there were 250 items in stock. The FD would like to use LIFO as the basis of valuation but is not sure if this is allowable; if it is, then this should be used but if not average cost should be used. Of these 5 had been damaged and now only have a resale value of 25 euros net of resale costs.
Payables
The company has payables to the value of 275,000. Of these 90% are payable within the next twelve months.
Debt
The company has debt of 800,000 repayable in one year and 250,000 repayable in three years. Interest on this was 45,000 for the year, of which 7,500 was unpaid at the year-end. The company has also made a loan of 250,000 to another non-related company; 50% is payable in the next financial year and 50% in the year following that. Interest for the year received was 27,500 and a further 7,500 should have been paid but was not received. There is no reason to believe that this outstanding amount will not be received at some point in the near future.
Cash
The company has petty cash floats to the value of 17,500. It also has bank accounts which collectively have amounts of 1,838,025 in them.
Provisions
The company has allegedly provided bad advice on a consultancy contract in the previous financial year. At the end of the previous financial year, it set up a provision for 215,000. At the end of the current financial year, new information has been received from the company’s legal adviser. The advice is that there is now a 75% chance of having to pay out 185,000 as a result of this claim.
Wages and salaries
At the start of the year, 257,000 of wages and salaries for the last month of the previous year was unpaid. During the year wages were paid to the value of 2,578,000. These included all of the broughtforward wages and salaries that were unpaid at the previous year-end apart from 24,000 which was included in error. At the end of the year, the last month was again unpaid so that 310,000 would not be paid until the following year.
The company pays bonuses based on 2.5% of wages and salaries for the year in question but had not yet done so at the year-end. However, it has already declared that it will do so but payment will not be made until the month after the year-end reporting date.
There is unused holiday not yet taken by employees to the value of 375,000. This amounts to an average of 6.5 days unused holiday for the employees involved. The company will only allow 5 days per employee to be carried forward. All of this must be used in the following year and cannot be carried forward again. Based on past experience employees will only use 3.5 days per annum of any amounts carried forward.
Utilities
Electricity charges paid during the year amounted to 152,000, of which 28,000 relate to an accrual from the previous year which was all paid off during the year. There were 19,000 of bills unpaid at the end of the financial year. These amounts are not included in uncleared payables quoted elsewhere.
Water bills paid during the year amounted to 85,000. This includes 8,000 accrued for at the end of the previous year. Amounts paid include a prepayment for the following year of 4,000.
Shares
The company had 720,000 common stock shares in issue at the start of the year with a nominal value of 840,000. A further 180,000 were issued on 30 September 2017 for 220,000. No dividends were paid or agreed during the year for these shares.
200,000 15% preference shares to a nominal value of 350,000 were in issue throughout the year. Dividends of 65,000 were declared during the year, of which 23,000 remained unpaid at the year-end.
These shares are convertible to common stock shares on a ratio of 2 preference to 1 common stock share in the future.
Pensions
The company runs a defined benefit pension scheme. During the year, it received information that the scheme had suffered an unrealised loss of 56,000. It had already set up pension provisions for unrealised losses of 120,000 carried forward in the financial statements from previous years.
Loans made
The company in the past made a loan to another unconnected company. At the end of the financial year 180,000 of this had not yet been paid back. 40,000 was due to be paid in the next financial year and the remainder in the following year.
Interest received on this loan amounted to 23,000 during the year and a further 7,000 relating to the current financial year remained unpaid at the year-end.
Research and development
The company has been developing a new product which, if successful, will lead to the creation of intellectual property which it deems will have a significant value in the future. During the year, expenditure of 95,000 was spent on what is regarded as research and 75,000 on actual development (10,000 of these development costs remained unpaid at the end of the year and are not already included elsewhere in payables figures). The FD wishes to capitalise this expenditure and amortise it over its expected life of 10 years.
Tax
Tax paid in the year amounted to 350,000. 50,000 was an accrual brought forward from the previous year and 25,000 was a prepayment for the next financial year.