financial statements to an IFRS basis

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Objectives:

CLO	PLO	Total marks	Marks awarded
4	CS 2	6
4	AS 3	21
4	IT 2	9
4	E 1	9
	TOTAL	45

Criteria	Excellent Response Level 3	Moderate Response Level 2	Weak Response Level 1
CS 3- Content (2 marks each level) Structure	Written work has appropriate beginning with correct definition with clear explanation.	Written work has appropriate beginning with correct definition but not with clear explanation	Written work has definition with no clear explanation.
AS 3 - Applying procedure, formulas and principles or themes (7 marks each level)	Students apply correct and logical procedures, formulas, in the new context.	Students apply partially correct and logical procedures, formulas, in the new context.	Students apply partially correct procedure formulas, in the new context.
IT 2- (3 marks each level) Effective use of IT to gather, interpret and communicate information about US GAAP and IFRS.	The explanation of the written work provides in depth coverage of the topic and assertions are clearly supported by evidence.	The explanation of the written work provides sufficient coverage of the topic and assertions are supported by evidence.	The explanation of the written work does not cover the assigned topic, and assertions are not supported by evidence.
E 3- Identification of Ethical Issue and interpretation of answers incorporate ethical issues ( 3 marks each level)	Answers is correct and interpretation of the answer incorporate ethical issues	Answers is correct but the interpretation of the answer partially incorporate ethical issues	Answers is incorrect but the interpretation of the answer does not incorporate ethical issues

Questions

INTRODUCTION

In 2008, the Securities and Exchange Commission (SEC) proposed a roadmap to issuing new rules that would require US domestic listed companies to adopt International Financial Reporting Standards (IFRS) by as early as 2014.

COMPANY BACKGROUND

Abeer Inc.

Abeer Inc. is a private company based in Charlotte, NC. The company operates retail sporting goods stores in most of the larger cities in the eastern US. It has issued common shares and bonds to a small group of investors and secured additional financing through bank loans. The company has no plans at this time to seek capital in public markets.

Abeer currently reports on a US GAAP basis. In February 2014, Abeer sent copies of its 2013 financial statements, for the calendar year 2013, to its investors and bank lenders. The company’s controller, Bayan, has been learning about IFRS, and she is giving more and more thought to Abeer possibly switching to these standards. As a private company, Abeer could elect to use IFRS as long as its stakeholders would be willing to accept IFRS basis financial statements. Bayan is aware that two versions of IFRS exist, the full version and a shorter and slightly simpler SME version. From preliminary conversations with the company’s investors and lenders, she has determined that they would be more willing to receive IFRS financial statements if prepared according to the full version of the standards.

Bayan has discussed the idea with other members of the company’s management team, and they have encouraged her to investigate further. As an initial step, Bayan wants to see how IFRS adoption would affect the company’s 2013 financial statements. In early March 2014, she meets with the members of her accounting staff and asks them to begin working on converting the recently released 2013 financial statements to an IFRS basis. Abeer’s 2013 US GAAP basis financial statements are shown in Exhibit 1.

Bayan and her staff plan to proceed with using the IFRS expected to be in effect as of December 31, 2014. She has gathered some information she believes will be relevant to converting Abeer’s 2013 financial statements and organized it into a list of 5 items, given in the table.

REQUIREMENT:-

1. Assume you are a valued member of Bayan’s staff. She has asked you to assist with recasting Abeer’s 2013 financial statements to an IFRS basis. In part, she hopes this project will help you develop a better understanding of how IFRS differs from US GAAP. Specifically, you must research the differences between US GAAP and IFRS income statement and balance sheet item. Identify the major similarities and differences in table form.

2. Bayan also asks you to provide her with the following two things:

a) Fill up the table that lists the 8 items, and for each one, shows how the item will be affected on the financial statements of IFRS format.

b) A set of IFRS basis income statement and statement of financial position for the calendar year 2013.

NO	DESCRIPTION	TREATMENT	EFFECT – B/S OR I/S
1	Abeer plans to use the fair value measurement model option for reporting its land under IFRS. The company has obtained independent real estate appraisals as follows: January 1, 2013 $55,000 December 31, 2013 $70,000
2	The discontinued operation presented in Abeer’s 2013 US GAAP financial statements relates to a disposal in 2013 of the company’s stores in Florida. Abeer continues to operate retail stores in other parts of the eastern US. The Florida operations that were sold qualify as an asset group, but not as a separate major line of business or geographical area of operations. The income from operations of the Florida stores of $16,920 (before taxes) from the beginning of the year to the sale date was determined as follows: Net sales $49,670 Cost of goods sold 22,500 Salaries expense 6,600 Utilities expense 1,800 Advertising expense 1,100 Depreciation expense 750 Income from operations $16,920 The cost of goods sold figure of $22,500 is computed on a LIFO basis. The figure would be the same under the average cost method which is required under IFRS.
3	Abeer has gathered the following information related to its cost of inventories and cost of goods sold: 2013 Prior Years Inventories (LIFO) $181,400 – Inventories (Average Cost) $265,900 – C/G/S (LIFO) $405,800 $2,160,000 C/G/S (Average Cost) $347,100 $2,134,200
4	The bank overdraft of $8,500 exists on a checking account at Citigroup. This particular account sometimes is overdrawn, and when that happens, the overdraft automatically converts to a loan balance. Abeer does not have any other cash accounts at Citigroup
5	During 2013, Abeer’s operations in Virginia were hit by the biggest earthquake to occur in that area in more than a century. The company suffered losses to facilities and inventory totaling $22,900 (before taxes).
6	At year-end 2012, Abeer had notes receivable totaling $61,300. Abeer recognized impairment of these receivables in 2012 amounting to $15,700. The company has determined that the same write-down would have been needed in IFRS financial statement for 2012. At year-end 2013, Abeer continues to hold these notes and the debtor’s credit rating has improved dramatically. As a result, the present value of the expected future cash flows from the notes has increased to their full face value of $77,000.
7	Abeer has gathered the following information related to the market value of its inventories at December 31, 2013 Replacement cost $167,600 Net realizable value $249,100 Net realizable value reduced by normal price $174,300
8	Assume the company’s income tax rate for all years and income items is 35%. For any adjustment that create a change in Abeer’s income taxes, recognize the effect of the change in income taxes through the company’s Deferred Income taxes account.

Exhibit 1- US GAAP financial statements

Abeer Inc

Statement of Earnings

For the year ended December 31, 2013

Net Income		731,600
Cost of goods sold		405,800
Gross Margin		325,800
Operating expenses:
Salaries expenses	98,300
Utilities expenses	27,400
Advertising expenses	23,700
Repairs expenses	21,200
Depreciation expenses	16,900
Bad Debt expenses	9,800
Amortization expenses	4,300	201,600
Income from operations		124,200
Other revenue and gains:
Dividend Revenue	7,400
Gain on sale of investment	27,100	34,500
Other expenses and losses:
Interest expenses	(9,600)
Loss on inventory write-down	(7,100)
Loss on retirement of debt	(11,800)	(28,500)
Income from continuing operations before taxes		130,200
Income taxes		45,570
Income from continuing operations		84,630
Discontinued operations:
Income from operations ( net of taxes of $5,922)	10,998
Loss on disposal ( net of taxes of $15,750)	(29,250)	(18,252)
Extraordinary loss from earthquake damage ( net of taxes of $8,015)		(14,885)
Net Income		$51,493

Abeer Inc

Statement of Comprehensive Income

For the year ended December 31, 2013

Net Income		51,493
Other comprehensive income
Unrealized gain on available for sale securities ( net of taxes $5,110)		9,490
Comprehensive income		$60,983

Abeer Inc

Statement of Financial Position

As at December 31, 2013

Assets
Current Asset:
Cash and equivalents		55,240
Account Receivable	164,700
Less: Allowance for bad debts	(9,900)	154,800
Inventories	181,400
Less: Allowance to reduce to market	(7,100)	174,300
Deferred income		21,600
Prepaid Expenses		10,900
Total current Asset			416,840
Long term Investment			132,700
Property, plant & Equipment:
Land		32,000
Building	319,400
Less: Accumulated Depreciation	(126,300)	193,100
Equipment	171,900
Less: Accumulated Depreciation	(108,200)	63,700	288,800
Intangible Asset:
Goodwill		52,000
Licenses		34,600	86,600
Other Assets:
Long Term notes receivable			61,300
Total Assets			$986,240
Liabilities & Stockholder’s Equity
Current liabilities
Account Payable		87,100
Accrues expenses		35,400
Customer deposit		26,900
Bank overdraft		8,500
Total current Liabilities			157,900
Noncurrent Liabilities
Bond payable		120,000
Long term notes payable		113,200
Long term lease obligations		91,600
Deferred income taxes		54,700	379,500
Total Liabilities			537,400
Stockholder’s equity
Common Stock	75,000
Additional Paid In capital	138,400	213,400
Retained Earnings		205,140
Accumulated other comprehensive income		30,300
Total shareholder’s equity			448,840
Total liabilities & Shareholder’s equity			$986,240

Prepared by: Ms Rahayu Abdull Razak