Posted: November 2nd, 2015

question 3

question 3
American Captain One Company is a US based company that prepares its consolidated financial statements in accordance with US GAAP. The company reported income for the year ended 31 December 2011 of $5 million and stock equity at 31 December 2011, of $40 million.
The company is considering to cross list its shares on the European Stock Exchanges and the CFO is interested to find out the impact of restating their accounts under IFRS. You have identified the following five areas in which American Captain One’s accounting principles based on US GAAP differ from IFRS.
1. Restructuring
2. Pension Plan
3. Stock Options
4. Revenue Recognition
5. Bonds payable
The following information was provided with respect to each of these accounting differences.
Restructuring Provision
The company publicly announced a restructuring plan in 2011 that created a valid expectation on the part of the employees to be terminated that the company will carry out the restructuring. The company estimated that the restructuring would cost $300,000. No legal obligation to restructure exists as of December 31, 2011.
Pension Plan
At the start of 2010, the company amended its pension plan, creating a past service cost of $60,000. Half of the past service cost was attributable to already vested employees who had an average remaining service life of 15 years, and half of the past service cost
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July Semester 2012
was attributable to nonvested employees who, on average, had two more years until vesting. The company has no retired employees.
Stock Options
Stock Options were granted to key officers on January 1, 2011. The grant date fair value per option was $10, and a total of 9,000 options were granted. The options vest in equal installments over three years: one-third vest in 2010, one-third in 2011 and one- third in 2012. The company uses a straight-line method to recognise compensation expense related to stock options.
Revenue Recognition
The company entered into a contract in 2011 to provide engineering services to a long term customer over a period of 12-month period. The fixed price is $250,000, and the company estimates with a high degree of reliability that the project is 30% complete at the end of 2011.
Bonds Payable
On January 1, 2010, the company issued $10 million of 5 percent bonds at par value that mature in five years on December 31, 2014. Costs incurred in issuing the bonds were $500,000. Interest is paid on the bonds annually. For accounting under IFRS, assume the effective interest rate is 6.193%.
Required:
Compare the differences which exist between US GAAP and IFRS and prepare:
a) A note to explain each adjustment that needs to be made in a reconciliation schedule to reconcile 2011 net income and 31 December 2011 stockholders’ equity from a US GAAP basis to IFRS (ignore income tax).
(17 marks)
b) A reconciliation schedule to reconcile 2011 net income and December 31, 2011 stockholders’ equity from a US GAAP basis to IFRS (ignore income tax).
(8 marks)