Policy Group of Duchek International, Inc., a U. manufacturer of women's handbags and other fashion accessories. In February 2020, Duchek expressed...
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Policy Group of Duchek International, Inc., a U.S. manufacturer of women's handbags and other fashion accessories.

In February 2020, Duchek expressed interest in acquiring Curreri International, Ltd., a UK-based company in the same industry that is listed on the London Stock Exchange. Curreri prepares its financial statements in accordance with IFRS. You have been assigned to the acquisition team based upon your in-depth knowledge of both US GAAP and IFRS. Your role is to assist your peers at Curreri in preparing its IFRS-based financial information for 2019 on a comparative basis with US GAAP. This will enable management of Duchek to better understand the merits of this potential acquisition.

After detailed discussions with the Controller of Curreri and their financial reporting team, you have identified key areas where the accounting practices between IFRS and U.S. GAAP are different. A description of these items are attached.


Using the information provided, prepare Curreri's comparative Income Statements for 2019 (in Word or Excel) under IFRS and US GAAP. You are to assume that Curreri's Net Income for IFRS and US GAAP purposes is $8,000,000 before consideration of these items. For each adjustment, you must include a footnote that explains the adjustment and shows the related calculations. Ignore income taxes. All numbers are in U.S. dollars.

Note: This is not a group case. The work submitted must be your own.

IAS 2: Inventories

The ending inventory under FIFO at December 31, 2019 was $125,000, which represents historical cost. Further analysis indicates the following: (1) replacement cost of $90,000, (2) net realizable value of $95,000, and (3) normal profit margin is 20 percent of NRV. Curreri uses the Lower of Cost or NRV method to measure its inventories. Note that the inventory items are related to similar product lines and, accordingly, are tested at the "Group" level.

IAS 16: PP&E

Curreri uses the straight-line method to depreciate its property, plant & equipment. Curreri has four PP&E categories: (1) land, (2) buildings, (3) machinery & equipment, and (4) furniture & fixtures.  The buildings were purchased on January 3, 2018 for $3,250,000, have an estimated useful life of 25 years and an estimated residual value of $250,000. The company elected the revaluation model under IAS 16 to determine the carrying value of its buildings subsequent to acquisition.

At the beginning of 2019, the building was appraised, and was determined to have a fair value of $3,850,000. There was no change in the estimated useful life or residual value of the building. Curreri determined that a new appraisal was not warranted at December 31, 2019. Curreri uses the historical cost method for all other categories of PP&E.


IAS 38: Intangible Assets

The "Curreri" brand is well known in the UK. In 2016, the company acquired a trademark at a cost of $75,000. Curreri has classified the trademark as an intangible asset with an indefinite life. Using outside consultants, the trademark is determined to have a selling price (net of costs to sell) of $65,000 at December 31, 2019. Expected future cash flows from continued use of the trademark are $72,000 and the present value of the expected future cash flows is $60,000. (Assume that the fair value of this trademark for US GAAP purposes is $62,000 based on a consultant's report). Curreri is required to perform an annual impairment test on this trademark. 

IAS 38: Development Costs

During 2019, Curreri incurred research and development costs on a new product of $250,000, of which 60% were related to development activities that occurred subsequent to reaching the "technical feasibility" of the project. As of the end of the 2019, the development phase of the new product had not yet been completed.


IAS 23: Borrowing Costs

On January 1, 2019, Curreri borrowed $2,000,000 at an interest rate of 4 percent to finance the construction of a new office building expected to cost $2,000,000. Curreri temporarily invested the proceeds until the cash was needed. Interest earned during 2019 was $4,000. During 2019, expenditures of $1,500,000 were incurred and the weighted-average expenditures were $1,100,000. The project will be completed and the loan will be paid in late 2020. An exchange gain of $5,000 was also recognized on the borrowing as a result of the differences in exchange rates between the United States and Great Britain. (Use US dollars as presented; no foreign exchange calculations are necessary).

                        IFRS 2: Stock Options (Chapter 5, p.166)

Stock options were granted to key employees on January 1, 2018. The fair value per option was $10 on the grant date, and a total of 18,000 options were granted. The options vest in equal installments (i.e., graded vesting) over three years: one-third at the end of 2018, one-third at the end of 2019, and one-third at the end of 2020.  For U.S. GAAP purposes, Duchek wants Curreri to use the straight-line method to recognize compensation expense related to the stock options.

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