Advanced Financial Reporting

Background

ABC Inc. is a privately held Canadian company. For several years, it has prepared its financial statements under IFRS, but management is now considering adopting ASPE. For its Year 8 financial statements, ABC reported the following under IFRS:

- Net income: $5,200 - Current assets: $18,600 - Current liabilities: $14,300 - Total debt: $31,500 - Total shareholders' equity: $27,800

The CFO has identified three areas where ABC's accounting policies differ between IFRS and ASPE: 1. Impairment losses 2. Convertible bonds 3. Income taxes

Additional Information

1. Impairment Losses

	Dec 31, Year 7	Dec 31, Year 8
Cost of equipment	$36,000	$36,000
Accumulated depreciation	7,200	9,000
Carrying amount before impairment	28,800	27,000
Undiscounted future cash flows	24,500	22,800
Value in use	23,000	22,500
Fair value	22,600	23,200
Depreciation expense for year	1,800	1,800

At the end of Year 7, the equipment had 18 years of useful life remaining. There were no impairment losses prior to Year 7.

2. Convertible Bonds

On January 1, Year 7, ABC issued $35,000 of bonds, convertible into common shares anytime within five years. If they had not been convertible, the bonds would have been worth only $32,200. The discount amortization on the bonds was $85 in Year 7 and $88 in Year 8.

3. Income Taxes

	Dec 31, Year 7	Dec 31, Year 8
Future income tax payable	$7,100	$7,500
Future income tax expense	400	420

ABC's income tax rate is 40% and is expected to remain stable. Under IFRS, the company has used the future tax payable method.

CEO's Concern

The CEO wants to understand how changing from IFRS to ASPE would impact ABC's: - Current ratio - Debt-to-equity ratio - Return on shareholders' equity Where ASPE provides a policy choice, management prefers the simplest and most straightforward option.

Required

(a) Calculate the three ratios under IFRS and then under ASPE. Clearly show adjustments to the numerators and denominators. Ignore income taxes when adjusting impairment losses and convertible bonds. (b) Discuss whether ABC liquidity, solvency, and profitability would appear stronger or weaker under ASPE after considering all three differences.