Vernon Ltd. is a private company that can report in accordance to either ASPE or IFRS. It currently prepares its financial statements in accordance to ASPE. But since it has plans to go public in the next 3-5 years, it is considering changing to IFRS for the current year.

Based on preliminary accounts on December 31, Year 3, its Net Income is $ 400,000 and its Total Shareholder Equity is 2,500,000. You have identified the following areas in which Vernon’s accounting principles differ between ASPE and IFRS:

1)

Vernon acquired equipment at the beginning of year-1 for $200,000. The Equipment has a 10 year estimated life with no expected residual value and is depreciated on a straight-line basis. At December 31, Year 3, Vernon compiles the following information on the

Equipment: Expected future cash flows from use of Equipment: $150,000

Present value of expected future cash flows from use of equipment: $130,000

Net Realizable Value or Fair Value : $136,000

2)Vernon incurred research and development costs of $270,000 in Year-1. 30% of these costs were related to development activities that met the criteria for capitalization as an intangible asset. The newly developed product was brought to market in January, Year 3 and is expected to generate sales revenue for 10 years

3)Vernon arranged for a loan of $50,000 to finance the construction of a production facility. $25,000 was borrowed on March 1, Year 3 and another $25,000 borrowed on October 1, Year-3. The loan was repayable over 5 years with an interest rate of 10%, with the first payment due on September 30, year-4. The facility is nearly complete at the end of Year-5. No interest has been accrued on the loan at the end of Year-3.

4) Vernon acquired equipment at the beginning of year 1 at a cost of $20,000. The equipment has a useful life of 5 years. At the beginning of Year-3, the equipment was appraised and determined to have a fair value of: i.$9,000 ii.$7,000

5) It’s estimated useful life and residual value did not change. The company could adopt the revaluation option under IAS 16 to periodically revalue the equipment at fair value subsequent to acquisition.

6) Vernon instituted a defined benefit pension plan in year 1. The first actuarial evaluation, which was done as at June 30, Year 3, indicated an actuarial gain of $14,500. The expected average service life of the employee workforce is 15 years at the time of actuarial evaluation. The actuarial gain has not yet been recognized in the preliminary financial statements

Under ASPE, Vernon choses policies to minimize Net Income and Shareholder Equity. Under IFRS, Vernon chooses policies to maximize Shareholder Equity

Prepare a schedule to convert Net Income and Total Shareholders’ Equity from the preliminary statements amounts to amounts under ASPE and IFRS - Similar to table in Problem 1-3 (You are NOT required to do a reconciliation between ASPE and IFRS)

Answer rating: 100% (QA)

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