The following financial information is for HKUST Company, a non-U.S. firm with shares listed on a U.S. stock exchange.
Net income, computed according to home country GAAP. . . . . . . . . . . . . . . . . . . . . . . . $ 33,000
Stockholders’ equity, computed according to home country GAAP. . . . . . . . . . . . . . . . . 146,000
Deferred income taxes, recorded as an addition to stockholders’ equity . . . . . . . . . . . . . . 25,000
Market value of investment securities acquired this year
that were reported at cost of $3,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,700
Interest on the financing of self-constructed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
If HKUST were following U.S. GAAP, the deferred income taxes would have been classified as a liability instead of part of stockholders’ equity. In addition, deferred income tax expense of $4,100 for the year would have been subtracted in the computation of net income. Under U.S. GAAP, the investment securities would have been classified as trading securities. Also under U.S. GAAP, the interest on the financing of self-constructed assets would have been capitalized rather than expensed.
Instructions:
1. Prepare a reconciliation of HKUST’s reported stockholders’ equity of $146,000 to U.S. GAAP.
2. Reconcile HKUST’s reported net income of $33,000 to U.S. GAAP.
3. Compute ROE using both HKUST’s home country GAAP financial statement numbers and the U.S. GAAP numbers. In this case, ROE is higher for HKUST using U.S. GAAP. Are there reasons that a company might not wish to reconcile its reported numbers to U.S. GAAP, even when doing so would result in higher ROE? Explain.