upward at the beginning of 2010 to its fair value of 5,440,000. The appropriate journal entry to recog- nize the revaluation would be:
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
Revaluation Surplus a stockholders’ equity account . . . . . . . . . . . . 600,000
In 2010, depreciation expense would be 185,000 [5,440,000 ⫺ 1,000,00024 years]. The additional depreciation under IFRS causes IFRS-based income in 2010 to be 25,000 smaller
than U.S. GAAP income. IFRS-based stockholders’ equity is 575,000 larger than U.S. GAAP stock- holders’ equity. This is equal to the amount of the revaluation surplus 600,000 less the additional de-
preciation in 2010 under IFRS 25,000, which reduced retained earnings.
3. Deferred Development Costs. Under U.S. GAAP, research and development expense in the
amount of 2,000,000 would be recognized in determining 2010 income. Under IAS 38, 1,200,000 60 ⫻ 2,000,000 of research and development costs would be ex-
pensed in 2010, and 800,000 40 ⫻ 2,000,000 of development costs would be capitalized as an in- tangible asset deferred development costs. IFRS income in 2010 would be 800,000 larger than U.S.
GAAP income. Because the new product has not yet been brought to market, there is no amortization of the deferred development costs under IFRS in 2010. Stockholders’ equity under IFRS at the end of 2010
would be 800,000 larger than under U.S. GAAP.
4. Gain on Sale and Leaseback. Under U.S. GAAP, the gain on the sale and leaseback operating
lease is recognized in income over the life of the lease. With a lease term of five years, 600,000 of the gain would be recognized in 2010. 600,000 also would have been recognized in 2008 and 2009, resulting
in a cumulative amount of retained earnings at year-end 2010 of 1,800,000. Under IAS 13, the entire gain on the sale and leaseback of 3,000,000 would have been recognized in
income in 2008. This resulted in an increase in retained earnings of 3,000,000 in that year. No gain would be recognized in 2010. IFRS income in 2010 would be 600,000 smaller than U.S. GAAP income,
but stockholders’ equity at December 31, 2010, under IFRS would be 1,200,000 3,000,000 ⫺ 1,800,000 larger than under U.S. GAAP.
5. Prior Service Costs. Under U.S. GAAP, the prior service cost of 240,000 is amortized over the re-
maining service period number of years to be worked of the employees. Expense recognized in 2010 is 16,000 [240,00015 years]. The cumulative expense recognized since the plan was changed in 2009 is
32,000 [16,000 ⫻ 2 years]. Under IAS 19, the prior past service cost attributable to the vested employees would have been expensed
in 2009—120,000 [50 ⫻ 240,000]. The past service cost attributable to nonvested employees would be expensed over the three remaining years until vesting. Expense recognized in 2010 would be 40,000
[120,0003 years]. The cumulative expense recognized since the plan was changed is 200,000 [120,000 ⫹ 40,000 ⫻ 2 years]. IFRS income in 2010 would be 24,000 less than U.S. GAAP in-
come [40,000 ⫺ 16,000], and stockholders’ equity at year-end 2010 under IFRS would be 168,000 less than under U.S. GAAP [200,000 ⫺ 32,000].
6. Impairment of Machinery.
Under U.S. GAAP, an impairment occurs when an asset’s carrying value exceeds its undiscounted expected future cash flows. In this case, the expected future cash flows
are 450,000, which is higher than the machinery’s carrying value of 440,000, so no impairment occurred.
Under IAS 36, an asset is impaired when its carrying value exceeds the higher of 1 its value in use present value of expected future cash flows and 2 its fair value less costs to sell. The machinery has
a value in use of 375,000 and its fair value less costs to sell is 360,000. An impairment loss of 65,000 [440,000 ⫺ 375,000] would be recognized in determining 2010 net income, with a corre-
sponding reduction in retained earnings. IFRS income in 2010 is 65,000 smaller than U.S. GAAP in- come, and stockholders’ equity at year-end 2010 under IFRS would be 65,000 smaller than under
U.S. GAAP.
Questions
1. What factors contribute to the diversity of accounting systems worldwide? 2. Nestlé S.A. is a very large company headquartered in a very small country Switzerland. It has op-
erations in more than 50 different countries around the world. Much of the company’s international expansion has been through the acquisition of local i.e., foreign companies. What major problems
does worldwide accounting diversity cause for a company like Nestlé? 3. According to Gray, how do societal values affect national accounting systems?
4. According to Nobes, what is the relationship between culture, type of financing system, and class of accounting?
526 Chapter 11
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