Reconciliation to GAAP / IAS 16

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Reconciliation to GAAP / IAS 16

Abacab Company’s shares are listed on the New Market Stock Exchange, which allows the use of either international financial reporting standards (IFRS) or U.S. GAAP.  On Jan 1, Year 1, Abacab Company acquired a building at a cost of $10 million.  The building has a 20-yr. useful life and no residual value and is depreciated on a straight-line basis.  On January 1, Year 3, the company hired an appraiser who determines the fair value of the building (net of any accumulated depreciation) to be $12 million.
IAS16, “Property, plant, and equipment,” requires assets to be initially measured at cost.  Subsequent to initial recognition, assets may be carried either at cost less accumulated depreciation and any impairment losses (benchmark treatment)  or at a revalued amount equal to fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses (allowed alternative treatment).  If a firm chooses to use the allowed alternative treatment, the counterpart to the revaluation of tha asset is recorded as an increase in Accumulated Other Comprehensive Income (stockholders’ equity).  Subsequent depreciation is based on the revalued amount less any residual value.
APB Opinion No.6 (U.S.GAAP) required items of property, plant, and equipment to be initially measured at cost.  APB Opinion No.6 does not allow property, plant, and equipment to be revalued above original cost at subsequent balance sheet dates.  The cost of property, plant, and equipment must be depreciated on a systematic basis over its useful life.  Subsequent to initial recognition, assets must be carried at cost less accumulated depreciation and any impairment loss.

a) Determine the amount of depreciation expense recognized in Year 2, Year 3, and Year 4 under (a) the allowed alternative treatment of IAS 16 and (b) U.S. GAAP.
b) Determine the book value of the building under the two different sets of accounting rules at January 2,  Year 3; December 31, Year 3; and December 31, Year 4.