International Accounting
Case #2
Ruckman, Inc
In his assessment of Ruckman, Inc, Chris should recommend many of the following conversion implementations take place. We will start with the differences between IFRS and US GAAP in capitalization of development costs. For IFRS, there are six requirements that need to be met in order to capitalize a development cost, and a development cost can only be capitalized if it meets all of these six requirements. First of the criteria is a technical feasibility of completing the development project, which means that it has to be possible to complete this project. Second requirement the company’s, in this case Ruckman, Inc’s, intentions to complete the project. IFRS does not want to give any …show more content…
The third obligation is the Ruckman, Inc’s ability to sell that project or use it to help generate revenue, speed up processes, or increase safety for the company. If the project brings no benefit, then there can be no capitalization of the development. Fourth would be the likelihood of the project generating future economic benefits. Just because it can be used, does not mean that it will necessarily be used or useful when the project is finished. Fifth would be having the necessary resources to finish the project. If there is a lack of monetary financing, technical expertise, or any other resource problem that may occur, then the project would be useless to the company and the capitalization would be false. Finally, Ruckman, Inc would have to be able to measure and present the costs related to the development of this project. A company can consider a project to be worth $1billion while they only expend $400million. This would be a gross overstatement of the value of the project and …show more content…
The adjustments will need to be made in a few areas because of this rule. The inventory value, cost of goods sold, and the income tax expense will all be affected by this change. The inventory for the cost of finished goods purchased for resale in relation to semiconductor repair services will have to be switched from LIFO to FIFO. In general, when prices are rising, the company’s gross profits will be higher because of FIFO. This higher statement will result in higher cash tax payments. This has high effect during periods of high inflation. Ruckman, Inc would normally use LIFO, therefore during high inflation they would normally report higher levels of Cost of Goods Sold and lower inventory. This higher cost of goods sold will mean lower profits, which will also lead to lower income taxes. This also means that Ruckman, Inc would be reporting a lower equity than if they were under IFRS. This lower equity would impact retained earnings negatively. Now that they are switching to US GAAP all of these effects are reversed. Ruckman, Inc will start to report lower levels of cost of goods sold and a higher inventory number. This will lead to higher profits and higher income taxes. This will also lead to an increase in retained earnings. To convert all of the previous LIFO to FIFO, Chris will need to research what the inventory prices were coming in and going out and