CASE WRITE-UPS
Instructions: Cases should be prepared using a word processing program with EXCEL inserts as necessary. There is no page limit.
You are to answer Phase 1 requirements only.
Phase: I Requirements:
1. Reviewthecompany’sfinancialstatements(Tables1,2,3,and4)andsummaryof significantaccountingpolicies(Exhibit1).Preparealistofaccountingareasforwhich sufficientinformationhasbeenprovidedtodeterminethatconversionisrequired.Include differences inpresentationaswellasaccountingmethods.Foreachitem,listany additionalinformationChriswillneedtoobtaintocompletetheconversion.
2. Preparealist ofaccountingareasforwhichadjustmentmaybenecessary,butinsufficient information wasprovidedtomakeanaccurateassessment.Listthespecific information Chriswillrequireinordertoconductfurtheranal
Ruckman, Inc.:
Converting fromU.S.GAAPtoIFRS
PHASEI Introduction
ThisisChrisGilmore’sfirstweek workingasanaccountantatRuckman,Inc.
Thecontrollerofthecorporation, MarthaGreen,selectedChrisfromnumerousqualifiedcandidates,inpart becausehehadlearnedInternationalFinancialReportingStandards(IFRS)whileearninghisMasterofAccountancydegree.Chris’sresponsibilities,asdescribedduringtheinterviewprocess,includereviewingthefinancialstatementsofthecompany’sforeignsubsidiaries,preparingthe consolidatedfinancialstatements,andassistingthecorporationinconvertingitsfinancialstatements fromaccountingprinciples generallyacceptedintheUnitedStatesofAmerica (U.S.GAAP)to International FinancialReportingStandardsforreportingtoitsEuropeanstakeholders.Chrishas spent theearlypartoftheweek familiarizinghimselfwiththecompany’soperations,aswellasits accounting policiesandpractices.Thismorning,MarthahasanewprojectforChristoworkon.
Martha: Chris, as you know, the company is intending to prepare its 2013financial statements inaccordancewithIFRS.Werealizethiswillbeatime-consuming process,andwouldliketogetstartedassoonaspossible.
Chris: Thatsoundslike agreatidea.Iremembermyprofessorsmentioningthatcompanies mustbegin theconversionprocessseveralyearsbefore thefinancialstatementswill beissuedinordertobecertaintheygather thenecessaryinformation.Forexample, preparationofthe2013financialstatementswillrequireabeginningbalancesheetas ofDecember31,2011andpubliccompanies needtobeginevenearliertopresent thethreeyearsofbalancesheetsrequiredbytheSEC.
Martha: That’sexactlywhatIwouldlikeyoutobeginworkingon.Ibroughtyouacopyof our2011financialstatementsaswellasoursummaryofsignificantaccounting policiesfromthenotestothefinancialstatements.Iwouldlikeyoutoperforma preliminaryassessmentof ourconversionrequirements.Identifytheareaswhereour U.S.GAAPaccountingmethodsmustbemodifiedtoconformtoIFRS.Insome areas,youmaynothavesufficient informationtocometoaconclusion.Makea separatelistoftheareasforwhichadjustment mayberequired,andlistthe additionalinformationyouneedtomakeafinaldetermination.
Chris: Iwillstartworkonthattoday.Whenwouldyoulikethiscompleted?
Martha: Whydon’tyousubmityourliststomenextweek?Wecandiscussyourfindings, andmakeanynecessaryadjustments. Thenwecanbegingatheringanyadditional informationyouneedtoconvertthe2011financialstatementstoIFRS.
AfterMarthaleft,Chrisdevelopedhisstrategyforcompletingtheassignment.Chrisdecidedto reviewthefinancialstatementsfordifferencesinpresentationbetweenIFRSandU.S.GAAP,and thenanalyzeeachsectionofthefootnotesforaccountingmethodsthatrepresentdeparturesfrom IFRS.Heexpectstofindissuestoconsiderformost,ifnotall,of theaccountingareasdescribedin thefootnotesaswellassomechangesinpresentation.
Phase:IRequirements:
2. Reviewthecompany’sfinancialstatements(Tables1,2,3,and4)andsummaryof significantaccountingpolicies(Exhibit1).Preparealistofaccountingareasforwhich sufficientinformationhasbeenprovidedtodeterminethatconversionisrequired.Include differences inpresentationaswellasaccountingmethods.Foreachitem,listany additionalinformationChriswillneedtoobtaintocompletetheconversion.
2. Preparealist ofaccountingareasforwhichadjustmentmaybenecessary,butinsufficient information wasprovidedtomakeanaccurateassessment.Listthespecific information Chriswillrequireinordertoconductfurtheranalysis.
PHASEII
MarthawaspleasedbyChris’spreliminary assessmentofareasinwhichtheRuckman,Inc. U.S.GAAPfinancialstatementsmayrequireadjustmenttoconformtoIFRS.Shedistributed
TABLE1
Consolidated IncomeStatement
Ruckman, Inc.
YearendedDecember 31,2011(in$thousands)
Revenues $191,685
Costofsales 120,638
Grossprofit 71,047
Sellingexpenses 16,370
Generalandadministrationexpenses 18,077
Researchanddevelopmentcosts 15,317
Otheroperatingincome 8,293
Otheroperatingexpenses 1,135
Totalexpenses 59,192
Operatingresult 11,855
Interest income 235
Otherincome 756
Interest expense (56)
Netincomefromordinaryactivitiesbeforetax 12,790
Incometax 789
Netincomefromordinaryactivities 12,001
Extraordinaryexpense 2,872
Netincomefortheyear $9,129
Chris’slistthroughoutthecompanyinordertogathertherequestedinformation.Severalweeks later,MarthaenteredChris’sofficetocheckonthestatusoftheproject.
Martha: WellChris,howistheIFRSconversionprojectcomingalong?Haveyoureceived alloftheinformationyourequested?
Chris: TheinventorymanagerdroppedoffherinformationthismorningandIhavejust begunworkingonconversionofthefinancialstatements.
Martha: I’mgladtohearit.Forthefirstdraftofthefinancialstatements,don’tworryabout calculating thetaxeffectofeachadjustment.We’llreviewyourconversionentries withourtaxadvisortoconsiderthefullimpact oftheproposedchanges.Andnow I’llletyougettowork.Ilookforwardtoseeingtheresults.
PhaseIIRequirements
1. UsetheadditionalinformationChrisgathered(Exhibit2)topreparealistofjournal entriesconvertingRuckman,Inc.’sU.S.GAAPfinancialstatementstoIFRS.
2. RecordyourconversionentriesandmakeanynecessarychangestopresentRuckman Inc.’sbalancesheetandincomestatement inaccordance withIFRSfortheyearended December31,2011.Tosaveyoutime,thecompany’sU.S.GAAPfinancialstatementsare availablefromyourinstructorinanExcelspreadsheet.Considerthefollowingitemswhen preparingtheIFRSfinancialstatements:
Assets
TABLE2
Consolidated BalanceSheet Ruckman, Inc.December31,2011
(in$thousands)
Cashandcashequivalents $71,943
Accounts receivable 33,490
Inventories 45,095
Available-for-salesecurities 9,025
Deferredtaxassets 59
Othercurrentassets 4,831
Totalcurrentassets 164,443
Property,plantandequipment 35,119
Investmentproperty 4,908
Deferredtaxassets 4,773
Goodwill 14,747
Otherintangibleassets 11,160
Othernon-currentassets 747
Totalnon-currentassets 71,454
Totalassets $235,897
Liabilities andshareholders’equity
Short-term debt
$1,251
Accounts payable 23,761
Accruedincometaxes 254
Otheraccruedliabilities 2,820
Othercurrentliabilities 4,878
Deferredrevenues 24,877
Totalcurrentliabilities 57,841
Debt
10,103
Othernon-currentliabilities 16,475
Totalnon-currentliabilities 26,578
Totalliabilities 84,419
Commonstock:29,713,000sharesissuedandoutstanding
29,713
Additional paidincapital 71,228
Retainedearnings 52,906
Accumulatedothercomprehensiveloss (2,369)
Totalequity 151,478
Totalliabilitiesandshareholders’equity $235,897
TABLE3
Statement ofCashFlows
Ruckman, Inc.
YearendedDecember 31,2011(in$thousands)
Cashflowfromoperatingactivities
Netincomefortheyear
Reconciliationbetweennetincomeandcashflowsfromoperatingactivities
Impairmentexpense $9,129
2,872
Depreciationandamortization 7,844
Deferredincometaxes
Otherchangesin
Assetaccounts 232
(27,777)
Liabilityaccounts 29,006
Cashflowprovided byoperatingactivities 21,306
Cashflowfrominvestingactivities
Capitalexpendituresinproperty,plant,andequipment
(2,181)
Capitalexpendituresinintangibleassets (184)
Cashflowusedforinvestingactivities (2,365)
Cashflowfromfinancingactivities
Issuanceofconvertiblebonds
4,000
Cashflowprovided byfinancingactivities 4,000
Effectofchangesofexchangeratesoncashandcashequivalents
(390)
Netchangeincashandcashequivalents 22,551
Cashandcashequivalents atthebeginning oftheperiod 49,392
Cashandcashequivalents attheendoftheperiod $71,943
Supplementaldisclosure ofcashflowinformation:
Interest paid
(42)
Interest received 253
Incometaxespaid (923)
a. Presentationofdeferredtaxes
b. Appropriateterminologyforequityaccounts
EXHIBIT 1:NOTESTOTHECONSOLIDATED FINANCIAL STATEMENTS
1.General Principles
Ruckman,Inc.isadiversifiedtechnologycompanywithaglobalpresenceintwobusinesses.It isaproviderofequipmentandservicestothesemiconductor andcompound-semiconductor industry,aswellasaproviderofpaperandpulpproductsworldwide.Theconsolidatedfinancial
TABLE4
Consolidated Statement ofChanges InEquity
Ruckman, Inc.
YearendedDecember 31,2011(in$thousands)
Common
Stock
Additional
Paid-In-Capital
Accumulated Other Comprehensive Income/Loss
Retained
Earnings
Total
Equity
BalanceatJanuary1,2009 $29,713 $71,228 $(1,991) $43,777 $142,727
Netincomefortheperiod 9,129 9,129
Currencytranslation (48) (48) Unrealizedinvestment gains 393 393
Actuariallosses (723) (723)
BalanceatDecember 31,2009 $29,713 $71,228 $(2,369) $52,906 $151,478
statementsincludetheaccountsofRuckman,Inc.anditswhollyownedsubsidiaries (‘‘Ruckman’’or the‘‘Company’’). Intercompanyprofits,transactions,andbalanceshavebeeneliminatedin consolidation.
2.SignificantAccountingPolicies
(a)BasisofAccounting
ThepreparationoffinancialstatementsinconformitywithU.S.generallyacceptedaccounting principlesrequiresmanagementtomakeestimatesandassumptions thataffectthereportedamounts ofassetsandliabilitiesanddisclosuresofcontingentassetsandliabilitiesatthebalancesheetdate andthereportedamountsofincomeandexpenses duringthereportedperiod.Actualresultsmay differfromtheseestimates.
Theaccountingpoliciessetoutbelowhavebeenappliedconsistentlytoallperiodspresentedin theseconsolidatedfinancial statements,andhavebeenappliedconsistentlybyeachconsolidated company.
(b)CashandCashEquivalents
Cashandcashequivalentscomprisecashonhand,currentdepositswithcreditinstitutions,and short-termnoteswitharemainingmaturityofthreemonthsorlessatthedateofacquisition.The basisofmeasurementisnominalvalue.
(c)AccountsReceivableandOtherReceivables
TheCompanyperformsongoingcreditevaluationsofitscustomersandgenerallydoesnot requirecollateral.Itmaintainsallowancesfordoubtfulaccountsfor estimatedlossesresultingfrom theinabilityofitscustomers tomakerequiredpayments, andsuchlosseshavebeenwithin management’sexpectations.
TheCompanyassessesthecustomer’s abilitytopaybasedonanumberoffactors,includ- ingits past transaction history with the customer and creditworthinessof the customer.
Managementspecifically analyzesaccountsreceivableandhistoricalbaddebts,customer concentrations, customercreditworthiness, currenteconomictrends,andchangesinthe Company’scustomerpaymenttermswhenevaluatingtheadequacy oftheallowances for doubtfulaccounts.Ifthefinancialconditionofthecustomersweretodeteriorate inthefuture, resultinginanimpairmentoftheir abilitytomakepayments,thenadditionalallowancesmaybe required.Uncollectibleaccountsreceivablearewrittenoffagainsttheallowancefordoubtful accountswhenalleffortstocollectthemhavebeenexhausted,andrecoveriesarerecognized whentheyarereceived.
(d)Inventories
(i)Valuation. Inventoriesarestatedatthelowerofcostandmarket.Costofrawmaterialsis determinedusingthefirst-infirst-outmethod.Forthesemiconductorsegment,costofworkin process,aswellasmanufacturedfinishedgoodsisdeterminedforspecificallyidentifiableassets. Certainfinishedgoodsarepurchasedforresalein relationto semiconductorrepairservices.Costof thesepurchasedfinishedgoodsisdeterminedusingthelast-infirst-outmethod.Forthepapergoods segment,costofworkinprocess,aswellasfinishedgoods,ispresentedusingthefirst-infirst-out method.
Thecostincludesexpendituresincurredinacquiringtheinventoriesandbringingthemto their existinglocationandcondition. Inthecaseofworkinprogressandfinishedgoods,costincludes direct materialandproductioncost,aswellasanappropriateshareofoverheadsbasedonnormal operatingcapacity.
(ii)Impairment.Allowanceforslowmoving,excessandobsolete,andotherwiseunsaleable
inventoryisrecordedbasedprimarily oneithertheCompany’sestimatedforecastofproduct demandandproductionrequirementforthenext12monthsorhistoricaltrailing12monthusage. Whentherehasbeennousageofaninventory itemduringaperiodof12months,theCompany writesdownsuchinventoriesbasedonpreviousexperience.
DuringtheyearendedDecember 31,2010,theCompanyrecognizedrevenuesof approximately$1.7millionfromsalesofinventorythathadbeenpreviouslyconsideredexcess orobsoleteandwritten-off.Consequently,therewasnocostofrevenuesrecognizedinconnection withtheseproductsalesin2010.
(e)Property,Plant, andEquipment
(i)AcquisitionorManufacturingCost.Items ofproperty,plant,andequipmentarestatedatcost, lessaccumulateddepreciationandimpairmentlosses(seebelow).Costsofinternallygenerated assetsincludenotonlycostsofmaterial andpersonnel,butalsoashareofoverheadcosts.Interestis expensedasincurred.
Timberandtimberlandsarerecordedatcost,andreforestationcostiscapitalized,lessdepletion forthecostoftimberharvested.Depletioniscomputedbytheunits-of-productionmethod.
(ii)Subsequent Costs.TheCompanycapitalizesimprovementstoproperty,plant,andequipment
whenitisprobablethatfutureeconomicbenefits willflowtotheCompany.Repairsand maintenanceareexpensedasincurred.
(iii)Depreciation. Depreciationischargedonastraight-linebasisovertheestimatedusefullives
ofproperty,plant,andequipment.Theestimatedusefullivesareasfollows:
• Buildings40years
• Machineryandequipment 10–20years
• Otherplant,factoryandofficeequipment3–8years
(iv)Impairment.Property,plant,andequipmentaretestedforimpairmentwhenthereisany indicationthattheassetmaybeimpaired.Impairmentlossesonsuchassetsarerecognizedif carryingamountexceedsthesumofexpectedfuturecashflows,totheextentthatthecarrying amountexceedsthefairvalue.
(f)Intangible Assets
(i)Goodwill.Goodwillistheexcessofthepurchasepriceoverthefairvalueofnetassetsof acquiredbusinesses.Goodwillisstatedatcostlessanyaccumulatedimpairmentloss.Goodwillis allocatedtoreportingunitsandistestedannuallyforimpairment(seebelow).
(ii)Research andDevelopment.Expenditureonresearchactivities,undertakenwiththeprospect
ofgainingnewtechnicalknowledgeandunderstandingscientificmethods,isrecognizedasan expenseasincurred.
Expenditureondevelopment, comprisingcostsincurredwiththepurposeofusingscientific knowledgetechnically andcommercially,isexpensedasincurred.
(iii)Other Intangible Assets.OtherintangibleassetsthatareacquiredbytheCompanyarestatedat
costlessaccumulated amortizationandimpairmentlosses(seebelow).Expenditureoninternally generatedgoodwill,trademarks,andpatentsisexpensedasincurred.
(iv) Subsequent Expenditure. Subsequent expenditure on capitalized intangible assets is
capitalizedonlywhenitincreasesthefutureeconomicbenefitsembodiedinthespecificassetto whichitrelates.Allotherexpenditure isexpensedasincurred.
(v)Amortization.Amortizationischargedonastraight-linebasisovertheestimatedusefullives
ofintangibleassets,exceptforgoodwill.Goodwillistestedatleastannuallyinrespectofits recoverableamount.Otherintangibleassets areamortizedfromthedatetheyareavailableforuse. Theestimated usefullivesareasfollows:
• Software2–3years
• Patentsandsimilarrights5–20years
• Customerbaseandproductandtechnologyknow-how6–7years
(vi) Impairment.Goodwillandotherintangibleassetsarereviewedforimpairmentatleast annuallyorwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofthese assetsmaynotberecoverable. Goodwillistestedseparatelyforeachreportingunitinthefourth quarterofeachfiscalyear.Thefirststepofthetestidentifiesifpotentialimpairmentmayhave occurred,whilethesecondstepmeasurestheamountoftheimpairment,ifany.Impairmentis recognizedwhenthecarrying amountoftheassetexceedsthefairvalue.Todate,noimpairment lossesforgoodwillhavebeenrecognized.Intangibleassetswithdefinitelivesareamortizedona straight-linebasisovertheirestimated usefullives.
(g)Contingencies
TheoutcomesoflegalproceedingsandclaimsbroughtagainsttheCompanyaresubjectto significantuncertainty.SFASNo.5,AccountingforContingencies,requiresthatanestimatedloss fromalosscontingencysuchasalegalproceedingorclaimshouldbeaccruedbyachargeto incomeifitis probablethatan assethasbeenimpairedordisclosureis requiredifthereis at leasta reasonablepossibilitythatalosshasbeenincurred.Indetermining whetheralossshouldbe accrued, theCompanyevaluates,amongotherfactors,thedegreeofprobabilityofanunfavorable outcomeandtheabilitytomakeareasonableestimateoftheamountofloss.Whenarangeof estimatesis consideredequallylikely,thelowestestimateis accruedonthebalancesheet.Changes inthesefactors(degreeofprobabilityortheabilitytoestimate) couldmateriallyimpactour financialpositionorourresultsofoperations.
(h)Debt
Debtconsistsofbankborrowings,convertible bonds,andbankoverdrafts. Management considersbankoverdrafts anintegralpartofRuckman’scashmanagementpolicy.TheCompany classifies borrowingsduewithin12monthsofthebalancesheetdateaslong-termwhena refinancingagreement isobtainedpriortothedateofthereport.
Convertiblebondsthatcanbeconvertedtocommonstockattheoptionoftheholder,wherethe numberofsharesissueddoesnotvarywithchangesintheirfairvalue,arerecorded asliabilities. Theinterestexpenserecognizedintheincomestatementiscalculatedusingtheeffective interest ratemethod.
(i)Earnings perShare
Basicearningspershare,asdisclosedinthenotestothefinancialstatements,arecomputedby dividingnetincome(loss)bytheweightedaveragenumberofcommonsharesoutstandingduringthe year.Dilutedearningspersharereflectthepotentialdilutionthatcouldoccurifconvertiblebonds wereconverted,unlesssuchconversionhadananti-dilutiveeffect.
(j)Investments
Investmentsincludeequitysecuritiesclassifiedasavailable-for-sale.Investmentsinlisted securitiesaremeasuredatfairvalue.Unlistedequitysecurities arecarriedatcost.
(k)Revenue
Ourrevenuesconsistofproductsales,whichprimarilyincludesalesofsemiconductorand compound-semiconductorequipment,replacementparts,paperandpulpproducts, and,toalesser extent,servicesandtrainingrelatedtothesemiconductorindustry.
Thesalesofoursemiconductorandcompound-semiconductorequipmentgenerallyinclude installationservices.Wedetermined theseelementsqualifyasoneunitofaccountingunder EmergingIssuesTaskForceBulletinNo.00-21,RevenueArrangementswith Multiple Deliverables(EITF 00-21),aswedonothaveevidenceoffairvaluefortheundelivered installationelements.
Furthermore,wedeterminedthattheundeliveredinstallation elementsareperfunctory performanceobligationsandarenotessentialtothefunctionalityofoursemiconductorequipment. Therefore,inaccordancewiththeprovisions ofStaffAccountingBulletinNo.104,werecognize revenuewhentherevenuerecognitioncriteriaaremetforthesemiconductorequipment,andaccrue thecostsofprovidingtheinstallationservices.Werecognizesemiconductorequipmentrevenueat oneoffollowingthreepoints,dependingonthetermsofourarrangementwithourcustomer:(1) shipmentofthesemiconductorequipment,(2)deliveryofthesemiconductorequipment,or(3) receiptofanacceptancecertificate.Forthemajorityofoursemiconductorequipmentsales,the shippingtermsareF.O.B.shippingpointandrevenueisrecognized uponshipment.Forour arrangementsthatincludeF.O.B.destinationshippingterms,revenueisrecognizedupondelivery ofthesemiconductor equipmenttoourcustomer.Last,oneofourarrangementsincludesan acceptanceprovision,whichissatisfiedbytheissuanceofanacceptancecertificate bythe customer.Forthesetransactions,werecognizerevenueuponreceiptoftheacceptancecertificate.In addition,wetestoursemiconductorequipmentinenvironmentssimilartothoseusedbyour customerspriortoshipmenttoensurethattheymeetpublishedspecifications.
Revenuefromreplacementparts,paper,and pulpsalesisrecognizedatthepointthatlegaltitle passestothecustomer,whichisgenerallyuponshipmentfromourfacility.
Forourservicecontracts,revenueisgenerallyrecognizedstraight-line overthetermofthe contract.Todate,serviceandtrainingrevenuehasbeenlessthan10percentofourtotalrevenue.
(l)Expenses
(i)CostofSales.Costofsalesincludessuchdirectcostsasmaterials,labor,andrelatedproduction overheads
(ii)Research andDevelopment. Researchanddevelopmentcostsareexpensedasincurred
(m)DeferredTax
Deferredtaxassetsandliabilitiesarerecordedforalltemporarydifferencesbetweentaxand financialbalancesheetsand forlossesbroughtforwardfortaxpurposesas wellasfortaxcreditsof thecompaniesincludedinconsolidation.Thedeferredtaxesarecalculatedbasedontaxrates applicableatthebalancesheetdate.Effects ofchangesintaxratesonthedeferredtaxassetsand liabilitiesarerecognized uponadoptionoftheamendedlaw.
(n)EmployeeBenefits
(i)DefinedContributionPlans.Obligationsforcontributionstodefinedcontributionpensionplans arerecognizedasanexpenseintheincomestatement asincurred.
(ii)DefinedBenefitPlans.Theobligationfromdefinedbenefitplansiscalculatedbyestimatingthe
amountof futurebenefitthatemployeeshaveearnedin returnfortheirservicein priorperiods;that benefitisdiscountedtodetermineitspresentvalue.Thecalculationisperformedbyaqualified actuaryusingtheprojectedunitcreditmethod.
Theassetsandliabilitiesofthepensionandpostretirementmedicalbenefitplansareaffected bychangingmarketconditionsaswellasdifferencesbetweenassumedandactualplanexperience. Sucheventsresult ingainsandlosses. Investmentgainsandlossesaredeferredandrecognizedin pensionandpostretirementmedicalbenefitcostsoveraperiodofyears.If,asoftheannual measurementdate,theplan’sunrecognizednetgainorlossexceeds10percentof thegreaterofthe projectedbenefitobligationorthemarket-relatedvalueofplanassets,thentheexcessisamortized overtheaverageremainingserviceperiodofactiveplanparticipants.This10percentcorridor methodhelpstomitigatevolatilityofnetperiodicbenefitcostsfromyeartoyear.
(o)OperatingLeases
Paymentsmadeunderoperatingleasesarerecognizedasexpense onastraight-linebasisover thetermofthelease.
(p)CashFlowStatement
Thecashflowstatementispreparedusingtheindirectmethod.Cashinflowsand cashoutflows fromtaxesandinterestareincludedincashflowsfromoperatingactivities.
EXHIBIT 2:SUPPLEMENTALINFORMATIONPROVIDED FORPHASEII
a.ExtraordinaryLoss
TheCompanycarriescomprehensive liability,fire,extendedcoverage,andrentalloss insuranceforeachofitsproperties.Thereare,however,certaintypesofextraordinarylosses,such aslossesforterrorism orearthquake,forwhichtheCompanydoesnothaveinsurancecoverage. The$2.872millionextraordinarylossreportedfortheyearrepresentsearthquakedamageincurred
TABLE5
ActivityofInventory forSemiconductorRepair Parts
Purchases
Month Units UnitCost Total UnitsSold
Jan-08 1,000 $80.00 $80,000 200
Feb-08 500 $82.00 $41,000 500
Mar-08 500 $85.00 $42,500 600
Apr-08 500 $85.00 $42,500 500
May-08 3,500 $85.00 $297,500 3,000
Jun-08 2,500 $87.00 $217,500 2,500
Jul-08 3,500 $88.00 $308,000 3,500
Aug-08 3,800 $89.00 $338,200 3,250
Sep-08 3,500 $92.00 $322,000 3,000
Oct-08 3,500 $91.00 $318,500 3,500
Nov-08 4,000 $90.00 $360,000 3,400
Dec-08 4,000 $95.00 $380,000 3,800
Jan-09 4,000 $100.00 $400,000 3,500
Feb-09 4,250 $102.00 $433,500 825
Mar-09 4,250 $103.00 $437,750 4,200
Apr-09 4,100 $105.00 $430,500 4,050
May-09 4,230 $110.00 $465,300 4,150
Jun-09 4,250 $112.00 $476,000 4,000
Jul-09 2,500 $115.00 $287,500 4,100
Aug-09 2,500 $116.00 $290,000 4,150
Sep-09 4,250 $118.00 $501,500 4,125
Oct-09 4,600 $118.00 $542,800 4,150
Nov-09 4,700 $120.00 $564,000 4,200
Dec-09 4,200 $121.00 $508,200 4,150
at the Californiafacilityduring August 2011. The Company classifiesdepreciationfor the
Californiafacilitywithgeneralandadministrativeexpenses.
b.Inventory
TheCFO haselectedtousethefirst-infirst-outmethodforcostingfinishedgoodsacquiredfor resaleinthesemiconductorsegmentforIFRSfinancialstatements.TheCompanyhasdeveloped strongrelationshipswith suppliers,andpurchasessubstantiallyalloftheserepairpartsondemand.
TheCompanymaintainsstockonthemostcommonlyuseditem,andrecordsperiodicactivityfor
TABLE6
ImpairmentofSemiconductorFinished Goods
Unit#1 Unit#2 Total
Cost $750,000 $1,230,000 $1,980,000
Fairvalue 38,000 198,000 236,000
Impairment $712,000 $1,032,000 $1,744,000
accountingpurposes.Table5providestheactivityinformationChrisobtainedtocalculatethe inventoryadjustmentfortheonlyitemonhandatyear-endfor2008or2009.TheCompanyhadno unitsonhandatDecember31,2009.
In2008,theCompanyrecordedimpairmentontwounitsoffinishedgoodsmanufacturedforthe semiconductorsegment.Theseunitswerecustommanufacturedforaspecificcustomerthatfiledfor bankruptcybefore takingpossessionofthegoods.AsofDecember31,2010,theCompanyhadno customerswith similarneeds andbelievedthefairvalueoftheequipmentwasequaltothevalue of salvagedparts.TheCompanyrecordedimpairmentof$1,744,000,calculatedasshowninTable6.
InDecember2011theCompanyobtaineda$1.1millionorderfromanewcustomer,with specificationssimilartoUnit#2.ManagementestimatesthecostofmodifyingUnit #2tomeetthe newspecificationsis$87,500.Themodifiedunitisscheduledforcompletionanddeliveryinthe firstquarterof2012.
c.Timber
IFRSrequiresthatbiologicalassetsbedisclosedonthefaceofthefinancialstatements,and carriedatfairvaluewithchanges invalue recordedintheincomestatement.TheCompany’sforest assets,intheformofstandingtrees,werevaluedat$1.3millionatbothDecember31,2010and2011.
d.Depreciation
Table7isasummaryofproperty,plant,andequipmentaspresentedontheDecember31,2011
U.S. GAAP balancesheet.Managementof the Company has determinedthat buildingsare comprisedofthecomponentslistedbelow,alongwiththeirestimatedusefullives:
• Building shell (site preparation, foundation, steel frame, exterior construction, floor structure,exteriorwalls,roofstructure)—40years
• Roof,floor, andinteriorconstruction—20years
• Electric,heating,ventilation,AC,plumbing,fireprotection,elevators—23years
• Fixedequipment—10,15or20years
• Informationtechnology (IT)infrastructure—10years
TheCompanyoperatesfacilitiesatthreelocations:
• FacilityconstructedinVirginia,withoperationsbeginningJanuary1,2000
• FacilitypurchasedinEnglandonJanuary1,2001
• FacilitypurchasedinCaliforniaonJuly1,2001
Asummaryofcostbycomponent andlocationhasbeenprovidedtoChris(seeTable8).
TABLE7
Property,Plant andEquipmentperU.S.GAAPBalanceSheet
Cost Depreciation andImpairment
Landandbuildings $31,095 $11,412
Timber $1,282 $1,009
Technical equipment andmachinery $30,247 $16,918
Otherplant,factory,andofficeequipment $9,338 $7,504
Total $71,962 $36,843
TABLE8
Identifiable Components ofLand andBuildingsbyLocation
Component Virginia England California Total
Land $855 $234 $281 $1,370
Buildingshell $15,002 $1,408 $4,624 $21,034
Roofandinterior construction $2,522 $758 $1,105 $4,385
Electric,ventilation, etc. $1,768 $550 $547 $2,865
Fixedequipment—20years $419 $196 $148 $763
Fixedequipment—15years $75 $52 $33 $160
Fixedequipment—10years $186 $69 $40 $295
ITinfrastructure $124 $48 $51 $223
TotalLand andBuildings $20,951 $3,315 $6,829 $31,095
e.Impairment
OnDecember31,2011,afterrecordingdepreciationexpenseforthemonth,theCompany testeditsCaliforniafacilityforimpairmentduetodamagefromanearthquake.TheCompany determinedthatdamagewasisolatedtothebuildingshell.Basedontherecoverabilitytests,no impairment wasrecorded.TheCompanygatheredthefollowinginformationtoconductthe recoverabilitytest:netsellingpriceof$3.315million,expectedfuturecashflowsof$7.424million, anddiscounted expectedfuturecashflowsof$3.595million.
Accumulateddepreciationandimpairmentalsoincludes$1.231millionimpairmentforthe Virginiabuildingshelland$0.2millionimpairment fortheVirginialandrecordedin2008.The Virginiaimpairment wascalculatedusingthefairvalueoftheassets($855thousandfortheland and$15.002millionforthebuildingshell),whichexceededthediscounted futurenetcashflows ($800thousandfortheland and$14.9millionfor thebuildingshell).Therehasbeennochangein estimatedfairvaluesincetheimpairmentwasrecorded.TheCompanyclassifiesdepreciationfor theCaliforniaandVirginiafacilitieswithgeneralandadministrativeexpenses.
f.IntangibleAssets
Engineersinthepaperandpulpsegmenthavepatentedaprocessthatresultsinhigh-yield,high- qualityfibrous rawmaterials that,usedtoaugmentexistingwoodfiber resources,reducescostof productionwhileincreasingqualityofthefinishedgoods.OnOctober31,2008theboardofdirectors approvedthe2009budget,includingadequateresourcesfordevelopmentoftheprocess.OnJuly1,
2011theengineersestablishedfeasibilityoftheprocess,estimatinga$2.5millionannualsavingsin
TABLE9
ExpendituresRelated toPatent
Costs
Developmentcost,Nov–Dec2010 $230,000
Developmentcost,Jan–Jun2011 $840,000
Developmentcost,July–Nov2011 $935,000
Legalfees—patent $50,000
Short-Term
TABLE10
DebtasofDecember 31,2011
Bankoverdrafts $51
Currentinstallment ofbanknote 1,200
$1,251
Long-Term
Convertiblebonds $4,000
BanknotematuringOctober15,2012,refinancedwithfive-yearbanknoteonFebruary
15,2012.
3,603
Banknotepayableinmonthlyinstallments(of$100plusinterest)throughJanuary2012. 2,500
$6,103
paperproductioncosts. TheCompanywasgrantedapatentonNovember30,2009thatprotectsthe processfor20years.ExpendituresrelatedtothepatenteddevelopmentarelistedinTable9.
Managementassessesperformanceofthecompanybyreviewingthefinancialperformanceof eachoperatingsegmentandgeographiclocation.BasedonappraisalsobtainedinSeptember2009, thefairvalueofeachoperatingsegmentexceedsthecarryingvalueofitsassets.
g.Contingent Liabilities
Othernon-currentliabilities includea$3,550,000accrualforalawsuitthatmanagement believesprobablywillresultinanegativeoutcome.Basedonstudiesofsimilarlitigation,the estimatedlossrangesbetween$3,550,000and$40,000,000.Nocontingentliabilities were identifiedwithprobabilitybetween50and75%.
h.Debt
DebtreportedasofDecember31,2011consistsofshort-termandlong-termdebt,asshowninTable
10.OnJune30,2011,Ruckman,Inc.issued$4millionofconvertiblebonds.Interestonthebondsispaid annuallyat4.5%.TheprevailingrateasofJune30,2009forsimilardebtwithoutconversionfeatures was6.5%.Eachbondhasafacevalueof$1,000andisconvertiblefor200sharesofcommonstock.
i.Investments
TheCompanyholdsthefollowingavailable-for-salesecuritiesasofDecember31,2011,as showninTable11.
TABLE11
AvailableFor SaleSecurities
Cost
Fair Value
12/31/2008 12/31/2009
Equitysecurities, publiccompanies $7,824 $8,305 $8,698
Equitysecurities, privatecompanies $327 $524 $843
JobNumber
TABLE12
InstallationAccruals
Estimated Installation(inthousands)
Revenue Labor Cost
09-26753 $500 $125
09-26754 332 83
09-26758 984 246
09-26759 748 187
09-26760 676 169
$3,240 $810
j.RevenueRecognition
Whilemultiple-elementarrangementsmust meet specificcriteriato be accountedfor as individual componentsforU.S.GAAP,eachelementisgenerallyaccountedforseparatelyunder IFRS.Chrisand Marthaworkedtogetherto draftthefollowingmodificationto therevenue recognitionpolicyforuseinthecompany’sIFRSfinancialstatements:
Revenuerelatingtoinstallationofthe equipmentatthecustomer’ssiteisrecognizedwhenthe serviceiscompletedandthefinalcustomeracceptancehasbeenconfirmed.The portionofthe contractrevenuedeferreduntilcompletionoftheinstallationservicesisdeterminedbasedon eitherthefairvalueoftheinstallationservicesortheportionof thecontractamountthatis due andpayableuponcompletionoftheinstallation.Fairvalueoftheinstallationservicesis determinedbasedonanestimateofthematerials andtimerequiredtocompletethe installation.
Chrishasgatheredinformationregardingjobsrecordedasrevenuein2009, asshown inTable
12,forwhichinstallationoccurredin2012.
k.Deferred TaxAsset
Chrishasdetermined anadjustmentshouldbemadetopresentthedeferredtaxassetin accordancewithIFRS,butnoadditionalinformationisrequired.
Funded status:
TABLE13
Summary ofPensionPlan
Planassetslessthanbenefitobligation $12,925
Netamountrecognized $12,925
Amounts recognized intheconsolidated balance sheet:
Non-currentliability $12,925
Accumulatedothercomprehensiveloss $951
Amount recognized inother comprehensive income:
Othercomprehensivepensionloss $723
l.Pensions
TheCFOhaselectedtousethecorridormethodforIFRSreporting, aswellasU.S.GAAP. WhencompaniesusethecorridormethodofaccountingforbothIFRSandU.S.GAAP,thebalance sheetsunderthetwoframeworkswillstilldifferbytheunrecognizedactuariallossesandprior servicecosts.These‘‘unrecognized’’amountsareincludedonthebalancesheetandaccumulated as othercomprehensiveincomeforU.S.GAAP,butaretrulyunrecordedforIFRS.Tomakethis adjustment,ChrisobtainedthesummaryinformationprovidedinTable13.
m.LeasedEquipment
InJuly2011,theCompanyenteredintoanon-cancelableagreementtoleasecertainpaper productionequipmentfor11years.Monthlypaymentsof$17,000commencedonJuly1,2011.The Companyestimates theusefullifeoftheequipmentas15years.TheCompanyconsidered purchasingtheequipmentfromanalternatevendorfor$1,749,000with financingat7percent,but electedtoleasetheequipment instead.Theleasepaymentsareclassifiedascostofsales