A1 Systems Inc. is a U.S.-based company that prepares itsconsolidated financial statements in accordance with U.S. GAAP. Thecompany reported income of $8,000,000 in 2014 and stockholders’equity of $30,000,000 as of December 31, 2014.

The CFO of A1 Systems has learned that the U.S. Securities andExchange Commission (SEC) is considering requiring U.S. publicfirms to use IFRS in preparing consolidated financial statements.The company wishes to determine the impact that a switch to IFRSwould have on its financial statements and has engaged your team toprepare a reconciliation of income and stockholders’ equity fromU.S. GAAP to IFRS. Your team has identified the following fivemajor areas in which accounting principles based on U.S. GAAPdiffer from those of IFRS.

Inventory

At year-end 2014, inventory had a historical cost of $5,000,000,a replacement cost of 4,750,000, a net realizable value of$4,800,000, and a normal profit margin of $900,000.

Property, plant, and equipment

The company acquired a building on 1/1/2012 at a cost of$10,000,000. The building has an estimated useful life of 30 years,an estimated residual value of $1,000,000, and is being depreciatedon a straight-line basis. On 1/1/2013, the building was appraisedand determined to have a fair value of $11,150,000. There is nochange in estimated useful life or residual value. In a switch toIFRS, the company would use the revaluation model to determine thecarrying value of PP&E subsequent to acquisition.

Impairment of Assets

The company purchased a piece of equipment on 1/1/2014 at a costof $1,000,000. The equipment is expected to have a useful life of10 years and no residual value. The straight-line method ofdepreciation is used. Technological innovations took place in theindustry during 2014. At year-end 2014, the equipment is determinedto have a selling price of $800,000 with zero-cost to sell.Expected future cash flows from continued use of the equipment are$950,000, and the present value of the expected future cash flowsis $825,000.