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In 2022, its first year of operations, Pinnacle AG[1] prepared its financial statements in accordance with IFRS (as audited by Rdl & Partners). The financial statements have been translated and restated from Euros to U.S. dollars. After-tax Operating Income amounted to $250,000 and Shareholders Equity is reported at $1,300,000. Germanys headline corporate income tax (CIT) rate is 15.8%

Pinnacle is interested in attracting additional external investors to help finance a major expansion. Our company, Apex, LLC, is interested in Pinnacle as a potential investment. As part of the due diligence process, The CFO asked you to reconcile the income statement and the Shareholders Equity portion of the balance sheet to U.S. GAAP.

You have identified the following five (5) items as having potentially material impact for the reconciliation process.

1. The 12/31/2022 balance sheet shows inventory with a balance of $605,000. Records indicate historical cost of $620,000 and replacement cost of $600,000. Through additional analysis you determined that the current estimated selling price is $630,000 with $25,000 cost to sell. The normal profit margin is 15% of the selling price. Pinnacle uses the retail inventory method.
2. The footnotes describe property, plant, & equipment, all acquired in 2022, with historical cost of $2,000,000 and accumulated depreciation of $150,000 as of 12/31/2022. Pinnacles analysis indicates the fair market value as of December 31 is $2,050,000 and that the revaluation model is applied.
3. In 2022 Pinnacle incurred research and development costs totaling $50,000. Pinnacle can clearly distinguish the research phase from the development phase of the project. Research-phase costs amounted to $32,000 and development-phase costs are $18,000. An additional $25,000 of development costs are budgeted in 2023. All the IAS 38 criteria have been met for recognition of the development costs. The product is expected to be brought to market in 2023 and to be marketable for five years.
4. Pinnacle owns a 2.02 hectare plot of land that is currently not in use and is being held as investment property. The historical cost of the land is $350,000. A real estate broker conducted a comparative analysis in December and determined the fair market value of the tract is $325,000. Pinnacle applied the revaluation model consistent with IFRS.
5. In 2022 Pinnacle began construction of a new plant that is recognized as a qualifying asset under IAS23: Borrowing Costs. Interest costs associated with construction loans amounted to $15,000. Additionally, other borrowing costs associated with the loans (bank fees, closing costs, etc.) amounted to $4,000.

Use the following template to prepare the reconciliation of U.S. GAAP income to IFRS income.

Item	Adjustment	Explanation
After-tax Operating Income (IFRS)	$250,000
After- tax Operating Income (U.S. GAAP)

Item	Adjustment	Explanation
Shareholders Equity (IFRS)	$1,300,000
Shareholders Equity (U.S. GAAP)

ROE Impact Analysis

Use this sheet to show your calculations for the 5 reconciliation items.

[1]Aktiengesellschaft (AG) is a German joint stock company

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