The following transactions relate to MicroChip, a manufacturer located in Thailand. Indicate whether each transaction immediately gives rise to an asset of the company under U.S. GAAP and separately, under IFRS. If MicroChip recognizes an asset, state the account title, the amount, and the classification of the asset on the balance sheet as either a current asset or a noncurrent asset. MicroChip

Question

reports its results in millions of baht (Bt).
a. MicroChip invests Bt800 million in a government bond. The bond has a maturity value of Bt1,000 million in five years, and MicroChip intends to hold the bond to maturity.

b. Two months prior to its year-end, MicroChip pays its insurer Bt240 million to cover annual premiums on its European plants.

c. MicroChip pays a developer in another country Bt6 million for an option to purchase a tract of land on which it intends to build a warehouse to serve future markets. The price of the land is Bt450 million.

d. MicroChip signs a four-year employment agreement with its chief executive officer for a package valued at Bt17.4 million per year. Of this amount, Bt3.1 million is base salary; the rest is expected bonus and deferred compensation arrangements. The contract period begins next month.

e. MicroChip spends Bt80 million on research and development (R&D) related to new, circuitry; 60% of the total amount was spent on pure research, the rest on development. The R&D is successful, and the firm is able to acquire a patent on the new circuitry. The cost of filing the paperwork and other procedures to obtain the patent is Bt0.5 million.

f. MicroChip received notice that a component supplier had shipped by freight components invoiced at Bt700 million with payment due in 30 days. The supplier retains title to the components until received by MicroChip.

Answer 1

a. Both U.S. GAAP and IFRS would recognize Investment in Bond (noncurrent asset), Bt800 million. MicroChip would record the bond at acquisition cost, not the amount it will receive at maturity.

b. Both U.S. GAAP and IFRS would recognize Prepaid Insurance (current asset); Bt240 million would be recorded initially. At MicroChip year end, the balance in the Prepaid Insurance account needs to be decreased to reflect the two months' usage of the insurance, reducing the balance to Bt200 [= Bt240 – (Bt240 X 2/12)] million.

c. Both U.S. GAAP and IFRS would recognize Option to Purchase Land (noncurrent asset), Bt6 million.

d. Neither U.S. GAAP nor IFRS recognizes the employment contract, a mutually unexecuted contract, as an asset.

e. Under U.S. GAAP, MicroChip would record only the costs of obtaining the patent as an asset on its balance sheet, Patent (noncurrent asset), Bt0.5 million. The remaining Bt80 million is an expense of the period. Under IFRS, MicroChip would recognize Research Expense of Bt48 (= 60% X Bt80) million in the period incurred and record a Development Asset (noncurrent asset) at the acquisition cost of Bt32 million (= 40% of Bt80 million) as an asset on its balance sheet, which it would depreciate over the useful life of the product. Under IFRS, MicroChip would also recognize the patent as an asset on its balance sheet, Patent (noncurrent asset), Bt0.5 million.

f. Under both U.S. GAAP and IFRS, MicroChip would not recognize the components as an asset until it receives the inventory.