explain why each of the individual reconciling items is added or subtracted to conve 613754

Reconciliation of Income and Shareholders’ Equity:

The United States and Chile

Foreign companies whose shares are registered on U.S. security exchanges must file a description of significant differences between U.S. and domestic accounting principles with the SEC as well as a reconciliation of net income and shareholders’ equity under domestic and U.S.GAAP. Gold plate Company, Inc., a Chilean firm, included the following information:

1. Differences in Measurement Methods

The principal methods applied in preparing the accompanying financial statements that have resulted in amounts which differ from those that would have otherwise been determined under U.S.GAAP, are as follows:

(a) Inflation Accounting

The cumulative inflation rate in Chile, as measured by the Consumer Price Index, for the three-year period ended December 31, 2000, was approximately 85 percent.

Chilean accounting principles require that financial statements be restated to reflect the full effects of loss in the purchasing power of the Chilean peso on the financial position and the results of reporting entities’ operations. The method is based on a model in which net inflation gains or losses caused by monetary assets and liabilities exposed to changes in the purchasing power of local currency are calculated by restating all nonmonetary accounts of the financial statements.

The inclusion of price-level adjustments in the accompanying financial statements is considered appropriate under the prolonged inflationary conditions affecting the Chilean economy.

(b) Revaluations of Property, Plant, and Equipment

Certain property, plant, and equipment are reported in the financial statements at amounts determined in accordance with a technical appraisal carried out in 1997. Revaluation of property, plant, and equipment is an accounting principle not generally accepted in the United States.

(c) Vacation Expense

The cost of vacations earned by employees is generally recorded by the Company on a pay-as-you-go basis. Accounting principles generally accepted in the United States require that this expense be recorded on the accrual basis as the vacations are earned.

Required

a. For each of the indicated differences between U.S. and U.K. GAAP, indicate which method of accounting you consider to be more suitable to the needs of investor analysts. Explain your reasoning.

b. Based on the information provided, do you consider U.K. or U.S.GAAP to be more conservative? Explain.

c. Based on the explanations of differences between U.K. and U.S. GAAP, explain why each of the individual reconciling items is added (or subtracted) to convert to U.S.GAAP. (For example, why is goodwill subtracted in the income reconciliation and added in the shareholders’ equity reconciliation?)