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ACC 680 Module Three Homework

Jaguar Land Rover capitalized a higher percentage of R&D expenditures than German automakers, at around 200% compared to 30-80% for others. The estimated useful life of capitalized product development costs was just under 6.5 years, within the 2-10 year range disclosed. Converting Jaguar's financial metrics to US GAAP lowered reported profit before tax to $953 million, net profit to $752 million, total assets to $9.536 billion, and shareholders' equity to $1.495 billion.

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Jeirel Ruiz
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527 views2 pages

ACC 680 Module Three Homework

Jaguar Land Rover capitalized a higher percentage of R&D expenditures than German automakers, at around 200% compared to 30-80% for others. The estimated useful life of capitalized product development costs was just under 6.5 years, within the 2-10 year range disclosed. Converting Jaguar's financial metrics to US GAAP lowered reported profit before tax to $953 million, net profit to $752 million, total assets to $9.536 billion, and shareholders' equity to $1.495 billion.

Uploaded by

Jeirel Ruiz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
  • Case Study 4-1: Jaguar Land Rover PLC
  • Capitalized Product Development Analysis

Case Study 4-1: Jaguar Land Rover PLC

Required:
1. What percentage of R&D expenditures was capitalized during the fiscal year ending March 31,
2017? How does this percentage compare with the capitalization ratios of the German
automakers profiled in Exhibit 4.4?
2. Estimate the average useful life of product development costs by dividing average capitalized
product development costs by the amortization expense for fiscal 2016-2017. Compute average
capitalized product development costs as simple average balances at the beginning and end of
each fiscal year. Does your estimate fall within the range of the useful lives for development
costs disclosed in the accounting policy footnote?
3. The table below contains metrics as reported in JLR’s three primary financial statements. Convert
these metrics to a US GAAP basis. Where necessary assume that JLR’s tax rate is 21.1 percent, a
rate disclosed in Footnote 14, Taxation.

As Reported (IFRS) U.S. GAAP


(£ millions)
Profit before tax $1,610
Net profit (after tax) $1,272
Total assets $10,962
Shareholders’ Equity $6,581
Operating Cash Flow $3,160
Capital expenditures* $3,056

*Expenditures for both PPE & Intangibles

Answers:

1. Jaguar has about a 200% average in which was capitalized related to R&D expenditures. Jaguar
was able to capitalize more of their total expense than German companies.

Exhibit 4.4 data


Monetary Amounts Stated in €
Millions
Jaguar BMW Daimler Volkswagen
Capitalized Development Costs $1,426 $2,092 $2,315 $5,750
R&D Expenditures 1,794 5,164 7,572 13,672
Capitalization Ratio 79.48% 40.51% 30.57% 42.05%
2. The estimated useful lives fall between the range in which is disclosed in the accounting policy
footnote. The footnote has the range being between 2 and 10 years and our calculation shows
that we have an estimated useful life of just under 6.5 years.
a. “Product development cost is amortized over a period of between two and ten years.”
CAPITALIZED PRODUCT DEVELOPMENT
(£ MILLIONS)
BAL. MARCH 31, 2016 $4,525
BAL. MARCH 31, 2017 5,196
AVG CAPITALIZED PRODUCT DEVELOPMENT 4,860.50
AMORTIZATION EXP 769
ESTIMATED USEFUL LIFE 6.32
3. U.S. GAAP basis

As Reported (IFRS) U.S. GAAP


(£ millions)
Profit before tax $1,610 $953
Net profit (after tax) $1,272 $752
Total assets $10,962 $9,536
Shareholders’ Equity $6,581 $1,495
Operating Cash Flow $3,160 $1,734
Capital expenditures* $3,056 $1,630
Calculations:

PBT:
IFRS Amount – Amount Capitalized + Amortization Expense
U.S. GAAP Basis = $1,610 – 1,426 + 769 = $953
Net:
PBT X (1 – Tax Rate)
U.S. GAAP Basis = $953 X (1 – 0.211) = $751.92
U.S. GAAP Basis = $953 X (0.789) = $751.92 ≈ $752
Total Assets:
IFRS Amount – Amount Capitalized
U.S. GAAP Basis = $10,962 – 1,426 = $9,536
Shareholders’ Equity:
IFRS Amount – Net BV on March 31, 2017
U.S. GAAP Basis = $6,581 – 2,156 – 2,930 = $1,495
Oper. Cashflow:
IFRS Amount – Amount Capitalized
U.S. GAAP Basis = $3,160 – 1,426 = $1,734
Cap. Expenditures:
IFRS Amount – Amount Capitalized
U.S. GAAP Basis = $3,056 – 1,426 = $1,630

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