Types of Differences Between IFRS and U.S. GAAP

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What are the types of differences between IFRS and US GAAP?


—Definitions. —Recognition. —Measurement. —Alternatives. —Lack of requirements or guidance. —Presentation. —Disclosure.


How is IFRS more flexible in many cases:


—- Choice of alternatives. —- Less guidance leads to more judgment in applying IFRS.


What does IAS 2: describe



—- Initial cost. —- Cost formulas to allocate cost of inventories to expense. —- Subsequent balance sheet measurement.


IAS 2, Inventories-Costs Included and Excluded


—Costs included: Cost of purchase (purchase price and direct acquisition costs). Conversion costs (labor and overhead). Other costs (design, interest if takes time to bring to saleable condition).
—Costs excluded: Abnormal waste. Storage unless necessary for production process. Purely administrative overhead. Selling costs.


IAS 2, Inventories-Cost formulas to allocate cost of inventories to expense.


Cost formulas:
—No LIFO! —Must use same cost formula for similar inventory items.

Must report on balance sheet at lower of cost or net realizable value:
—Unlike U.S. GAAP which uses lower of cost or market. NRV = estimated selling price less costs of completion and other costs to make sale.


What type of accounting system is IFRS, GAAP?


IFRS: Principles-based acccounting system.

GAAP: Rules-Based


IAS 2, How should Inventories be reported under IFRS, How is US GAAP different


1) Inventory is required to be reported at the lower of cost or Net Realizable Value-(est. selling price less est. cost of completion and est cost to make sale.)
2) Grouped by: item or goroup of similar items
3) Write-downs to NRV must be reversed when Selling price increases.

1) Lower of cost or market-(replacement cost w/ceiling NRV and floor NRV less normal profit margin.
2) Grouped: same, and total inventory basis
3) write-downs to market NOT reversable

—IFRS and U.S. GAAP both yield same expense over entire life.


IAS 16: PP&E when should both initial costs and subsequent costs related to PP&E be recognized as an asset?


1) costs—when yield probable future benefits which can be measured.

2) i.e. replacements—follow initial recognition rules and then remove cost and a/d of the replaced part.

Replacement of a part of an asset should be capitalized if 1 and 2 are met and the carrying amount of the replaced part should be derecognized


IAS 16:PP&E how should PP&E be measured initial recognition, how about after?


1) purchase price plus costs to put into service.

2) can use cost or---unlikeU.S. GAAP, can use revaluation model.


IAS 16:PP&E how should PP&E be measured at initial recognition?


At cost: (which includes)
1) purchase price, including import duties and taxes
plus costs to put into service.
2) cost directly attributable to bringing the asset to the location and necessary conditions for it to perfrom as intended.
3) est. of the costs of dismantling and removing and restoring the site location.

IF acquired in exchange for a non-monetary asset or combination of monetary and non-m should be initially measured at Fair Value,...unless the exchange lacks commercial substance.


IAS 16:PP&E how should PP&E be measured after initial recognition?


Two models:
1) Cost Model-item is carried at cost less accumulated depr. and any accum. impairment losses. (This is consistant w/US GAAP)

2) Revaluation model-item is carried at fair value at the date of revaluation, less any subsequent accum. depr. and any accum. impairment losses.
--Using this model requires revaluationsoften enough that the carrying value does not differ materially from assets fair value.
--Revaluations are made to entire class.
--Revaluations INC. are CR directly to OCI as revaluation surplus, DEC. are reductions of this surplus, excess is recognized as expense.
--Revaluation surplus may be trans. to RE on disposal of the asset.

Revalued assets may be presented either:
1) at a gross amount less separately reported accum. depr.(both revalued).
2) at a net amount.


IAS 16: PP&E What are the two alternative treatments for accum. depreciation?


1) Restate the accumulated depr. proportionately w/ the change in the gross carrying amount of the asset so that the carrying amount of the asset after revalueation ='s its revalued amount.

2) Eliminate the accum. depr. against the gross carrying amount of the asset, and restate the net amount to the revalued amount of the asset.


IAS 16: PP&E What are the requirements IAS 16 places on Depreciation?


Requires est. of useful life, residual value, and the method of depreciation to be reviewed on an annual basis.

Changes in any of these treated prospectively as changes in est.

--Items comprised of significant parts for which diff. depr. methods or useful lives are appropriate each oart must be depr. separately, Commonly referred to as component depr. (not commonly used under GAAP)


IAS 16:PP&E When and where is Derecognition recognized?


When the carrying amount of item is:
1) disposed
2)when no future economic benefits are expected from its use or disposal.

Gains or Loss included in net income.


What does IAS 40 prescribe?


Investment Property:
Same general principles as IAS 16 choice or cost or revaluation,
--Except gains or losses from changes in FV recognized in current income and not revaluation surplus
--Even using cost model—disclose FV in notes

(—U.S. generally requires use of cost model for investment property.)


What does IAS 36 require?


—Must test annually for impairment to P,P & E; intangible assets; goodwill; investments in subs; associates and joint ventures. — —Does not apply to inventory, construction in progress, deferred tax assets, employee benefit assets or financial assets (eg accounts and notes receivable). — —Some differences with U.S. GAAP. —Impairment indicators—external events (eg economic, legal, technological) or internal events (eg damage, obsolescence).


IAS 36: Impairment of Assets differences between IFRS and US GAAP?


Definition: —Impairment means carrying amount > recoverable amount: --Recoverable amount = greater of net selling price and value in use --Net selling price = price in active market less disposal costs --Value in use = PV of future net cash flows (cover maximum of 5 years unless longer period is justified)—based on approved budgets and using appropriate discount rate
—U.S. GAAP– carrying amount > undiscounted future cash flows (net selling price not considered). — —Impairment more likely under IFRS since discounted cash flows used—lower threshold.

—Reverse if recoverable amount > new carrying amount---if changes in estimates used to determine original impairment loss or change in how recoverable amount is determined. — —Can only reverse up to original carrying amount. — —Recognize reversal in income immediately. — U.S. GAAP—no reversal!


What are the three high priority convergence projects currently being worked on by accounting boards?


1) Revenue recognition
2) Leasing
3) Financial instruments


IAS 38 provides accounting rules and definitions for?


Applies to:
—Purchased intangibles. —Intangibles acquired in business combination. —Internally-generated intangibles. —Goodwill covered separately under IFRS 3—Business Combinations.
—Identifiable, nonmonetary asset . —No physical substance. —Held for production of goods or services, rental to others, or for administrative purposes. —Must be controlled by enterprise as result of past events from which future economic benefits are expected to be realized.


What if potential intangible asset does not meet the defintion of IAS 38?

How are purchased intangibles treated?


Definition (continued):
—Must expense immediately if definition not met unless obtained in business combination and then it is included in goodwill.
Purchased intangibles:
—Similar to U.S. GAAP treatment. — —Initially measured at cost and life is either finite or infinite . — —Finite—amortize over useful life—usually assume zero residual value unless 3rdparty agreement to purchase or active market exists.


What is the accounting treatment under IAS 38 for Intangibles acquired in business combination?


—Like U.S. GAAP—patents, trademarks and customer lists should be separate from goodwill and recognized as long as fair value is measurable (even if not previously recognized by target). — —Must have finite or infinite life. — —Special situation re: target’s development costs incurred prior to its being acquired---if meet certain criteria—capitalize—otherwise include in goodwill. — —Recent changes in U.S. GAAP converged treatment of in-process development costs with IFRS.


What is the accounting treatment under IAS 38 for Internally generated intangibles?


—Major difference with U.S. GAAP—some development costs may be capitalized whereas U.S. GAAP expenses all research and virtually all development (special rules re: software under U.S. GAAP). — —If can’t separate R & D—must treat all as research and expense immediately. — —May not capitalize internally-generated goodwill. — —Capitalize development when six criteria are met.
1. Technical feasibility so asset can be available for use or sale. — 2. Intention to complete asset for use or sale. —3. Ability to use or sell the asset. 4. —How probable future economic benefits will be generated (eg—market or internal use). —5. Available adequate technical, financial and other resources to complete the asset for use or sale. —6. Ability to reliably measure expenditures pegged to development.


IAS 38 what are other consideration re: capitalization of development costs?


—Considerable management judgment. —Include direct costs. —Allocate indirect costs (personnel, materials, depreciation of equipment, etc.). —Under IAS 23, Borrowing Costs --must include such costs if they constitute a qualifying asset. —Amortize over useful life with appropriate method reflecting pattern of how economic benefits will be realized (e.g. declining balance, units of production and straight-line).


Does IAS 38 allow the use of revaluation model for intangible assets?

How is Impairment of intangibles treated?


—Revaluation model:
is allowed with finite-lived intangibles if there is a price on an active market—THIS IS RARE IN PRACTICE. —

Impairment of intangibles: -If carrying amount can’t be recovered on finite-lived assets—need to look at changes in events or circumstances. -For indefinite-lived intangibles and goodwill—test annually.
Under special circumstances can reverse per IAS 36—EXCEPT for goodwill—no reversal allowed!


Under IFRS 3, Business Combinations how is Goodwill treated?


—Recognize only in business combinations. — —Equals consideration paid by acquirer plus recognized noncontrollinginterest lessfair value of net assets acquired
---(note—noncontrollinginterest may be measured under two options—eitherproportionate share of fair value of target’s acquired net assets excluding goodwill or fair value of their share including goodwill). — —Negative goodwill is possible—must recognize in income. — Not amortized as life is indefinite.


Under IFRS 3, Business Combinations how is impairment or goodwill treated?


—Test at least annually. —
Impairment is tested at the level of the cash-generating unit (CGU)—the smallest identifiable group of assets that generates cash inflows—use bottom-up and top-down test to allocate overall goodwill to each CGU.
—Compare carrying value of CGU, including goodwill, with recoverable amount (higher of value in use and fair value less costs to sell).
—U.S. GAAP is tested at level of the reporting unit which can be different and typically larger than CGU.
—U.S. GAAP only requires only a bottom-up test.


IAS 23, Borrowing cost: what is so special about you?


—Revised in 2007 to be similar to U.S. GAAP as part of convergence project.
—Capitalize all borrowing costs to extent they are attributable to acquisition, construction, or production of a qualifying asset.
—Expense all other borrowing costs.
—Borrowing costs are interest and other costs incurred in connection with borrowing—broader in scope than U.S. GAAP definition of interest cost.
—IAS 23 includes foreign currency exchange g/l if regarded as adjustment to interest cost.
—Qualifying asset takes substantial time to get ready for intended use or sale.
—Under IAS 23 (and not U.S. GAAP) inventories qualify if substantial time period as above.

—Capitalize interest that could have been avoided in absence of expenditure on the qualifying asset. — —Multiply weighted average accumulated expenditures by appropriate interest rate (similar to U.S. GAAP)---can use actual interest rate if can associate specific borrowing as being less than total expenditures. — —Unlike U.S. GAAP—allowed to net interest income on invested borrowed funds against interest cost.


What does IAS 17 define accounting treatment for?


—Distinguishes between finance (capitalized) leases and operating leases. — —Also provides rules for sale-leaseback transactions. — —Conceptually similar to U.S. GAAP but less specific guidance (one of the best examples of “principles-based” vs. “rules-based” provisions of IFRS and GAAP, respectively). — —IAS 17 says lease is finance when substantially all the risks and rewards of ownership have been transferred to lessee.


What are some Examples of situations normally leading to capitalization, individually or in combination (for U.S. GAAP—any one of the first four criteria will trigger capitalization):


1. —Lease transfers ownership to lessees by end of lease term. 2. Lessee has option to purchase at less than FMV. 3. Lease term is for major part of the asset’s economic life (U.S. GAAP says 75%). 4. Present value of future minimum lease payments at lease inception is equal to substantially all of the fair value of the leased asset (U.S. GAAP says 90%) 5. —Leased assets specialized so only usable by lessee without major modifications (not present in U.S. GAAP).

Other indicators leading to capitalization (not present under US GAAP):
—-Lessee bears loss on lease cancellation. —-Lessee absorbs gain or loss from fluctuation in market value of residual asset value. —-Lessee may extend lease for additional period at substantially below market rent.

Other finance lease considerations:
-—Capitalize lease acquisition costs (U.S. GAAP silent—common practice is defer and amortize over lease term). —-IAS 36 impairment rules apply. —-Depreciate over shorter of useful life or lease term. —-Finance leases must be classified as such by lessor and lessee.


Under IAS 17 what is the treatemtent for Sale-Leasebacks?


Finance Lease:

—Must defer any gain on sale and recognize it in income over the lease term. —U.S. GAAP rules generally similar. —If fair value less than carrying value IAS 17 recognizes loss only if loss due to impairment, whereas US GAAP requires immediate recognition of loss regardless of source.

Operating Lease:

—IAS 17 recognizes gain immediately in income. U.S. GAAP amortizes gain over lease term


Under IAS 17 what are the disclose requirements?


—Lessees must disclose future minimum payments related to finance leases and operating leases separately as follows: Amount to be paid in Year 1 Amount to be paid in Years 2-5 as a single amount Amounts to be paid in Year 6 and beyond as single amount Present value of future minimum payments under finance leases
—U.S. GAAP—more detailed info—disclose payments for each of Years 1-5 separately by year and then lump remaining years as single amount.


Possible future changes due to Convergence Project:


—Exposure draft issued in August 2010 for proposed new standard on accounting for leases. —
Significant changes proposedfor lessors and lessees.
—Lessee would recognize “right-of-use” asset and liability to make lease payments for all leases.
—No more finance and operating lease distinction.
—All leases would be finance leases.
—Take over furthest possible term.
—Lessors would recognize an asset for right to receive payments and derecognize lease asset or recognize liability depending on exposure to risks and rewards associated with leased asset.
—Sale-leaseback—seller would recognize as sale or borrowing depending on certain conditions.


IAS 17 and its effects on Statement of Cash Flows:


—Classified as operating, investing or financing. —
Operating cash flows may use direct or indirect method (indirect method: can reconcile to operating income or any measure of income). —
Interest, dividends and income taxes must be reported separately.
—Interest and dividends paid may be classified operating or financing.
—Interest and dividends received may be classified operating or investing.
—Income taxes are operating unless specifically identified with investing or financing activities. —
Can only disclose noncash investing and financing activities outside of this statement.

—Must disclose and reconcile components of cash and cash equivalents with amounts reported on balance sheet (need not agree with a single line item on the balance sheet). —
Bank overdrafts can reduce cash/cash equivalents if an integral part of cash management—otherwise classified as financing activity.


IFRS/U.S. GAAP differences in statement of cash flows:


—Interest paid and received and dividends received all operating cash flows —Dividends paid are financing cash flows —Indirect method—reconciliation must begin with net income —Direct method—must reconcile operating cash flows to net income

—Cash/cash equivalents line must reconcile with same line on balance sheet.


IAS 10, Events After Reporting Period:


—Known under U.S. GAAP as “subsequent events”. —Covers events between balance sheet date and authorized date of issuance of financial statements (U.S. GAAP—through date of issuance). —Adjusting events—existed at balance sheet date, such as estimated legal settlement—finalized before authorized date of issuance—must adjust as of balance sheet date! —Non-adjusting events—events arose after balance sheet date but before issuance authorized—disclose nature of event and estimate of financial effect or that estimate can’t be made.


IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors:


—Hierarchy of authoritative pronouncements: IASB Standard or Interpretation specific to to the event or transaction IASB Standard or Interpretation dealing with similar and related issues Definitions, recognition criteria and measurement concepts in the IASB Framework Most recent pronouncements of other standards setting bodies that use similar framework (like FASB) —Changes in accounting policy: Only if required by IFRS Results in more relevant and reliable information Apply retrospectively if practical—adjust carrying value of affected assets and liabilities and beginning retained earnings—do not report cumulative effect of change in net income!

—Changes in estimates are handled prospectively —Correction of errors—if material—handle retrospectively and change all affected comparative periods and beginning retained earnings If can’t determine period-specific effects—just change earliest period and restate opening balances where practical (U.S. GAAP has no such option—all material errors must be corrected through restatement)

Related Party Disclosures:
—Similar to U.S. GAAP —Must disclose transactions in notes if one party has ability to significantly influence or control another party