1. Chapter 4: International Financial Reporting Standards: Part I

2. Learning Objectives
Discuss the types of differences that exist between International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP)
Describe IFRS requirements related to the recognition and measurement of assets, specifically inventories; property, plant, and equipment; intangibles; and leased assets
Explain major differences between IFRS and U.S. GAAP on the recognition and measurement of assets
Describe the requirements of IFRS in a variety of disclosure and presentation standards

3. Learning Objectives
Explain major differences between IFRS and U.S. GAAP on certain disclosure and presentation issues
Analyze the impact that differences between IFRS and U.S. GAAP can have on the financial statements

4. Types of Differences Between IFRS and U.S. GAAP
Definition differences
Recognition differences
Measurement differences
Alternatives
Lack of requirements or guidance
Presentation differences
Disclosure differences

5. IFRS and U.S. GAAP IFRS more flexible in many cases
Choice between alternative treatments in accounting
IFRS generally have less bright-line guidance
More judgment is required in applying IFRS
IFRS is a principles-based accounting system:
whereas U.S. GAAP is a rules-based system

6. IAS 2, Inventories Provides more extensive guidance than U.S. GAAP
Cost of inventories include:
Costs of purchase
Costs of conversion
Other costs
design, interest if takes time to bring to saleable condition
Cost of inventories exclude:
Abnormal waste
Storage unless necessary for the production process
Administrative overhead
Selling costs

7. IAS 2, Inventories Limited choice with regard to cost formulas
Does not allow LIFO
Standard cost method and retail method are acceptable only if they approximate cost as per IAS 2
Cost of inventories not ordinarily interchangeable and produced and segregated for specific projects should use specific identification
An entity must use same cost formula for similar inventory items
IAS 2 requires inventory to be reported at the lower of cost or net realizable value
Typically applied on item-by-item basis, but grouping allowed for items of inventory relating to same product line
Write-downs are reversed when selling price increases

8. IAS 16, Property, Plant, and Equipment
Recognition of initial costs
Probable future benefits
Can be measured
Recognition of subsequent costs
Must follow initial recognition rules
Carrying amount of the replaced part should be de-recognized
Measurement at initial recognition
Purchase price + costs to perform as intended + costs of dismantling and removing the asset
Measurement subsequent to initial recognition
Can use cost model or revaluation model

9. IAS 16, Property, Plant, and Equipment
Depreciation
Review estimated lives, residual value, and method annually
Treat any changes prospectively
When comprised of significant parts, use component depreciation
Derecognition
Derecognize carrying amount of property, plant, and equipment
When asset is disposed
When no future economic benefits are expected
Gain or loss is included in net income

10. IAS 40, Investment Property
Land or buildings held for rental, capital appreciation, or both
Same general principles as per IAS 16: choice of cost or revaluation model:
Changes in fair value is recognized in current income and not revaluation surplus
U.S. GAAP generally requires use of cost mode
Disclose fair value in notes when using the cost model

11. IAS 36, Impairment of Assets
Must test annually for impairment to plant, property and equipment; intangible assets; goodwill; investments in subsidiaries; 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)
Impairment under IAS 36 = carrying amount > recoverable amount
Recoverable amount is the greater of net selling price and present value of future net cash flows
Impairment more likely under IFRS since discounted cash flows are used
U.S. GAAP uses undiscounted future cash flows

12. IAS 36, Impairment of Assets
Reverse impairment loss when recoverable amount exceeds new carrying amount:
if changes in estimates used to determine original impairment loss or change in how recoverable amount is determined
Reversal only up to original carrying amount
Recognize reversal in income immediately
U.S. GAAP allows no reversal

13. IAS 38, Intangible Assets
Applies to purchased intangibles, intangibles acquired in business combination, internally generated intangibles
Goodwill is covered separately under IFRS 3
Intangible asset is identifiable, nonmonetary asset without physical substance:
Held for production of goods or services, rental to others, or for administrative purposes
Controlled by enterprise as result of past events from which future economic benefits are expected to be realized
Must be expenses immediately if it does not meet the definition
Except when obtained in business combination

14. IAS 38, Intangible Assets Purchased intangibles measured at cost
Useful life could be assessed as finite or indefinite
Distinction between intangibles with finite life and indefinite life is made in IAS 38

15. Intangibles Acquired in Business Combination
Patents, trademarks, and customer lists recognized as assets measured at fair value
Even if not previously recognized by target
Must have finite or infinite life
Special treatments for in-process research and development
Capitalize when certain criteria is met
Otherwise include in goodwill

16. Internally Generated Intangibles
Major difference with U.S. GAAP
IFRS allows some development costs to be capitalized
U.S. GAAP expenses all research and virtually all development

17. Internally Generated Intangibles
Criteria for development cost capitalization:
Technical feasibility of completion
Intention to complete asset for use or sale
Ability to use or sell the asset
How probable future economic benefits will be generated
Market or internal use
Available adequate technical, financial, and other resources to complete the asset for use or sale
Ability to reliably measure expenditures pegged to development

18. Internally Generated Intangibles
Other issues:
Revaluation model is allowed with finite-lived intangibles
If there is a price on an active market
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 as per IAS 36

19. IFRS 3, Business Combinations
Recognize goodwill only in business combinations
Difference between:
Consideration paid by acquirer plus noncontrolling interest
Fair value of net assets acquired
Negative goodwill must be recognized as income
Goodwill depends on the option selected to measure any noncontrolling interest
Measured at either
A proportionate share of the fair value of the acquired firm’s net assets excluding goodwill
Fair value, including the noncontrolling interest’s share of goodwill

20. IFRS 3, Business Combinations
Not amortized as it is an indefinite-lived intangible asset
Impairment of goodwill must be tested annually
Impairment is tested at the level of the cash-generating unit (CGU)
Compare carrying value of CGU, including goodwill, with recoverable amount
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 a bottom-up test

21. IAS 23, Borrowing Costs
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 include interest and other costs incurred in connection with borrowing
IAS 23 includes foreign currency exchange to the extent they related to interest costs
Under IAS 23, inventories qualify if they require substantial period to manufacture

22. IAS 23, Borrowing Costs
Capitalize interest that could have been avoided in absence of expenditure on the qualifying asset
Amount capitalized by multiplying weighted-average accumulated expenditures by appropriate interest rate
Can use actual interest rate if can associate specific borrowing as being less than total expenditures

23. IAS 17, Leases
Distinguishes between finance (capitalized) leases and operating leases
Provides rules for sale-leaseback transactions
Conceptually similar to U.S. GAAP but provides less specific guidance
Finance leases transfer substantially all the risks and rewards of ownership to lessee

24. IAS 17, Leases
Situations normally leading to capitalization, individually or in combination
Lease transfers ownership to lessee by end of lease term
Lessee has option to purchase at less than FMV
Lease term is for major part of the asset’s economic life
U.S. GAAP says 75%
Present value of minimum lease payments at lease inception is equal to substantially all of the fair value of the leased asset
U.S. GAAP says 90%
Leased asset is specialized that only the lessee can use it without major modifications
Not present in U.S. GAAP

25. IAS 17, Leases
Other indicators leading to capitalization, individually or in combination:
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
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

26. IAS 17, Leases Sale-Leaseback—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
Sale-Leaseback—Operating Lease:
IAS 17 recognizes gain immediately in income
U.S. GAAP amortizes gain over lease term

27. IAS 17, Leases Disclosures:
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 requires disclosure payments for each of years 1–5 separately by year and then lump remaining years as single amount

28. IAS 17, Leases IASB/FASB Convergence Project:
Exposure draft issued in August 2010 for proposed new standard on accounting for leases
Revised draft on leases in 2013
Significant changes proposed for 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 furthest possible term
On sale-leaseback, seller would recognize as sale or borrowing depending on certain conditions

29. Disclosure and Presentation Standards
IAS 7, Statement of Cash Flows:
Classified as operating, investing or financing
Operating cash flows may use direct or indirect method
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

30. Disclosure and Presentation Standards
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

31. Disclosure and Presentation Standards
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
Types of after-the-reporting-period events
Adjusting events
Non-adjusting events

32. Disclosure and Presentation Standards
IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors:
Hierarchy of authoritative pronouncements
IASB Standard or interpretation specific 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 the change:
Is required by IFRS
Results in more relevant and reliable information

33. Disclosure and Presentation Standards
IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors:
Changes in estimates due to new developments and new information accounted for in current or future periods
Correction of errors material, prior-period errors should be corrected retrospectively
When impractical to determine period-specific effects of an error, the entity retrospectively restates the opening balances for the earliest period practicable
Related party disclosures must be disclosed in the notes to financial statements

34. Disclosure and Presentation Standards
IAS 33, Earnings per Share:
Basic and diluted EPS must be on face of income statement
U.S. GAAP has more detailed guidance on diluted EPS:
But application appears consistent with IAS 33
IAS 34, Interim Financial Reporting:
No guidance as to who should prepare, how often, or how soon after end of the period
Treats interim periods as discrete reporting periods
U.S. GAAP treats interim reporting as integral part of full year
Describes minimum content and accounting principles applied

35. Disclosure and Presentation Standards
Noncurrent assets held for sale reported separately on balance sheet at lower of carrying value or fair value less costs to sell
These assets are not depreciable
Similar to U.S. GAAP
After-tax profit/gain or loss on disposal of discontinued operation must be reported as a single amount
Details must be disclosed in the notes or on the income statement

36. Disclosure and Presentation Standards
IFRS 8, Operating Segments, issued in 2006
Replaced IAS 14, Segment Reporting
Requires extensive disclosures for each separate operating segment
Disclosures similar to U.S. GAAP except the latter doesn’t require disclosure of liabilities

37. End of Chapter 4