1. Chapter 5: International Financial Reporting Standards: Part II

2. Learning Objectives
Describe and apply the requirements of IFRS related to the financial reporting of current liabilities, provisions, employee benefits, share-based payment, income taxes, revenue, and financial instruments
Explain and analyze the effect of major differences between IFRS and U.S. GAAP related to the financial reporting of current liabilities, provisions, employee benefits, share-based payment, income taxes, revenue, and financial instruments

3. Current Liabilities
IAS 1, Presentation of Financial Statements, requires classification of liabilities
Current liabilities
Noncurrent liabilities
Expected to settle in normal operating cycle
Held for trading purpose
Settled within 12 months of balance sheet date
Not deferred until 12 months after balance sheet date

4. Differences in IFRS and U.S. GAAP: Current Liabilities
Refinanced short-term debt
IFRS: Long-term, if refinanced prior to balance sheet date
U.S. GAAP: Long-term, if refinancing is agreed prior to balance sheet
Accounts payable on demand due to violation of debt covenants
IFRS: Current, unless lender issued waiver of 12 months by balance sheet date
U.S. GAAP: Current, unless lender issued waiver obtained by annual report issuance date
Bank overdrafts
IFRS: Long-term, if integral part of cash management netted against cash
U.S. GAAP: Always treated as current liabilities

5. Provisions, Contingent Liabilities, and Contingent Assets
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, provides guidance for:
Reporting liabilities and assets of uncertain timing, amount, or existence
Environmental and nuclear decommissioning costs

6. Contingent Liability Recognized under IFRS, when:
There is a present obligations from past events
It is probable that there will be an outflow of resources
A reliable estimate of the obligation can be made
Constructive obligation: arise from past actions or current statements indicating that a company will accept certain responsibilities
No concept of constructive obligation in U.S. GAAP

7. Contingent Liability As defined by IAS 37
Possible obligation confirmed by occurrence or nonoccurrence of future event
Present obligation not recognized because:
No probable outflow of resources
Amount cannot be measured reliably
Recognized under U.S. GAAP when outflow is probable
Only disclosed if outflow possible, and not probable

8. Provisions
IAS 37
The best estimate of the expenditure required to settle the present obligation
Probability-weighted expected value
Discounted to present value
Recognized under U.S. GAAP at the low end of the range of possible amounts
Provision is reversed when outflow of resources is not probable

9. Onerous Contract
Unavoidable costs of obligation exceed economic benefits to be received
Recognize provision for lower of
Cost of fulfillment
Penalty from non-fulfillment
If onerous from entity's own action, no recognition until that action happens

10. Restructuring
A program planned and controlled by management that changes either:
Scope of business
Manner in which business is conducted
Under IAS 37, a restructuring provision is recognized when:
Formal restructuring plan exists
There is a valid expectation of the restructuring
U.S. GAAP does not allow recognition until liability has been incurred

11. Employee Benefits
IAS 19, Employee Benefits, covers all forms of employee compensation and benefits
Excludes share-based compensation
Four types of employee benefits
Short-term benefits (compensated absences and bonuses)
Post-employment (pensions and medical benefits)
Other long-term benefits (deferred compensation and disability)
Termination benefits (severance and early retirement)

12. Employee Benefits
Short-term benefits recognize expense and liability at the time employees provide service
Amount recognized is undiscounted
Compensated absences (for sick/vacation pay) accrue when services are provided only if:
The compensated absences accumulate over time
They can be carried forward to future periods
For nonaccumulating compensating balances, an expense and liability are recognized
Profit sharing and bonus plans
An expense and a liability are accrued if:
There are present legal or constructive obligation o make such payments
The amount can be reasonably measured

13. Employee Benefits Post-employment benefits
IAS 19 distinguishes between defined contribution plans and defined benefit plans
Defined contribution plan
Benefits accrue when services are rendered
Liability reduces when contributions are made
Defined benefit plan
Two major issues
Calculation of the net defined benefit liability (or asset)
Calculation of the defined benefit cost

14. Post-employment benefits
Net defined benefit liability (asset)
Balance sheet amount calculated as:
+ Present value of the defined benefit obligation (PVDBO)
− Fair value of plan assets (FVPA)
Asset recognized is limited to the larger of
Surplus
Asset ceiling
No asset ceiling under U.S. GAAP

15. Post-employment benefits
Defined benefit cost reported in income
Components include
Current service cost
Past service cost and gains and losses on settlements
Net interest on the net defined benefit liability (asset)
Remeasurements of net defined benefit liability (asset)
Net income
Other comprehensive income

16. Other post-employment benefits
IAS 19 does not provide separate guidance for other post-employment benefits
U.S. GAAP provides more guidance for measurement of post-employment medical benefits

17. Share-based Payment
IFRS 2, Share-based Payment, sets out measurement principles and specific requirements for three types of share-based payment transactions
Equity-settled share-based payment
Cash-settled share-based payment
Choice-of-settlement share-based payment
IFRS 2 and U.S. GAAP are substantially similar

18. Equity-Settled Share-Based Payment
Payments to non-employees for goods and services
IFRS measurement
Fair value of goods or services, if determined
Fair value of the equity instrument
U.S. GAAP measurement
Fair value of instrument at earlier of
Commitment for performance
When performance completed

19. Equity-Settled Share-Based Payment
Payments to employees
Measured at the fair value of the equity instruments
Consider vesting conditions
Total compensation cost
Recognized as compensation expense
Estimate of options vested to be revised throughout the vesting period
Recognition of associated compensation expense
Straight-line over service period for cliff vesting
Amortize each installment (tranche) over their vesting period for Graded vesting
U.S. GAAP allows choice of accelerated or straight-line recognition

20. Modification of Stock Option Plans
Types of modification
Length
Vesting conditions
Result of fair value change
Increase in fair value
Increase compensation cost by the same amount
Decrease in fair value
No change in compensation cost deducted
U.S. GAAP
Fair value determines compensation expense
No minimum compensation as under IFRS

21. Cash-Settled Share-Based Payment
Cash payment on stock price increase above predetermined level
Recognize fair value as a liability using option-pricing model
Measure on each balance sheet date
Under U.S. GAAP, classify certain cash-settled payments as equity
Under IFRS, classify as liability

22. Choice-of-settlement Share-based Payment
Allow entity to choose equity settlement or cash settlement
If present obligation to settle in cash, treat as cash-settled
If obligation settled in equity, treat as equity-settled
Treat as compound financial instrument when receiving entity chooses equity settlement or cash settlement
Fair value split into separate debt and equity components
Remeasure debt component must be remeasured at fair value balance sheet date
Apply cash settlement against debt component
Transfer equity settlement to equity

23. Income Taxes IAS 12, Income Taxes, similar to U.S. GAAP
Asset-and-liability approach
Deferred tax assets and liabilities
For temporary differences
For operating loss tax credit carry forwards
Under IFRS, measure on the basis of tax laws and rates enacted or substantively enacted
Under U.S. GAAP, measure on the basis of actually enacted tax laws and rates
Account for double taxation effects and differences in rates

24. Income Taxes Recognition of Deferred Tax Asset Disclosures
Under IFRS, recognize if future realization probable
IAS 12 provides a more stringent threshold
U.S. GAAP, recognize if realization is more likely than not
Disclosures
IFRS requires
Extensive disclosures of tax expense
Explanation of hypothetical expense based on two approaches
Compare statutory tax expense in the home country and effective tax expense
Compare weighted-average statutory tax rate across jurisdictions and tax expense based on the effective tax rate
IFRS vs. U.S. GAAP
IFRS application can cause temporary differences

25. Income Taxes Financial Statement Presentation U.S. GAAP IAS 1
Deferred tax assets and liabilities
Current
Non-current
Based on underlying asset or liability
Tax loss or credit carry-forwards
Timing of expected realization
IAS 1
Only noncurrent

26. Revenue recognition IAS 18, Revenue covers revenues from U.S. GAAP
Sale of goods, rendering of services
Interest, royalties
Dividends
U.S. GAAP
200 authoritative pronouncements
General Measurement Principle
Fair value of consideration received or
Receivable
Multiple elements transaction
Split transaction into multiple elements or
Combine multiple transactions into one

27. Revenue recognition Sale of Goods—5 Criteria Rendering of Service
Transfer of significant risks and rewards to buyer
No effective control maintained or management involvement
Can measure revenue reliably
Probable future economic benefits flow to seller
Selling costs can be measured reliably
Rendering of Service
Revenue recognized in proportion to extent of services rendered
U.S. GAAP
Percentage-of-completion for service contracts not allowed

28. Revenue recognition Interest, Royalties and Dividends
Recognized on effective yield basis
Royalties
Recognized on accrual basis
Based on relevant agreement
Dividends
Recognized when shareholder’s right to payment established
Exchange of Goods or Services
If similar—no gain or loss
If dissimilar—recognize fair value of what is received adjusted for cash paid or received

29. Revenue recognition Construction Contracts
Revenues and expenses recognized using the percentage-of-completion method
Two types
Fixed-price contract
Cost-plus contract
Economic benefits flow to the entity
Contract costs
Clearly identified
Reliably measured29
Revenues measurable
Costs and stage of completion measurable

30. IAS 18, Revenue IASB-FASB Revenue Recognition Project
Both boards working since 2002
June 2010—joint Exposure Draft “Revenue from Contracts with Customers”
5 steps:
Identify the contract
Identify separate performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the separate performance obligations
Recognize the revenue allocated to each performance obligation when the entity satisfies each performance obligation

31. Financial Instruments
Standards
IAS 32, Financial Instruments: Presentation
IAS 39, Financial Instruments: Recognition and Measurement
IFRS 7, Financial Instruments: Disclosure
IFRS 9, Financial Instruments—issued in November 2009 to replace IAS 39—effective 2015
Definitions
IAS 32—a financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity

32. Financial Instruments
Definitions
IAS 32—a financial instrument gives rise to
Financial asset of one entity
Financial liability or equity instrument of another entity
Financial asset
Cash
Contractual right to:
Receive cash or other financial asset
Exchange financial assets or financial liabilities
under potentially favorable conditions
An equity instrument of another entity
A contract that will or may be settled in entity’s own equity instruments

33. Financial Instruments
Financial liability
A contractual obligation to
Deliver cash or another financial asset
Exchange financial assets or financial liabilities
Under potentially unfavorable conditions
A contract that will or may be settled in the equity’s own equity instruments

34. Financial Instruments
Liability or Equity
IAS 32
Financial instruments to be classified
As financial liabilities or
Equity or both
Compound Financial Instruments
Both a liability and equity element (e.g. convertible bond)
Split accounting
With and without method

35. Financial Instruments
Classification of Financial Assets and Liabilities
Classification of financial asset:
Fair value through profit or loss (FVPL)
Held-to-maturity investments
Loans and receivables
Available-for-sale financial assets
Financial liabilities:
Measured at amortized cost
Measurement of Financial Instruments
Initial—fair value (normally = amount paid or received)
Subsequent—cost, amortized cost, or fair value

36. Financial Instruments
Available-for-Sale Financial Asset Denominated in a Foreign Currency
Two components
The change in fair value in the foreign currency
A foreign exchange gain or loss
From exchange rate changes
Impairment
IAS 39 requires assessment of impairement
Derecognition
Appropriate if
Contractual rights to the cash flows expired
Financial asset has been transferred

37. Financial Instruments
Derivatives
Financial instruments swaps
Whose value changes with change in
A specified interest rate,financial instrument price,
Commodity price, foreign exchange rate,
Index, credit rating, or other variable.
IFRS 39
Derivatives measured at fair value
Receivables
Measured
Initially at fair value
Subsequently, at amortized cost using effective interest method

38. End of Chapter 5