1. Long Term Liabilities under US Generally Accepted Accounting Principles vs. International Financing Reporting Standards Rebecca Fay Julia Makarieva Brenna Palazzo

2. The Fundamental Differences US GAAP – generally rules based – more conservative IFRS – generally principles based

3. Bonds Payable Bonds based on the underlying debt instrument Bonds recorded at present value of future interest and principal payments Discount and premiums are amortized throughout the useful life of the bond using the effective-interest method (440-10, IAS 37)

4. Discounts and Premiums US GAAP – Discounts recorded separately – Premiums recorded separately (440-10) IFRS – Discounts included directly in carrying value of bond – Premiums included directly in carrying value of bonds (IAS 37)

5. Long Term Notes Payable US GAAP IFRS Notes recorded at present value of Future Interest and Principle Payment Discounts and premiums amortized over term of note using effective interest method Over one year, long term discounts and premiums are included directly in the carrying amount (IAS 37) discounts and premiums are recorded separately (440-10)

6. Issue Costs US GAAP IFRS Direct and incremental costs related to the issuance of debt are not expensed Internal costs generally excluded from consideration of capitalization Transaction Costs Directly reduce carrying value (IAS 37) Recorded as deferred charges (440-10)

7. Debt Modification and Extinguishment Debt modified when there is a non-substantial modification of terms Modifications should be accounted for prospectively If modification is substantial or debt is discharged, debt is extinguished and liability derecognized Difference between reacquisition price and carrying amount should be recognized in income (470-50, IAS 37)

8. Debt Modification and Extinguishment US GAAP – costs incurred are expensed as incurred – distinguishes treatment for a significant debt modification when the debtor is viable – When non-viable, may be accounted for as a troubled- debt restructuring (470-50) IFRS – costs incurred for debt modification directly reduce the carrying value of the debt and are amortized using effective interest method – troubled debt restructuring- not specifically addressed – the treatment for a substantial modification is the same as an extinguishment (IAS 37)

9. Troubled debt restructuring Debtor may be relieved for part of all of his obligations due to the financial hardships from the transfer of assets or equity securities to the creditor or through the modification of debt

10. Troubled Debt Restructuring US GAAP Transfer of Assets – gain or loss recognized to the extent the fair value of assets transferred exceeds the amount payable, including accrued interest Transfer of equity securities – the difference between the fair value of the equity and the carrying amount of debt is recognized as a gain or loss (470-60) IFRS Transfer of Assets – no gain or loss is recorded – new effective-interest rate is computed Transfer of equity securities – no gain or loss is recorded and – new effective-interest rate is computed (IAS 37.72.83)

11. Potential Audit Problems-GAAP Measurement of Contingencies – If a range is given as an estimate… GAAP uses low end of range IFRS uses mid-point – GAAP records a lower liability Conservatism (450-20)

12. Potential Audit Problems-IFRS Valuation of Bonds – IFRS directly changes the carrying value of bonds for discounts and premiums – Discounts= understated debt – Not full disclosure (IAS 39, IAS 37) Recognition of Contingencies – IFRS requires “present obligation” – Delays recognition of liabilities – Not conservative (IAS 37.86)

13. Recent Updates-GAAP July 2010: FASB Exposure Draft, Disclosure of Certain Loss Contingencies – Provide more information to users Project Postponed (ASB 450, fasb.com)

14. Recent Updates-IFRS January 2010 IASB Exposure Draft, Measurement of Liabilities in IAS 37 February 2012: IASB Working Draft of IFRS Liabilities – Cost of restructuring – Specific requirements to measure liabilities Project postponed (IFRS.com)

15. Sources http://www.pwc.com/en_US/us/issues/ifrs- reporting/publications/assets/ifrs-and-us-gaap-similarities- and-differences-2012.pdf http://ec.europa.eu/internal_market/accounting/docs/con solidated/ias37_en.pdf http://ec.europa.eu/internal_market/accounting/docs/con solidated/ias37_en.pdf http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_I FRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec %202011.pdf http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_I FRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec %202011.pdf http://www.kpmg.com/Global/en/IssuesAndInsights/Articl esPublications/IFRS-GAAP-comparisons/Documents/IFRS- compared-to-US-GAAP-2012.pdf http://www.kpmg.com/Global/en/IssuesAndInsights/Articl esPublications/IFRS-GAAP-comparisons/Documents/IFRS- compared-to-US-GAAP-2012.pdf Academic Research Center: Long Term Liabilities. Earnst and Young Foundation.