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Chapter 4:International FinancialReporting Standards:Part ICopyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning ObjectivesDiscuss 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 assetsExplain major differences between IFRS and U.S. GAAP on the recognition and measurement of assetsDescribe the requirements of IFRS in a variety of disclosure and presentation standards4-22Learning ObjectivesExplain major differences between IFRS and U.S. GAAP on certain disclosure and presentation issuesAnalyze the impact that differences between IFRS and U.S. GAAP can have on the financial statements4-3Types of Differences Between IFRS and U.S. GAAPDefinition differencesRecognition differencesMeasurement differencesAlternativesLack of requirements or guidancePresentation differencesDisclosure differences

4-4IFRS and U.S. GAAPIFRS more flexible in many casesChoice between alternative treatments in accountingIFRS generally have less bright-line guidanceMore judgment is required in applying IFRSIFRS is a principles-based accounting system:whereas U.S. GAAP is a rules-based system4-5IAS 2, InventoriesProvides more extensive guidance than U.S. GAAPCost of inventories include:Costs of purchaseCosts of conversionOther costsdesign, interest if takes time to bring to saleable conditionCost of inventories exclude:Abnormal wasteStorage unless necessary for the production processAdministrative overheadSelling costs

4-6IAS 2, InventoriesLimited choice with regard to cost formulasDoes not allow LIFOStandard cost method and retail method are acceptable only if they approximate cost as per IAS 2Cost of inventories not ordinarily interchangeable and produced and segregated for specific projects should use specific identificationAn entity must use same cost formula for similar inventory itemsIAS 2 requires inventory to be reported at the lower of cost or net realizable valueTypically applied on item-by-item basis, but grouping allowed for items of inventory relating to same product lineWrite-downs are reversed when selling price increases4-7IAS 16, Property, Plant, and EquipmentRecognition of initial costs Probable future benefits Can be measuredRecognition of subsequent costs Must follow initial recognition rules Carrying amount of the replaced part should be de-recognizedMeasurement at initial recognitionPurchase price + costs to perform as intended + costs of dismantling and removing the assetMeasurement subsequent to initial recognitionCan use cost model or revaluation model

4-88IAS 16, Property, Plant, and EquipmentDepreciationReview estimated lives, residual value, and method annuallyTreat any changes prospectivelyWhen comprised of significant parts, use component depreciationDerecognitionDerecognize carrying amount of property, plant, and equipmentWhen asset is disposedWhen no future economic benefits are expectedGain or loss is included in net income4-9IAS 40, Investment PropertyLand or buildings held for rental, capital appreciation, or bothSame general principles as per IAS 16: choice of cost or revaluation model:Changes in fair value is recognized in current income and not revaluation surplusU.S. GAAP generally requires use of cost modeDisclose fair value in notes when using the cost model4-10IAS 36, Impairment of AssetsMust test annually for impairment to plant, property and equipment; intangible assets; goodwill; investments in subsidiaries; associates, and joint venturesDoes 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 amountRecoverable amount is the greater of net selling price and present value of future net cash flowsImpairment more likely under IFRS since discounted cash flows are usedU.S. GAAP uses undiscounted future cash flows4-11IAS 36, Impairment of AssetsReverse 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 determinedReversal only up to original carrying amountRecognize reversal in income immediatelyU.S. GAAP allows no reversal4-12IAS 38, Intangible AssetsApplies to purchased intangibles, intangibles acquired in business combination, internally generated intangiblesGoodwill is covered separately under IFRS 3Intangible asset is identifiable, nonmonetary asset without physical substance:Held for production of goods or services, rental to others, or for administrative purposesControlled by enterprise as result of past events from which future economic benefits are expected to be realizedMust be expenses immediately if it does not meet the definitionExcept when obtained in business combination

4-13IAS 38, Intangible AssetsPurchased intangibles measured at costUseful life could be assessed as finite or indefiniteDistinction between intangibles with finite life and indefinite life is made in IAS 384-14Intangibles Acquired in Business CombinationPatents, trademarks, and customer lists recognized as assets measured at fair valueEven if not previously recognized by targetMust have finite or infinite lifeSpecial treatments for in-process research and developmentCapitalize when certain criteria is metOtherwise include in goodwill4-15Internally Generated IntangiblesMajor difference with U.S. GAAPIFRS allows some development costs to be capitalizedU.S. GAAP expenses all research and virtually all development4-16Internally Generated IntangiblesCriteria for development cost capitalization:Technical feasibility of completionIntention to complete asset for use or saleAbility to use or sell the assetHow probable future economic benefits will be generated Market or internal useAvailable adequate technical, financial, and other resources to complete the asset for use or saleAbility to reliably measure expenditures pegged to development4-17Internally Generated IntangiblesOther issues:Revaluation model is allowed with finite-lived intangibles If there is a price on an active marketImpairment of intangiblesIf carrying amount cant be recovered on finite-lived assetsneed to look at changes in events or circumstancesFor indefinite-lived intangibles and goodwillTest annuallyUnder special circumstances can reverse as per IAS 364-18IFRS 3, Business CombinationsRecognize goodwill only in business combinationsDifference between:Consideration paid by acquirer plus noncontrolling interestFair value of net assets acquiredNegative goodwill must be recognized as incomeGoodwill depends on the option selected to measure any noncontrolling interestMeasured at eitherA proportionate share of the fair value of the acquired firms net assets excluding goodwillFair value, including the noncontrolling interests share of goodwill4-19IFRS 3, Business CombinationsNot amortized as it is an indefinite-lived intangible assetImpairment of goodwill must be tested annuallyImpairment is tested at the level of the cash-generating unit (CGU)Compare carrying value of CGU, including goodwill, with recoverable amountU.S. GAAP is tested at level of the reporting unit which can be different and typically larger than CGUU.S. GAAP only requires a bottom-up test4-20IAS 23, Borrowing CostsRevised in 2007 to be similar to U.S. GAAP as part of convergence projectCapitalize all borrowing costs to extent they are attributable to acquisition, construction, or production of a qualifying assetExpense all other borrowing costsBorrowing costs include interest and other costs incurred in connection with borrowingIAS 23 includes foreign currency exchange to the extent they related to interest costsUnder IAS 23, inventories qualify if they require substantial period to manufacture4-21IAS 23, Borrowing CostsCapitalize interest that could have been avoided in absence of expenditure on the qualifying assetAmount 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 expenditures4-22IAS 17, LeasesDistinguishes between finance (capitalized) leases and operating leasesProvides rules for sale-leaseback transactionsConceptually similar to U.S. GAAP but provides less specific guidance Finance leases transfer substantially all the risks and rewards of ownership to lessee

4-23IAS 17, LeasesSituations normally leading to capitalization, individually or in combination Lease transfers ownership to lessee by end of lease termLessee has option to purchase at less than FMVLease term is for major part of the assets economic lifeU.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

4-24IAS 17, LeasesOther indicators leading to capitalization, individually or in combination:Lessee bears loss on lease cancellationLessee absorbs gain or loss from fluctuation in market value of residual asset valueLessee may extend lease for additional period at substantially below market rentOther finance lease considerationsCapitalize lease acquisition costsIAS 36 impairment rules applyDepreciate over shorter of useful life or lease termFinance leases must be classified as such by lessor and lessee4-25IAS 17, LeasesSale-LeasebackFinance Lease:Must defer any gain on sale and recognize it in income over the lease termU.S. GAAP rules generally similarIf fair value less than carrying value, IAS 17 recognizes loss only if loss due to impairmentSale-LeasebackOperating Lease:IAS 17 recognizes gain immediately in incomeU.S. GAAP amortizes gain over lease term

4-26IAS 17, LeasesDisclosures:Lessees must disclose future minimum payments related to finance leases and operating leases separately as follows:Amount to be paid in Year 1Amount to be paid in Years 2-5 as a single amountAmounts to be paid in Year 6 and beyond as single amountPresent value of future minimum payments under finance leasesU.S. GAAP requires disclosure payments for each of years 15 separately by year and then lump remaining years as single amount4-27IAS 17, LeasesIASB/FASB Convergence Project:Exposure draft issued in August 2010 for proposed new standard on accounting for leasesRevised draft on leases in 2013Significant changes proposed for lessors and lesseesLessee would recognize right-of-use asset and liability to make lease payments for all leasesNo more finance and operating lease distinctionAll leases would be finance leasesTake furthest possible termOn sale-leaseback, seller would recognize as sale or borrowing depending on certain conditions4-28Disclosure and Presentation StandardsIAS 7, Statement of Cash Flows:Classified as operating, investing or financingOperating cash flows may use direct or indirect methodInterest, dividends, and income taxes must be reported separatelyInterest and dividends paid may be classified operating or financingInterest and dividends received may be classified operating or investingIncome taxes are operating unless specifically identified with investing or financing activitiesCan only disclose noncash investing and financing activities outside of this statement

4-29Disclosure and Presentation StandardsIFRS/U.S. GAAP differences in statement of cash flows:Interest paid and received and dividends received all operating cash flowsDividends paid are financing cash flowsIndirect methodReconciliation must begin with net incomeDirect methodMust reconcile operating cash flows to net income4-30Disclosure and Presentation StandardsIAS 10, Events After Reporting Period:Known under U.S. GAAP as subsequent eventsCovers events between balance sheet date and authorized date of issuance of financial statementsU.S. GAAPthrough date of issuanceTypes of after-the-reporting-period eventsAdjusting eventsNon-adjusting events

4-31Disclosure and Presentation StandardsIAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors:Hierarchy of authoritative pronouncementsIASB Standard or interpretation specific to the event or transactionIASB Standard or Interpretation dealing with similar and related issuesDefinitions, recognition criteria, and measurement concepts in the IASB FrameworkMost recent pronouncements of other standards setting bodies that use similar framework (like FASB)Changes in accounting policy only if the change:Is required by IFRSResults in more relevant and reliable information4-32Disclosure and Presentation StandardsIAS 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 periodsCorrection of errors material, prior-period errors should be corrected retrospectivelyWhen impractical to determine period-specific effects of an error, the entity retrospectively restates the opening balances for the earliest period practicableRelated party disclosures must be disclosed in the notes to financial statements

4-33Disclosure and Presentation StandardsIAS 33, Earnings per Share:Basic and diluted EPS must be on face of income statementU.S. GAAP has more detailed guidance on diluted EPS:But application appears consistent with IAS 33IAS 34, Interim Financial Reporting:No guidance as to who should prepare, how often, or how soon after end of the periodTreats interim periods as discrete reporting periods U.S. GAAP treats interim reporting as integral part of full yearDescribes minimum content and accounting principles applied4-34Disclosure and Presentation StandardsNoncurrent assets held for sale reported separately on balance sheet at lower of carrying value or fair value less costs to sellThese assets are not depreciableSimilar to U.S. GAAPAfter-tax profit/gain or loss on disposal of discontinued operation must be reported as a single amountDetails must be disclosed in the notes or on the income statement4-35Disclosure and Presentation StandardsIFRS 8, Operating Segments, issued in 2006Replaced IAS 14, Segment ReportingRequires extensive disclosures for each separate operating segmentDisclosures similar to U.S. GAAP except the latter doesnt require disclosure of liabilities4-36End of Chapter 44-37