International Financial Reporting Standards (IFRSs)

  International Financial Reporting Standards (IFRSs) PROGRAM STUDI AKUNTANSI FAKULTAS EKONOMI DAN BISNIS EBA 604 AKUNTANSI PERTEMUAN #4

  

Standards (IFRSs)

Chapter Topics

  Basics of recognition and measurement.

• IFRSs: Recognition and measurement of
• assets.

  IFRS / U.S. GAAP differences: Recognition and

• measurement.

  IFRS / U.S. GAAP differences: Presentation

• and disclosure.

  Learning Objectives

  1. Describe the requirements of IFRSs on the recognition and measurement of assets.

  2. Explain the differences between IFRSs and

  U.S. GAAP on recognition and measurement issues.

  3. Describe the requirements of IFRSs related to the disclosure of financial information.

  

Standards (IFRSs)

  

Standards (IFRSs)

Learning Objectives

  4. Explain the differences between IFRSs and U.S. GAAP on disclosure issues.

  5. Use numerical examples to highlight the differences between IFRSs and U.S. GAAP.

  Review of important terminology Assets – resources controlled by the

  enterprise from which future economic benefts are expected to fow to the enterprise.

  Recognition – inclusion of items (e.g.,

  assets, liabilities) into the fnancial statements with the amount included in statement totals. which to quantify a recognized item. The most commonly used attributes:

  Measurement – choice of the attribute by

• – Historical cost
• – Net realizable value
• – Current (replacement) cost
• – Current market value
• – Present value of future cash fows
• Historical cost – amount paid to acquire an asset or, for liabilities, the amount received when the obligation is incurred.
• Net realizable value – amount of cash

  (sometimes the present value) minus collection and other costs incurred.

• Current (replacement) cost – amount needed to acquire an equivalent asset.
• Current market value – amount of cash received from an immediate sale of the asset.
• Present value of future cash fows – amount of cash to be received, discounted at the appropriate interest rate.

IFRSs • Substantially similar to U.S. GAAP

• However, signifcant diferences do exist.
• An efective way to understand IFRSs is to compare to U.S. GAAP.
• Describe IFRSs in terms of signifcant diferences from U.S. GAAP.

  Types of Diferences

• – Defnitions
• – Recognition
• – Measurement
• – Alternatives
• –

  Lack of requirements or guidance

• – Presentation
• – Disclosure

  Form 20-F

• Some frms fling Form 20-F initially use IFRSs to prepare fnancial statements.
• The Form 20-F of some of these frms can be used to gain an understanding of IFRS / U.S. GAAP diferences.

  Areas with signifcant diferences

• – Inventory (IAS 2)
• – Property, Plant, and Equipment (PP&E) (IAS 16)
• – Intangible Assets (IAS 38)
• – Impairment of Assets (IAS 36)
• – Borrowing Costs (IAS 23)
• – Leases (IAS 17)

  GAAP

  

IAS 2, Inventories – compared to U.S.

• Requires lower of cost or net realizable value (U.S. GAAP uses lower of cost or market).
• IAS 2 does not allow use of last-in, frst- out (LIFO).
• IFRSs would tend to lead to – Higher inventory balances.
• – Lower cost of goods sold.
• – Higher net income compared to U.S.

  GAAP if LIFO is used.

  GAAP

  

IAS 2, Inventories – compared to U.S.

• Allows for capitalization of interest on borrowings for some inventories.
• Capitalization of interest on inventories will lead to – Higher inventory balances.
• – Lower cost of goods sold.
• – Higher net income compared to U.S.

  GAAP.

  IAS 2, Inventories – numerical comparison to U.S. GAAP

  Application of lower of cost of net realizable value. Assume the following: Historical cost $500 Replacement cost 400 Estimated sales price 450 Estimated disposal costs 25 Normal proft margin 20% of sales price

  IAS 2, Inventories – numerical comparison to U.S. GAAP

  Lower of cost or net realizable value using

  IAS 2 Historical cost = $500 Net realizable value (NRV) = estimated sales price – estimated selling costs = $450 - $25 = $425 (lower of cost or

  NRV)

  

IAS 2, Inventories – numerical comparison

to U.S. GAAP Lower of cost or market under U.S. GAAP Historical cost = $500

  

Designated market is middle value of NRV

($425), Replacement cost ($400), and NRV – normal proft margin ($425 - $90 = $335). Designated market is $400 and lower of cost or market = $400

  IAS 2, Inventories – numerical comparison to U.S. GAAP

  The recognized inventory amount under IAS 2 is $425 and under U.S. GAAP is $400.

  Note: under U.S. GAAP the $400 now represents historical cost. Under IAS 2, historical cost remains at $500 which might be used as lower of cost or NRV in future years.

  IAS 16, PP&E – compared to U.S. GAAP

• Subsequent to initial measurement, IAS 16 allows the two diferent measurement approaches.
• Historical cost -- (the benchmark treatment) recognizes the asset at cost less accumulated depreciation, required by U.S. GAAP.

  IAS 16, PP&E – compared to U.S. GAAP

• Revaluation -- (the alternative treatment) requires that all assets within a class be revalued periodically
• – A major diference between IFRSs and

  U.S. GAAP as fxed assets are often substantial.

• – Revaluation is generally not allowed under U.S. GAAP.

  IAS 16, PP&E – compared to U.S. GAAP Accounting for revaluations

• Revaluation increases require a journal entry to increase the asset to fair value:

  Property, plant, and equipment xxxx Revaluation surplus xxxx Note: The revaluation surplus is an equity account.

  IAS 16, PP&E – compared to U.S. GAAP Accounting for revaluations

• Revaluation decreases require a journal entry to decrease the asset to fair value:

  Expense xxxx Property, plant, and equipment xxxx

  

IAS 16, PP&E – numerical comparison to U.S.

  GAAP

• Accounting for accumulated depreciation at time of revaluation. Assume the following as of 12/31/X2: Historical cost $10,000

  Accumulated depreciation 2,000

  Current market value 18,000 Ratio of carrying value to cost 80%

  GAAP, Revaluation adjustment to accumulated depreciation: Treatment 1

  

IAS 16, PP&E – numerical comparison

to U.S.

• Asset and accumulated depreciation are restated.
• Restated carrying amount equals current market value.
• The ratio of carrying value to gross carrying amount is maintained.

  

IAS 16, PP&E – numerical comparison

to U.S. GAAP: Treatment 1 Original Revaluation Total Cost

Gross carrying amount $10,000 + 12,500 =

$22,500 Accumulated depreciation 2,000 + 2,500 = $4,500 Carrying value $ 8,000 + 10,000 = $18,000

  GAAP, Revaluation adjustment to

accumulated depreciation: Treatment

  

IAS 16, PP&E – numerical comparison

to U.S.

  2

• Asset is frst decreased by the amount of accumulated depreciation.
• Asset account is then increased by the amount of the revaluation (current market value – carrying value).

  

IAS 16, PP&E – numerical comparison

to U.S. GAAP: Treatment 2 Accumulated Depreciation 2,000 Asset 2,000 Asset 10,000 Revaluation surplus 10,000

IAS 38, Intangible Assets • Purchased intangibles

• Intangibles acquired in a business combination.
• Internally generated intangibles.
• Does not address Goodwill (see IAS 3).

  

IAS 38, Intangible Assets – compared

to U.S.

  GAAP

• Purchased intangibles – consistent with

  U.S. GAAP except that fair value is used in some cases.

• Intangibles acquired in a business

  combination – consistent with U.S. GAAP

  except that in-process development costs are capitalized.

  

IAS 38, Intangible Assets – compared

to U.S.

  

GAAP internally generated intangibles

• Major diference with U.S. GAAP.

• U.S. GAAP (SFAS 2) requires expensing of almost all Research and Development (R&D) costs.
• IAS 38 allows capitalization, also called deferral, of many development costs.

  IAS 38, Intangible Assets – numerical comparison to U.S. GAAP Internally generated intangibles – Development Costs. Assume the following:

• – Development costs of $100,000 during 2005
• – 70% of costs qualify for capitalization
• – Product sales begin on January 2, 2006
• – Five years of sales expected
• – Capitalized costs amortized on a straight- line basis

  

IAS 38, Intangible Assets – numerical

comparison to U.S. GAAP Internally generated intangibles – Development Costs 2005: Accounting treatment under IAS

  Deferred development costs 70,000 Cash, payables, etc. 100,000

  IAS 38, Intangible Assets – numerical comparison to U.S. GAAP Internally generated intangibles – Development Costs 2006: Accounting treatment under IAS 38 Amortization expense 14,000 Deferred development costs 14,000

  IAS 38, Intangible Assets – numerical comparison to U.S. GAAP Internally generated intangibles – Development Costs 2005: Accounting treatment under U.S. GAAP Development expense 100,000 Cash, payables, etc. 100,000 2006: Accounting treatment under U.S. GAAP No entry

  IAS 36, Impairment of Assets – compared to

• Has lower threshold for impairments, sometimes results in impairments when U.S. GAAP does not.
• For assets considered impaired under U.S. GAAP, impairment is carrying amount minus fair value.
• Impairment is carrying amount minus the greater of net selling price or value in use. This is likely to difer from fair value.

  

IAS 36, Impairment of Assets – compared

to U.S. GAAP

• Allows for reversal of impairment loss in subsequent periods when recoverable amount exceeds carrying value.
• U.S. GAAP prohibits such reversals.

• • Impairment test for goodwill requires both a

  bottom-up and top-down test.
• U.S. GAAP requires only a bottom-up test.

  IAS 36, Impairment of Assets – numerical comparison to U.S. GAAP Assume the following: Carrying value $440

  Selling price 400 Cost of disposal

  25 Expected future cash fows 450 Present value of expected future cash fows 380

  IAS 36, Impairment of Assets – numerical comparison to U.S. GAAP Impairment under IAS 36

  Value in use $380 Net selling price 375 Recoverable amount $380 (greater of these two)

  Impairment loss = carrying amount – recoverable amount = $440 – 380 = $60

  IAS 36, Impairment of Assets – numerical comparison to U.S. GAAP

• Impairment under U.S. GAAP
• Carrying amount of $440 is less than expected future (undiscounted) cash fows of $450.
• No impairment.

  IAS 23, Borrowing Costs

• U.S. GAAP (SFAS 34) requires capitalization of interest on borrowings attributable to

  construction, acquisition, or production of

  qualifying assets.
• Capitalization of interest is the benchmark treatment under IAS 23. However, an alternative treatment allows for expensing of all interest.

  IAS 23, Borrowing Costs

• Explicitly allows for capitalization of interest on borrowing for the production of some inventories.
• U.S. GAAP explicitly prohibits the capitalization of interest on borrowings for production of most inventories.

  IAS 17, Leases

• Distinguishes between operating and fnance (capital) leases in much the same way as U.S. GAAP (SFAS 13).
• The criteria for classifying a lease as either operating or fnance is less detailed than U.S. GAAP

• • Leases is often used as an example in arguing that

  U.S. GAAP is rules-based and IFRSs are principles-

  based.

• Finance lease criteria, IAS

  17 • Lease transfers ownership.

  SFAS 13 • Lease transfers ownership.

• Bargain purchase option.
• Lease term is for the major part of the leased asset’s economic life.
• Present value of minimum lease payments equals substantially all of the fair value of the asset.
• The leased asset is specialized so that only the lessee can use it.
• Capital lease criteria,
• Bargain purchase option.
• Lease term is for 75

  percent of the leased asset’s economic life.

• Present value of minimum lease payments equals 90

  percent of the fair value of the asset.

  IFRSs and U.S. GAAP difer somewhat in each of the following areas

• • Cash Flow Statements (IAS 7) – Classifcation of

  dividends and interest paid is more fexible under

  IFRS.
• Segment Reporting (IAS 14) – U.S. GAAP requires management approach, IFRS is more fexible as of March 2005. This item is part of short-term convergence project.
• Interim Financial Reporting (IAS 34) – U.S. GAAP treats interim periods as integral part of the full year.

  

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