International Financial Reporting Standards (IFRSs)

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International

Financial Reporting

Standards (IFRSs)

PROGRAM STUDI AKUNTANSI FAKULTAS EKONOMI DAN BISNIS

UNIVERSITAS ESA UNGGUL EBA 604

AKUNTANSI INTERNASIONAL

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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.

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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.

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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.

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Recognition and Measurement: Some background

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.

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Measurement – choice of the attribute by which to quantify a recognized item. The most commonly used attributes:

– _{Historical cost}

– _{Net realizable value}

– _{Current (replacement) cost} – _{Current market value}

– _{Present value of future cash fows}

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• _{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.

Learning Objective 1

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• _{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.

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Recognition and Measurement: IFRSs

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.

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Recognition and Measurement: IFRSs and U.S. GAAP compared

Types of Diferences – _Defnitions

– _Recognition – _Measurement – _Alternatives

– _{Lack of requirements or guidance} – _Presentation

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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.

Learning Objectives 2 and 4

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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)}

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IAS 2, Inventories – compared to U.S. GAAP

• 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.

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IAS 2, Inventories – compared to U.S. GAAP

• _{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.

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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

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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)

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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

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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.

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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.

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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.

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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.

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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

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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%

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

GAAP, Revaluation adjustment to accumulated

depreciation: Treatment 1

• _{Asset and accumulated depreciation are}

restated.

• _{Restated carrying amount equals current market}

value.

• _{The ratio of carrying value to gross carrying}

amount is maintained.

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IAS 16, PP&E – numerical comparison to U.S. GAAP: Treatment 1

Original Revaluation Total

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

GAAP, Revaluation adjustment to

accumulated depreciation: Treatment 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).

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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

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IAS 38, Intangible Assets

• _{Purchased intangibles.}

• _{Intangibles acquired in a business}

combination.

• _{Internally generated intangibles.}

• _{Does not address Goodwill (see IAS 3).}

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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.

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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.

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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

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Internally generated intangibles – Development Costs

2005: Accounting treatment under IAS 38

Development expense 30,000

Deferred development costs 70,000

Cash, payables, etc. 100,000

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2006: Accounting treatment under IAS 38

Amortization expense 14,000

Deferred development costs 14,000

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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

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

• 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.

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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.

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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

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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

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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.}

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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.

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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.

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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.

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• Finance lease criteria, IAS 17

• _{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,}

SFAS 13

• _{Lease transfers ownership.} • _{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.

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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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International Financial Reporting Standards (IFRSs)

International

Financial Reporting

Standards (IFRSs)

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