Chapter 4: IFRS, Part 1 Flashcards
Types of Differences between IFRS and US GAAP
Definition differences: similar concepts. Definition differences can lead to differences in recognition and measurement
Recognition differences: 1) whether an item is recognized, 2) how it is recognized, 3) when it is recognized
Measurement differences: different amount is recognized resulting from either 1) a difference in the method required or 2) a difference in the detailed guidance for applying a similar method
Alternatives: one set of standards allows a choice between 2 or more alternative methods; the other set of standards requires on specific method
Lack of requirements or guidance
Presentation differences
Disclosure differences: 1) whether a disclosure is required, 2) the manner in which disclosures are required to be made
Cost of Inventories include (IAS 2):
Costs of purchase: purchase price, taxes, transportation handling, other costs to acquire materials, services, and finished products
Costs of conversion: direct labor and overhead costs (systematic allocation of variable and fixed production overhead). Fixed overhead should be applied based on normal level of production
Other costs: cost of inventories to bring the inventories to their present location or condition
Costs are expressly excluded from the costs of inventories:
Abnormal amounts of waster materials, labor, or other production costs
Storage costs, unless it is necessary in the production process before a further stage of production
Administrative overhead that does not contribute to bringing inventories to present location and condition
Selling costs
Other differences in IFRS inventories
FIFO and weighted-average costs are allowed, but LIFO is not allowed
The standard cost method and retail method are allowed
Entity must use the same cost formula for all inventories having similar nature and use to the entity.
Application of Lower Cost or Net Realizable Value (NRV) for IFRS and US GAAP
IFRS: IAS 2 requires inventory to be reported at lower cost or NRV. Applies on item-by-item basis.
_NRV: estimated selling price less the estimated costs of completion and the estimated costs to make the sale
_Write-down to NRV must be reversed when selling prices increases
US GAAP: lower cost or market
_Market price can be on the 3 values: 1) replacement cost, 2) NRV (ceiling), 3) NRV less normal profit margin (floor).
_Write-down to market must be reversed if replacement costs increase
Property, plants, and equipment IAS 16 guidance
- 1. Recognition of initial and subsequent costs:
Should be recognized when a) it is probable that future economic benefits will flow to the enterprise and b) the costs can be measured reliably.
_Replacement of part should be capitalized when a) and b) are met, and carrying amount of replaced part should be derecognized
Property, plants, and equipment IAS 16 guidance
- 2. Measurement at initial recognition: initial costs include:
Purchase price, costs attributable to bringing the asset to location and condition, and an estimate of the costs of dismantling and removing the asset.
Property, plants, and equipment IAS 16 guidance
- 3. Measurement subsequent to initial recognition:
_Cost model (consistent with US GAAP): cost less accumulated depreciation and any impairment losses.
_Revaluation model: carried at revalued amount (fair value at the date of revaluation) less accumulated depreciation and impairment loss. Entire PP&E class must be revalued. Revalued assets may be presented either at gross amount less a separated reported A/D or net amount.
. Revaluation surplus: credit to OCI
. Revaluation decreases: charged to I/S as an expense
+ Subsequent surplus: revaluation decreases recorded as reduction in any revaluation surplus, then additional revaluation decreases are recognized as an expense.
+ Subsequent expense: revaluation surplus should be recognized as income to previous expense and any excess should be credited to OCI.
Property, plants, and equipment IAS 16 guidance
- 3. Measurement subsequent to initial recognition (cont):
_Determination of fair value: the amount an asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction
_Frequency of revaluation: revalued amounts should not differ materially from fair values at balance sheet date
_Selection of assets to be revalued: all assets of the same class must be revalued at the same time.
_Accumulated depreciation:
+Restate the A/D proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount
+ Eliminate the A/D and restate the net amount to the revalued amount of the asset
_Treatment of Surplus and Deficits: surplus may be transferred to retained earnings when surplus is realized
+ Surplus is realized either through use of asset, sale, or disposal.
+ Surplus recognized to R/E:
. A lump sum
. An amount equal to the difference b/w depreciation on revalued amount and depreciation on historical cost may be transferred to R/E each period.
Property, plants, and equipment IAS 16 guidance
- 4. Depreciation
_Based on estimated useful lives, taking residual value into account.
_Depreciation method should reflect the pattern the asset’s future economic benefits are expected to be consumed.
_Changes are treated prospectively
_Significant parts with different depreciation methods or useful lives: each part must be depreciated separately
Property, plants, and equipment IAS 16 guidance
- 5. Derecognition
_1) Disposal or 2) when no future economic benefits are expected from its use or disposal.
_Gain and loss are recognized in N/I
_Reclassified as “noncurrent assets held for sale”
Investment Property (IAS 40)
_Land, buildings held to earn rentals, capital appreciation, or both.
_Cost model or fair value model can be used to measure principles of investment property.
+ Fair value model: changes in gains or losses are recognized in current income
+ Cost model: required to disclose fair value of investment property in the notes of F/S
. US GAAP requires to use cost model.
Impairment of Assets Events
_External events: decline in market value, increase in market interest rate, etc.
_Internal events: physical damage, obsolescence, idleness of an asset, etc.
Definition of Impairment (IAS 36)
_An asset is impaired when its carrying amount exceeds its recoverable amount (greater of net selling price and value in use).
+ Net selling price: the price of an asset in an active market less disposal cost
+ Value in use: present value of future net cash flows over its remaining useful life and upon disposal.
US GAAP: asset’s carrying amount exceeds the undiscounted future cash flow
Measurement of Impairment Loss
IFRS: excess amount of carrying value over recoverable amount is recognized in income. In case of revalued amount, impairment loss is taken against revaluation surplus and then to income.
US GAAP: excess amount of the carrying value over fair value.
Reversal of Impairment Losses
IFRS: recoverable amount exceeds its new carrying amount, the impairment loss should be reversed. The carrying value can only increase to the amount before impairment loss was recorded. Reversal should be recognized in income.
US GAAP: does not allow the reversal of a previously recognized impairment loss.
Intangible Assets Definition (IAS 38)
An identifiable, nonmonentary asset without physical substance for production of goods or services, for rental, or administrative purposes.
Conditions for a resource to become an intangible asset
_A resource controlled by the enterprise as a result of past events from which future economic benefits are expected to arise
_Identifiable, controllable, and measurable
Purchased intangibles measurement
_Measured at cost
_Useful life: finite or indefinite
+Asset with a finite useful life is amortized over useful life
+Indefinite life asset is when there is no foreseeable limit to the period over which it is expected to generate cash flow. No amortization is taken until the life is determined to be definite.
Residual value for intangible asset
Assume to be zero unless: 1) a third party agrees to purchase the asset at the end of its useful life or 2) there is an active market for the asset from which a residual value can be estimated.
Intangibles Acquired in a Business Combination
Intangible assets should be recognized at their fair value that can be measured reliably. If fair value cannot be measured, the intangible asset is included in goodwill
“In-process research & development”: incurred costs by acquiree prior to business combination. It must be capitalized that meets certain criteria. Unless fair value can not be determined, it is included in goodwill.
Internally generated intangibles
Expenditures giving rise to potential intangibles to be classified as either research or development expenditure
Research expenditure is expensed as incurred
Development cost for internally generated intangible is capitalized over a finite useful life.
6 criteria for development expenditures are recognized as an intangible asset:
- The technical feasibility of completing the intangible asset so that it will be available for use or sale
- Its intention to complete the intangible asset and use or sell it
- Its ability to use or sell the intangible asset
- Demonstration of probable future economic benefits or cash flow from the intangible asset
- The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset
- Reliable measurement of the expenditure attribute to the intangible asset during its development
Procedure to determine whether development costs should be capitalized as an internal generated intangible
_Determine the the point at which research ends and development begins
_Assess the six criteria for development cost capitalization
Development costs consist of
1) All costs directly attributable to development activities and
2) Costs that can be allocated to activities:
. Personal costs
. Materials and services costs
. Depreciation of property, plant, and equipment
. Amortization of patents and licenses
. Overhead costs (other than admin costs)
3) Borrowing costs are included to the extent that the costs constitute a qualifying asset.
Revaluation Model for Intangible Assets
Applies for assets with finite lives and the intangible has a price that is available on an active market.
Increase in asset’s fair value is credited to “revaluation surplus” in equity and its reversal reported in net income
US GAAP does not have revaluation of intangible assets
Impairment of Intangible Assets
Finite-lived intangible assets, impairment test when there are changes in events indicated an asset’s carrying amount may not be recoverable
Indefinite intangibles must be reviewed annually for impairment.
Reversal of impairment losses is prohibited, except for some special circumstances.
Goodwill Recognition (IFRS 3)
Goodwill is recognized only in a business combination
The measurement is the difference between:
a) The consideration transferred by the acquiring firm plus any amount recognized as noncontrolling interest
b) The fair value of net assets acquired (identifiable assets less liabilities)
Goodwill is recognized as an asset: a > b
“Bargain purchase” is recognized as a gain net income: b < a
Noncontrolling Interest Measurement under IFRS 3
1) A proportionate share of the fair value of the acquired firm’s net assets excluding goodwill or
2) Fair value, which includes the noncontrolling interest’s share of goodwill
Cash-Generating Unit (CGU)
The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from the assets
Impairment of Goodwill
Applies at CGU level
Impairment is the amount of CGU’s carrying amount (include goodwill) exceeds recoverable amount
_If noncontrolling interest was measured at proportionate share of net assets, carrying value must include the amount of goodwill attributable to noncontrolling interest (alternative 2)
Goodwill Impairment Loss Allocation
Impairment loss is applied against goodwill first and then allocated to other assets of the CGU based on their relative carrying amounts
_In alternative 1: goodwill impairment is shared between controlling and noncontrolling interest.
Bottom-Up Test for Goodwill
Apply to each cash-generating unit (CGU) by estimating the recoverable amount of the assets of each unit and compare with carrying amount excluding goodwill.
The impairment is allocated to the impaired unit’s assets on a pro-rata basis
Top-Down Test for Goodwill
Determine the smallest cash-generating unit to which goodwill can be allocated
The impairment is the carrying amount plus goodwill exceeds the recoverable amount
Top-Down and Bottom-Up Test for Goodwill Impairment is used when:
Goodwill cannot be allocated on a reasonable and consistent basis to CGU
Accounting Methods of Borrowing Costs
1) Benchmark treatment: expense all borrowing costs in the period incurred
2) Allowed alternative treatment: capitalize borrowing costs that are attributable to the acquisitions, construction, production of a qualifying asset; other costs are expensed
Borrowing Costs Definition
Interest and other costs incurred by an enterprise in connection with the borrowing of funds
_exclude foreign exchange gain and loss to the extend they are regarded as an adjustments to interest costs
IFRS and US GAAP exclude inventories that are routinely manufactured in large quantities over a short period
Asset qualified for borrowing cost capitalization
one that takes a substantial period to get ready for its intended use or sales
Borrowing amount to be capitalized
Amount of interest cost that could have been avoided if the expenditure on the qualifying asset has not been made
Amount of interest cost for borrowing costs
Multiplying the weighted-average accumulated expenditure by the interest rate
Sales Leaseback
Under IFRS, loss at time of sale is allowed only if the loss is due to impairment in the value of the asset sold. Under US GAAP, immediate recognition of loss is required regardless of the source.
Classified as a finance lease defer any gain on the sale and amortize it to income over lease term
Classified as operating lease immediate recognition of the gain due to difference between fair value and carrying value in income
Interim Financial Reporting
Interim period treated as discrete reporting periods
US GAAP treats Interim Period as an integral part of the full year
Statement of cashflow
Interest and dividends paid may be classified as either operating or financing (IFRS)
_Interest is classified under operating in US GAAP; and dividend is classified as financing activity
Interest and dividends received may be classified as either operating or investing (IFRS)
_Interest & Dividends received are classified as operating under US GAAP
Events after the Reporting Period
Adjusting events after the reporting period: events provide evidence of condition that existed at the end of the reporting period
Nonadjusting events after the reporting period: events arise after the balance sheet date but before the date of financial statements
_Need to disclose:
+The nature of the event
+ An estimate of the financial effects or a statement that an estimate cannot be made
Accounting Policies, Changes in Accounting Estimates and Errors provide guidance with respect to
Selection of accounting policies
Accounting for changes in accounting policies
Dealing with changes in accounting estimates, and
Correction of errors
Impairment Loss for Assets is Allowed when:
There are changes in the estimates used to determine the original impairment loss or change in the basis for determining recoverable amount
