Chapter 5: IFRS, Part 2 Flashcards
Current Liabilities in IAS 1
- Expect to settle within the normal operating cycle
- Holds primarily for the purpose of trading
- Expect to settle within 12 months of B/S date
- Does not have the right to defer until 12 months after the balance sheet date
Current Liabilities Classifications Differences between US GAAP and IFRS
Refinanced short-term debt: IFRS-classified as long-term debt if refinancing completed prior to the B/S date. US GAAP-refinancing agreement must be reached by B/S date
Amounts payable on demand due to violation of debt covenant: IFRS-classified as current, unless a waiver of at least 12 months is obtained by B/S date. US GAAP-waiver must be obtained by annual report issuance date
Bank overdrafts: IFRS-netted against cash if the overdrafts form an integral part of entity’s cash management, otherwise classified as current liabilities. US GAAP-always current liabilities
Provision Definition
A liability of uncertain timing or amount
Contingent Liabilities Definition
_ Possible obligation that arise from past events and whose existence will be confirmed by the occurrence or noncurrence of a future event
_A present obligation is not recognized because: 1) it is not probable an outflow of resources will be required to settle, or 2) amount cannot be measured
Provision should be recognized when:
- Entity has a present obligation as a result of a past event
- Probable outflow of resources will be required to settle the obligation
- A realistic estimate of the obligation can be made
Constructive Obligation
Based on past or current statements, a company will accept certain responsibilities and has created a valid expectation for other parties it will discharge those responsibilities
Recognized as provision when probable and estimable
Contingent Liability Recognition
Only disclosed in IFRS, unless the possibility of an outflow of resources embodying the economic future benefit is remote
US GAAP:
+ Neither disclosed or recognized if outflow of resource if remote
+ Discloses if outflow is possible
+ Recognized if out flow is probable (70-90%) by accrual at the low-end range
Probable Definition in IFRS
More likely than not ( greater 50%)
Provision Measurement
Best estimate
Must be discounted at present value
+US GAAP: discount when amount and timing of payments are fixed
Must be reviewed at the end of each accounting period and adjusted for current best estimate
Best Estimate
Midpoint within a range if all estimates are equally likely or probability-weighted expected value when a range of estimates exists
Subsequent Reduction of Provision can be made
only for the expenditures for which the provision was established
Provision Recognition for Onerous Contract
Recognized the unavoidable costs of the contracts (lower of the cost of fulfillment and penalty for non-fulfillment). Resulting provision should not be recognized until that action has occurred
Recognition for expected future operation losses is not allowed
Onerous Contract
a contract in which the unavoidable costs of meeting the obligation exceed the economic benefits expected to be received from it
Restructuring
a program that is planned and controlled by management that changes either 1) scope of a business or 2) manner the business in conducted
Restructuring Provision Recognition
IFRS: recognized when there is a detailed plan and valid expectation the plan will be carried out
US GAAP: does not allow recognition of a restructuring until a liability has been incurred.
Contingent Asset Definition
a probable asset that arises from past events and existence will be confirmed by future event
Contingent Asset Recognition
When the inflow of economic benefits is probable, contingent asset should be disclosed
Recognized when it’s virtually certain
Four Types of Employee Benefits
- Short-term employee benefits
- Post-employment benefits
- Other long-term employee benefits
- Termination benefits
Short-term benefits
Amount is undiscounted
- Compensated absences: amount is accrued if compensated absences accumulate and can be carried forward to future. Expense and liability when when absence occurs in case of non-accumulating.
- Profit-sharing and bonus plans: expense and liability are accrued if
a) company has present legal or constructive obligation to make such payments
b) amount can be reliably estimated
Defined contribution plan
- Accrues an expense and liability at the time the employee renders services
- Reduces liability when contributions are made
Net Defined Benefit Liability (Asset) =
+Present value of defined benefit obligation (PVDBO)
- Fair value of plan assets (FVPA)
Net Defined Benefit Liability (Asset) Deficit and Surplus
Deficit: PVDBO > FVPA. The net defined benefit liability is reported on balance sheet
Surplus: PVDBO < FVPA. The amount for net defined benefit asset is the larger of:
a. The surplus, and
b. The asset ceiling: PV of any economic benefits in the form of refunds from the plan or reduction in future contributions to the plan (No asset ceiling for GAAP)
Two Components for Defined Benefit Pension Plans
1) Net Defined Benefit Liability (Asset)
2) Defined Benefit Cost
Defined Benefit Cost For Components
Recorded in net income:
- Current service cost
- Past service cost and gains and losses on settlements: recognized in net income in period the benefit plan is changed (GAAP: recognized in OCI and amortized to net income)
- Net interest on the net defined benefit liability (asset): multiply by discount rate used in PVDBO
Recorded in OCI:
4. Remeasurement of net defined benefit liability (asset):
Remeasurement of net defined benefit liability (asset) includes:
- Actual gains and losses: arises when an employer changes the actuarial assumptions (GAAP: choice between OCI or net income)
- Difference b/w actual return on plan assets in the current period and interest income component of NIDBA (FVPA x discount rate)
- Any change in the effect of the asset ceiling
Other Long-Term Employee Benefits
A liability should be recognized for the difference between:
- Present value of defined benefit obligation
- Fair value of plan assets
Share-based payment types
- Equity-settled share-based payment transactions:
- Cash-settled share-based payment transactions
- Choice-of-settlement share-based payment transactions
Equity-settled share-based payment transactions:
_To nonemployees: payments are measured at fair value of goods or serviced received. If this is not available, use fair value of equity instrument (measurement date the entity obtains goods)
US GAAP: use fair value of equity instruments
_To employees: transaction is measured at the fair value of the equity instruments granted.
_Modification of stock option plans: require entity to recognize the original amount of compensation cost as measured at grant date. FV reduced, no change. FV increased, total compensation cost must increase by the fair value.
Stock Options
;Total compensation cost= number of options expected to vest x fair value of the options. APIC is used to offset for the increase of the options.
Cliff vesting (vest on a single date): compensation is recognized on straight-line.
Graded vesting (vest on installments): compensation is amortized over installment's (or tranche) vesting period. US GAAP: allows a choice
Cash-settled share-based payment transactions
Recognize as liability and expense, which is measured at fair value of share appreciation rights at each balance sheet date. Change in fair value reflected in net income
US GAAP: classified as equity
Choice-of-settlement share-based payment transactions
The fair value must be split into debt and equity components.
+Debt component: remeasured at fair value at balance sheet date, change reflected in net income. Cash payment applied to debt component (reduce liability)
+Equity component: debt component is transferred to equity when supplier chooses to receive settlement in equity
Tax Laws and Rates in IFRS
Current and deferred taxes are required to be measured on the basis of tax laws and rates that have been “enacted” or “substantively enacted” by balance sheet date.
Recognition of Deferred Tax Asset
IFRS: recognizes if future realization of a tax benefit is probable
US GAAP: recognizes when it’s more likely than not.
Income Tax Disclosures in IFRS
requires an explanation of relationship between tax expense based on statutory tax rate and effective tax rate using one of the two approaches:
- Reconciliation between tax expense based on statutory tax rate in home country and tax expense based on effective tax rate
- Reconciliation between tax expense based on weighted-average statutory tax rate across jurisdictions and effective tax rate expense
IFRS vs GAAP in Income Taxes
IFRS can create temporary differences unknown under GAAP
Different amounts of temporary differences
Financial Statement Presentation for Income Tax
IFRS: deferred tax assets and liabilities are classified as noncurrent
US GAAP: deferred tax assets and liabilities can classified as either current or noncurrent based on the related asset or liability
Five Conditions to Recognize Revenue for Sale of Goods
- The significant risks and rewards of ownership of the goods have been transferred to buyer* (can be difficult and requires judgement)
- Neither continuing managerial involvement normally associated with ownership nor effective control of the goods sold is retained
- The amount of revenue can be measured reliably
- Probable economic benefits with the sale will flow to seller
- The costs incurred or to be incurred with respect to the sale of goods can be measured reliably.
Revenue Recognition for Service Transaction
Recognize when 1) outcome of a service transaction can be estimated reliably and 2) probable economic benefits of transaction will flow to the enterprise
Revenue should be recognized in proportion to some measure of the extent of services rendered (stage of completion basis)
Outcome of a service transaction can be estimated reliably when:
1) amount of revenue, 2) costs incurred and 3) stage of completion can be measured reliably.
When outcome of service transaction cannot be estimated, revenue should be recognized to the extent that expense incurred are probable of recovery. If not probable of recovery, only expense should be recognized
Stage of Completion Ways of Estimation:
_Basis of percentage of total services to be performed
_Percentage of total costs to be incurred
_Survey of works performed
US GAAP: does not allow stage of completion in service contracts
Interest, Royalties, and Dividends Revenue Recognition
Recognize when probable of economic benefits will flow in business
Revenue should be recognized on bases:
+Interest income is recognized on an effective yield basis
+Royalties are recognized on an accrual basis
+Dividends are recognized when shareholders’ right to receive payment is established
Exchanges of Goods or Services
Exchanged items are similar: no revenue is recognized
Exchanged items are different, revenue = fair value of goods or services received. Fair value of received items cannot be measured, use fair value of items given up
Bill-and-Hold Sales
Delivery is delayed at buyer’s requests, but accept billing
4 conditions to recognize the revenue:
- It is probable the delivery will be made
- Item is on hand, identified and ready for delivery when sale is recognized
- Buyer acknowledges the deferred delivery instructions
- Usual payment terms apply
Servicing Fees included in the Price of the Product
Portion of the sale price should be deferred and recognized as revenue over the period during the service is performed. The amount must be sufficient to cover the expected costs of the service
Customer Loyalty Programs
The award credits is treated as a separately identifiable component of sales transaction.
Fair value received on the sale is allocated between the award credits (based on their fair value) and other component of sales
If company supplies the award itself, it recognizes the amount to award credits as revenue when it is redeemed and the obligation to provide a free or discount is fulfilled.
Fixed-Price Construction Contracts
Use percentage of completion method
Criteria:
+Probable of economic benefits inflow
+Contract costs can be identified and reliably measured
+Total contract revenue must be reliably measurable
+Costs to complete and stage of completion at balance sheet date must be reliably measurable
Cost of recovery method is used when construction contract outcome can not be estimated
Cost-plus Construction Contract
Use percentage of completion method
Criteria:
+Probable of economic benefits inflow
+Contract costs can be identified and reliably measured
Cost of recovery method for construction contract
Contract costs are expense as incurred and revenue is recognized to the extent contract costs are likely to recovered
Construction Contract under IFRS and GAAP
Expected loss is recognized immediately
GAAP requires percentage-of-completion and completed contract method when percent of completion cannot be used
5 Steps in IASB-FASB Revenue Recognition Project Proposal (pg. 203)
- Identify the contract with a customer
- Identify the separate performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the separate performance obligations
- Recognize the revenue allocated to each performance obligation when the entity satisfies each performance obligation
Financial Instruments Defintions
any contract gives rise to financial asset of one entity and financial liability or equity instrument of another entity.
Financial asset
_Cash
_A contractual right: to receive cash or any financial asset; to exchange financial assets or liability
_An equity instrument of another entity
_A contract that will be settled in the entity’s equity instrument
Financial liability
_A contractual obligation: to deliver cash or financial asset; to exchange financial assets or liability
_A contract that will or may be settled in the entity’s equity instrument
Equity instrument
_Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
Classification of Financial Assets
_Financial assets at fair value through profit or loss: an entity either holds for trading purpose or elect to classify into this category under so-called fair value option
_Held-to-maturity investment: finc assets with fixed payments and maturity
_Loans and receivables
_Available for sales: finc asset not clasified in one of other categories or entity elect to be AFS. Changes in fair value recognized in OCI
Classification of Financial Liability
_Financial liabilities at fair value through profit or loss
_Financial liabilities measured at amortized cost:
Fair Value Option Conditions to Designate Financial Asset or Liability
- It eliminates or reduces a measurement inconsistency that would arise from measuring asset/liability or recognizing gain/loss on them on different basis
- A group of financial assets/liabilities that is evaluated on a fair value basis and information about the group of instruments is provided internally to key management.
Transfer between Categories of Financial Assets and Liabilities
Restricted to avoid management earning
Reclassification between available for sale to held to maturity than insignificant amount results in a two-year ban on its use.
Initial Measurement of Financial Instruments
Recognize at fair value
For FVPL, transaction costs are capitalized and expensed as incurred
Subsequent Measurement of Financial Instruments
Measure using: 1) cost, 2) amortized cost, or 3) fair value
Unquoted investment (financial asset cannot be measured at fair value) is measured at cost
Measure at amortized cost: held-to-maturity, loans & receivable, liabilities
Measure at fair value: FVPL financial asset and liability, available-for-sale
Available-for-Sale Financial Asset Denominated in a Foreign Currency
Asset’s fair value in foreign currency must be translated into fair value in entity’s reporting currency.
Change in fair value 2 components:
+ Change in fair value in the foreign currency (OCI)
+ A foreign exchange gain or loss from changes in exchange rate (net income)
Impairment for Financial Asset
_Assess for impairment at each balance sheet date
_FVPL assets are not subject to impairment testing, unrealized gain/loss recognized in net income
_Investment in a loan impairment= principle and interest of investment - expected future cash flows discounted at historical effective interest rate.
+written-down can be direct or through an allowance
+recognize in net income
+can write up to carrying amount would have been without the impairment. reverse recognize against net income
Derecognition
_Remove an asset or liability from balance sheet
_Need to meet two criteria:
+The contractual rights to cash flows of financial assets have expired
+The financial assets have been transferred and to the extent to which risks and rewards of ownership have been transferred
So-Called-Pass-Through-Arrange Derecognition
_Entity continues to hold the asset, but transfer the payments to other parties immediately
_Need to meet two criteria
_Carrying amount is removed from balance sheet and gain/loss is recognize in net income
Derecognition of Financial Liability
_Allows when the obligation is extinguished (paid, canceled, expired)
_Difference between carrying amount and amount paid to extinguish is recognized as gain or loss in net income
_Cost incurred is included as part of gain or loss
Modification of Terms of Existing Debt
Treated as an extinguishment of old debt and issuance of new debt
US GAAP: debt modification costs are expensed as incurred, except when old debt is issued for new debt
Derivatives
Financial instruments (options, forwards, futures, swaps) whose value changes in response to the change in a specified interest rate, financial instrument price, foreign exchange rate, etc.
Measured at fair value
Recognized in net income (not hedge) or OCI
US GAAP 3 types of heding relationship: fair value hedge, cash flow hedge, hedge of a net investment in a foreign operation
Receivables (IAS 39)
Measured initially at fair value
Subsequently measured at amortized cost using an effective interest method
Impairment of Receivables
Significant receivables should be tested for impairment individually and insignificant receivables can be tested as a group
Bad debt loss and provision for uncollectible is estimated
Loss is difference between carrying amount and present value of future cash flows expected to be received
Aging method of estimating the provision for uncollectible is not appropriate
Sale of Receivables-Truly Sale of an Asset
Appropriate to recognize sale and derecognize the asset
Significant risks and rewards have been transferred
Sale of Receivables-Simply a Borrowing Secured by Account Receivable
Receivable not derecognized
Cash received from sale of receivable is treated as a loan payable
So-Called Pass-Through for Sales of Receivables
When an entity regains the right to collect cash flows from a receivable and transfer to a third-party
Derecognition criteria:
+ Entity has no obligation to pay cash to buyer of receivables
+ Entity is prohibited from selling or pledging the receivables
+ Entity has an obligation to remit any cash flows it collects on the receivables to eventual recipient without delay
