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INTERNATIONAL FINANCIAL REPORTING

STANDARDS

Chapter 4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

International Financial Reporting


Standards (IFRS)
Chapter Topics
Differences between IFRS and U.S. GAAP
Recognition and measurement
Disclosure and presentation

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International Financial Reporting


Standards (IFRS)
Learning Objectives
1. Describe the requirements of IFRS on the
recognition and measurement of assets.
2. Explain the differences between IFRS and U.S.
GAAP on recognition and measurement
issues.
3. Describe the requirements of IFRS related to
the disclosure of financial information.
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International Financial Reporting


Standards (IFRS)
Learning Objectives
4. Explain the differences between IFRS and U.S.
GAAP on disclosure issues.
5. Use numerical examples to highlight the
differences between IFRS and U.S. GAAP.

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Recognition and Measurement:


Some background
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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Recognition and Measurement:


Some background
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 flows amount of cash
to be received, discounted at the appropriate interest
rate.

Learning Objective 1

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Recognition and Measurement:


IFRS
IFRS
Substantially similar to U.S. GAAP
However, significant differences do exist.
An effective way to understand IFRS is to compare to
U.S. GAAP.
Describe IFRS in terms of significant differences from
U.S. GAAP.

Learning Objective 1

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Recognition and Measurement:


IFRS and U.S. GAAP compared
Types of Differences
Definitions
Recognition
Measurement
Alternatives
Lack of requirements or guidance
Presentation
Disclosure

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
Form 20-F
Ernst & Young 2007 study reflected 1,900 reconciling
items and 200 unique differences.
Many differences related to first time adoption of IFRS.
Greatest number of differences related to pensions and
business combinations.
Other differences related to provisions, asset impairment,
leases and intangibles.

Learning Objectives 2 and 4


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Recognition and Measurement:


IFRS and U.S. GAAP compared
Areas with significant differences
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)

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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, first-out (LIFO).
IFRS 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.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 2, Inventories numerical comparison to U.S. GAAP
Application of lower of cost or net realizable value. Assume the following:
Historical cost
$500
Replacement cost
400
Estimated sales price
450
Estimated disposal costs
25
Normal profit margin
20% of sales price

Learning Objective 5

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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)

Learning Objective 5

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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 profit
margin ($425 - $90 = $335). Designated market is
$400 and lower of cost or market = $400

Learning Objective 5

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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.

Learning Objective 5

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Recognition and Measurement:


IFRS
and U.S. GAAP compared
IAS 16, PP&E compared to U.S. GAAP
Subsequent to initial measurement, IAS 16 allows the
two different measurement approaches.
Historical cost -- (the cost model) recognizes the
asset at cost less accumulated depreciation, required
by U.S. GAAP.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 16, PP&E compared to U.S. GAAP
Revaluation -- (the revaluation model) requires that all
assets within a class be revalued periodically.
A major difference between IFRS and U.S. GAAP
as fixed assets are often substantial.
Revaluation is generally not allowed under U.S.
GAAP.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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
Revaluation surplus xxxx

xxxx

Note: The revaluation surplus is in the other comprehensive income


component of equity.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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
Property, plant, and equipment

Learning Objective 2

xxxx
xxxx

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Recognition and Measurement:


IFRS and U.S. GAAP compared
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%

Learning Objective 5

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 16, PP&E numerical comparison to U.S.
GAAP-- Revaluation adjustment to accumulated
depreciation: Alternative 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.

Learning Objective 5

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 16, PP&E numerical comparison to U.S. GAAP:
Alternative Treatment 1
Original
Cost
Gross carrying amount
$10,000 +
Accumulated depreciation
2,000 +
Carrying value
$ 8,000 +

Learning Objective 5

Revaluation
12,500 =
2,500 =
10,000 =

Total
$22,500
$ 4,500
$18,000

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 16, PP&E numerical comparison to U.S.
GAAP-- Revaluation adjustment to
accumulated depreciation: Alternative Treatment 2
Asset is first decreased by the amount of accumulated
depreciation.
Asset account is then increased by the amount of the
revaluation (current market value carrying value).

Learning Objective 5

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 16, PP&E numerical comparison to U.S. GAAP:
Alternative Treatment 2
Accumulated Depreciation
Asset
Asset
Revaluation surplus

Learning Objective 5

2,000
2,000
10,000
10,000

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 38, Intangible Assets
Purchased intangibles
Intangibles acquired in a business combination
Internally generated intangibles
Does not address goodwill (see IFRS 3).

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 38, Intangible Assets compared to U.S.
GAAP
Purchased intangibles consistent with U.S. GAAP
except that fair value is used in the rare cases where
there is an active secondary market for the intangible.
Intangibles acquired in a business combination
consistent with U.S. GAAP including the fact that inprocess development costs are capitalized.

Learning Objective 2

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Recognition and Measurement:


IFRS
and U.S. GAAP compared
IAS 38, Intangible Assets compared to U.S.
GAAP

Internally generated intangibles


Major difference 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.

Learning Objective 2

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Recognition and Measurement:


IFRS
and ofU.S.
GAAP
compared
IAS 36, Impairment
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 differ from fair value.
IFRS uses discounted cash flows vs. U.S. GAAP which uses
undiscounted cash flows.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 23, Borrowing Costs (as revised in 2007)
Both U.S. GAAP (SFAS 34) and IAS 23 require
capitalization of interest on borrowings
attributable to construction, acquisition, or
production of qualifying assets.
All other borrowing costs must be expensed in
the period incurred.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 23, Borrowing Costs
Explicitly allows for capitalization of interest on borrowing
for the production of inventories that require a substantial
period to bring them to marketable condition.
.
U.S. GAAP explicitly prohibits the capitalization of interest
on borrowings for production of most inventories.

Learning Objective 2

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Recognition and Measurement:


IFRS and U.S. GAAP compared
IAS 17, Leases
Distinguishes between operating and finance (capital)
leases in much the same way as U.S. GAAP (SFAS 13).
The criteria for classifying a lease as either operating or
finance is less detailed than U.S. GAAP.
Accounting for leases is often used as an example in
arguing that U.S. GAAP is rules-based and IFRS are
principles-based.

Learning Objective 2

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Disclosure and Presentation


Standards: IFRS and U.S. GAAP
compared
Cash Flow Statements (IAS 7) Classification of
dividends and interest paid is more flexible under IFRS.
Operating Segments (IFRS 8) Adopts the
management approach of U.S. GAAP (SFAS 131).
Interim Financial Reporting (IAS 34) U.S. GAAP
treats interim periods as integral part of the full year.

Learning Objectives 3 and 4

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Disclosure and Presentation


Standards: IFRS and U.S. GAAP
compared
Events after the Balance Sheet Date (IAS 10)
Similar to disclosure under U.S. GAAP.
Related Party Disclosures (IAS 24) Similar
to disclosure under U.S. GAAP.
Earnings per Share (IAS 33) U.S. GAAP
provides more detailed guidance on calculation
of diluted earnings per share.

Learning Objectives 3 and 4

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Disclosure and Presentation


Standards: IFRS and U.S. GAAP
compared
Noncurrent Assets Held for Sale and Discontinued
Operations (IFRS 5)Similar to disclosure under U.S.
GAAP, although for discontinued operations the
definition is somewhat narrower. Also, U.S. GAAP
requires both pre-tax and after-tax profit or loss from
discontinued operations be reflected on the income
statement.

Learning Objectives 3 and 4

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