Chapter 5:

International
Financial
Reporting
Standards: Part
II

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Learning Objectives
 Describe and apply the requirements of IFRS related to
the financial reporting of current liabilities, provisions,
employee benefits, share-based payment, income taxes,
revenue, and financial instruments
 Explain and analyze the effect of major differences
between IFRS and U.S. GAAP related to the financial
reporting of current liabilities, provisions, employee
benefits, share-based payment, income taxes, revenue,
and financial instruments

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Current Liabilities
 IAS 1, Presentation of Financial Statements, requires
classification of liabilities
 Current liabilities
 Noncurrent liabilities
 Current liabilities
 Expected to settle in normal operating cycle
 Held for trading purpose
 Settled within 12 months of balance sheet date
 Not deferred until 12 months after balance sheet date

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Differences in IFRS and U.S. GAAP: Current
Liabilities
 Refinanced short-term debt
 IFRS: Long-term, if refinanced prior to balance sheet date
 U.S. GAAP: Long-term, if refinancing is agreed prior to balance
sheet
 Accounts payable on demand due to violation of debt
covenants
 IFRS: Current, unless lender issued waiver of 12 months by balance
sheet date
 U.S. GAAP: Current, unless lender issued waiver obtained by
annual report issuance date
 Bank overdrafts
 IFRS: Long-term, if integral part of cash management netted
against cash
 U.S. GAAP: Always treated as current liabilities

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Provisions, Contingent Liabilities, and Contingent
Assets
 IAS 37, Provisions, Contingent Liabilities and Contingent
Assets, provides guidance for:
 Reporting liabilities and assets of uncertain timing, amount, or
existence
 Environmental and nuclear decommissioning costs

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Contingent Liability
 Recognized under IFRS, when:
 There is a present obligations from past events
 It is probable that there will be an outflow of resources
 A reliable estimate of the obligation can be made
 Constructive obligation: arise from past actions or current
statements indicating that a company will accept certain
responsibilities
 No concept of constructive obligation in U.S. GAAP

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Contingent Liability
 As defined by IAS 37
 Possible obligation confirmed by occurrence or nonoccurrence
of future event
 Present obligation not recognized because:
 No probable outflow of resources
 Amount cannot be measured reliably
 Recognized under U.S. GAAP when outflow is probable
 Only disclosed if outflow possible, and not probable

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Provisions
 IAS 37
 The best estimate of the expenditure required to settle the
present obligation
 Probability-weighted expected value
 Discounted to present value
 Recognized under U.S. GAAP at the low end of the range
of possible amounts
 Provision is reversed when outflow of resources is not
probable

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Onerous Contract
 Unavoidable costs of obligation exceed economic benefits
to be received
 Recognize provision for lower of
 Cost of fulfillment
 Penalty from non-fulfillment
 If onerous from entity's own action, no recognition until that
action happens

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Restructuring
 A program planned and controlled by management that
changes either:
 Scope of business
 Manner in which business is conducted
 Under IAS 37, a restructuring provision is recognized
when:
 Formal restructuring plan exists
 There is a valid expectation of the restructuring
 U.S. GAAP does not allow recognition until liability has
been incurred

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Employee Benefits
 IAS 19, Employee Benefits, covers all forms of employee
compensation and benefits
 Excludes share-based compensation
 Four types of employee benefits
 Short-term benefits (compensated absences and bonuses)
 Post-employment (pensions and medical benefits)
 Other long-term benefits (deferred compensation and
disability)
 Termination benefits (severance and early retirement)

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Employee Benefits
 Short-term benefits recognize expense and liability at the
time employees provide service
 Amount recognized is undiscounted
 Compensated absences (for sick/vacation pay) accrue when
services are provided only if:
 The compensated absences accumulate over time
 They can be carried forward to future periods
 For nonaccumulating compensating balances, an expense and
liability are recognized
 Profit sharing and bonus plans
 An expense and a liability are accrued if:
 There are present legal or constructive obligation o make such
payments
 The amount can be reasonably measured

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Employee Benefits
 Post-employment benefits
 IAS 19 distinguishes between defined contribution plans and
defined benefit plans
 Defined contribution plan
 Benefits accrue when services are rendered
 Liability reduces when contributions are made
 Defined benefit plan
 Two major issues
 Calculation of the net defined benefit liability (or asset)
 Calculation of the defined benefit cost

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Post-employment benefits
 Net defined benefit liability (asset)
 Balance sheet amount calculated as:
 + Present value of the defined benefit obligation (PVDBO)
 − Fair value of plan assets (FVPA)
 Asset recognized is limited to the larger of
 Surplus
 Asset ceiling
 No asset ceiling under U.S. GAAP

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Post-employment benefits
 Defined benefit cost reported in income Net income
 Components include
 Current service cost
 Past service cost and gains and losses on settlements
 Net interest on the net defined benefit liability (asset)
 Remeasurements of net defined benefit liability (asset)

Other comprehensive income

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Other post-employment benefits
 IAS 19 does not provide separate guidance for other
post-employment benefits
 U.S. GAAP provides more guidance for measurement of
post-employment medical benefits

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Share-based Payment
 IFRS 2, Share-based Payment, sets out measurement
principles and specific requirements for three types of
share-based payment transactions
 Equity-settled share-based payment
 Cash-settled share-based payment
 Choice-of-settlement share-based payment
 IFRS 2 and U.S. GAAP are substantially similar

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Equity-Settled Share-Based Payment
 Payments to non-employees for goods and services
 IFRS measurement
 Fair value of goods or services, if determined
 Fair value of the equity instrument
 U.S. GAAP measurement
 Fair value of instrument at earlier of
 Commitment for performance
 When performance completed

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Equity-Settled Share-Based Payment
 Payments to employees
 Measured at the fair value of the equity instruments
 Consider vesting conditions
 Total compensation cost
 Recognized as compensation expense
 Estimate of options vested to be revised throughout the
vesting period
 Recognition of associated compensation expense
 Straight-line over service period for cliff vesting
 Amortize each installment (tranche) over their vesting period for
Graded vesting
 U.S. GAAP allows choice of accelerated or straight-line
recognition

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Modification of Stock Option Plans
 Types of modification
 Length
 Vesting conditions
 Result of fair value change
 Increase in fair value
 Increase compensation cost by the same amount
 Decrease in fair value
 No change in compensation cost deducted
 U.S. GAAP
 Fair value determines compensation expense
 No minimum compensation as under IFRS

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Cash-Settled Share-Based Payment
 Cash payment on stock price increase above
predetermined level
 Recognize fair value as a liability using option-pricing
model
 Measure on each balance sheet date
 Under U.S. GAAP, classify certain cash-settled payments
as equity
 Under IFRS, classify as liability

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Choice-of-settlement Share-based Payment
 Allow entity to choose equity settlement or cash settlement
 If present obligation to settle in cash, treat as cash-settled
 If obligation settled in equity, treat as equity-settled
 Treat as compound financial instrument when receiving
entity chooses equity settlement or cash settlement
 Fair value split into separate debt and equity components
 Remeasure debt component must be remeasured at fair value
balance sheet date
 Apply cash settlement against debt component
 Transfer equity settlement to equity

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Income Taxes
 IAS 12, Income Taxes, similar to U.S. GAAP
 Asset-and-liability approach
 Deferred tax assets and liabilities
 For temporary differences
 For operating loss tax credit carry forwards
 Under IFRS, measure on the basis of tax laws and rates enacted
or substantively enacted
 Under U.S. GAAP, measure on the basis of actually enacted tax
laws and rates
 Account for double taxation effects and differences in rates

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Income Taxes
 Recognition of Deferred Tax Asset
 Under IFRS, recognize if future realization probable
 IAS 12 provides a more stringent threshold
 U.S. GAAP, recognize if realization is more likely than not
 Disclosures
 IFRS requires
 Extensive disclosures of tax expense
 Explanation of hypothetical expense based on two approaches
 Compare statutory tax expense in the home country and effective
tax expense
 Compare weighted-average statutory tax rate across jurisdictions
and tax expense based on the effective tax rate
 IFRS vs. U.S. GAAP
 IFRS application can cause temporary differences

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Income Taxes
 Financial Statement Presentation
 U.S. GAAP
 Deferred tax assets and liabilities
 Current
 Non-current
 Based on underlying asset or liability
 Tax loss or credit carry-forwards
 Timing of expected realization
 IAS 1
 Deferred tax assets and liabilities
 Only noncurrent

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Revenue recognition
 IAS 18, Revenue covers revenues from
 Sale of goods, rendering of services
 Interest, royalties
 Dividends
 U.S. GAAP
 200 authoritative pronouncements
 General Measurement Principle
 Fair value of consideration received or
 Receivable
 Multiple elements transaction
 Split transaction into multiple elements or
 Combine multiple transactions into one

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Revenue recognition
 Sale of Goods—5 Criteria
 Transfer of significant risks and rewards to buyer
 No effective control maintained or management involvement
 Can measure revenue reliably
 Probable future economic benefits flow to seller
 Selling costs can be measured reliably
 Rendering of Service
 Revenue recognized in proportion to extent of services
rendered
 U.S. GAAP
 Percentage-of-completion for service contracts not allowed

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Revenue recognition
 Interest, Royalties and Dividends
 Interest
 Recognized on effective yield basis
 Royalties
 Recognized on accrual basis
 Based on relevant agreement
 Dividends
 Recognized when shareholder’s right to payment established
 Exchange of Goods or Services
 If similar—no gain or loss
 If dissimilar—recognize fair value of what is received
adjusted for cash paid or received

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Revenue recognition
 Construction Contracts
 Revenues and expenses recognized using the percentage-
of-completion method
 Two types
 Fixed-price contract
 Cost-plus contract
 Cost-plus contract
 Economic benefits flow to the entity
 Contract costs
 Clearly identified
 Reliably measured29
 Fixed-price contract
 Revenues measurable
 Costs and stage of completion measurable

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IAS 18, Revenue
 IASB-FASB Revenue Recognition Project
 Both boards working since 2002
 June 2010—joint Exposure Draft “Revenue from Contracts
with Customers”
 5 steps:
 Identify the contract
 Identify 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

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Financial Instruments
 Standards
 IAS 32, Financial Instruments: Presentation
 IAS 39, Financial Instruments: Recognition and Measurement
 IFRS 7, Financial Instruments: Disclosure
 IFRS 9, Financial Instruments—issued in November 2009 to
replace IAS 39—effective 2015
 Definitions
 IAS 32—a financial instrument is any contract that gives
rise to both a financial asset of one entity and a financial
liability or equity instrument of another entity

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Financial Instruments
 Definitions
 IAS 32—a financial instrument gives rise to
 Financial asset of one entity
 Financial liability or equity instrument of another entity
 Financial asset
 Cash
 Contractual right to:
 Receive cash or other financial asset
 Exchange financial assets or financial liabilities
 under potentially favorable conditions
 An equity instrument of another entity
 A contract that will or may be settled in entity’s own equity
instruments

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Financial Instruments
 Financial liability
 A contractual obligation to
 Deliver cash or another financial asset
 Exchange financial assets or financial liabilities
 Under potentially unfavorable conditions
 A contract that will or may be settled in the equity’s own
equity instruments

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Financial Instruments
 Liability or Equity
 IAS 32
 Financial instruments to be classified
 As financial liabilities or
 Equity or both
 Compound Financial Instruments
 Both a liability and equity element (e.g. convertible bond)
 Split accounting
 With and without method

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Financial Instruments
 Classification of Financial Assets and Liabilities
 Classification of financial asset:
 Fair value through profit or loss (FVPL)
 Held-to-maturity investments
 Loans and receivables
 Available-for-sale financial assets
 Financial liabilities:
 Fair value through profit or loss (FVPL)
 Measured at amortized cost
 Measurement of Financial Instruments
 Initial—fair value (normally = amount paid or received)
 Subsequent—cost, amortized cost, or fair value

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Financial Instruments
 Available-for-Sale Financial Asset Denominated in a
Foreign Currency
 Two components
 The change in fair value in the foreign currency
 A foreign exchange gain or loss
 From exchange rate changes
 Impairment
 IAS 39 requires assessment of impairement
 Derecognition
 Appropriate if
 Contractual rights to the cash flows expired
 Financial asset has been transferred

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Financial Instruments
 Derivatives
 Financial instruments swaps
 Whose value changes with change in
 A specified interest rate,financial instrument price,
 Commodity price, foreign exchange rate,
 Index, credit rating, or other variable.
 IFRS 39
 Derivatives measured at fair value
 Receivables
 Measured
 Initially at fair value
 Subsequently, at amortized cost using effective interest method

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End of Chapter 5

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