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Write about your company that addresses the issues discussed in chapters 4 of the book.

International Accounting
Fifth Edition
Chapter 4:
International
Financial
Reporting
Standards:
Part I
Timothy Doupnik | Mark Finn
Giorgio Gotti | Hector Perera
©2020 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Learning Objectives
1
Discuss the types of differences that exist between International Financial
Reporting Standards (IFRS) and U.S. generally accepted accounting principles
(GAAP).
Describe IFRS requirements related to the recognition and measurement of
assets, specifically inventories; property, plant, and equipment, and leased
assets.
Explain major differences between IFRS and U.S. GAAP on the recognition and
measurement of assets.
Analyze the impact that differences in asset recognition and measurement
rules have on financial statements.
Explain how investment property and biological assets differ from PPE and
what special rules govern their accounting treatment under IFRS.
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Learning Objectives
2
Describe IFRS requirements related to business
combinations, goodwill, and non-controlling interests.
Describe IFRS requirements for determining effective
control and the scope of consolidation.
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Types of Differences Between IFRS and
U.S. GAAP
Definition differences.
Recognition differences.
Measurement differences.
Alternatives.
Lack of requirements or guidance.
Presentation differences.
Disclosure differences.
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IFRS and U.S. GAAP
IFRS more flexible in many cases.
• Choice between alternative treatments in
accounting.
IFRS generally have less bright-line guidance.
• More judgment is required in applying IFRS.
IFRS is a principles-based accounting system:
• whereas U.S. GAAP is a rules-based system.
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IAS 2, Inventories
1
Provides more extensive guidance than U.S. GAAP.
Cost of inventories include:
• Costs of purchase.
• Costs of conversion.
• Other costs.
• design, interest if takes time to bring to saleable condition.
Cost of inventories exclude:
• Abnormal waste.
• Storage, unless necessary for the production process.
• Administrative overhead.
• Selling costs.
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IAS 2, Inventories
2
Limited choice with regard to cost formulas.
• Does not allow LIFO.
• Standard cost method and retail method are acceptable only if they
approximate cost as per IAS 2.
• Cost of inventories not ordinarily interchangeable.
• Goods and services produced and segregated for specific projects should
use specific identification.
• An entity must use same cost formula for similar inventory items.
IAS 2 requires inventory to be reported at the lower of cost or
net realizable value.
• Typically applied on item-by-item basis, but grouping allowed for items of
inventory relating to same product line.
• Write-downs are reversed when selling price increases.
• U.S. GAAP now uses same approach without allowing reversal of writedowns.
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IAS 16, Property, Plant, and
Equipment
1
Recognition of initial costs.
• Cost includes.
•
•
•
•
Purchase price.
All costs needed for asset to perform as intended.
Estimate of cost of dismantling and removing asset along with restoring site.
Exchange of assets.
•
Fair value unless no commercial substance or fair value can’t be determined.
Measurement subsequent to initial recognition.
• IFRS allows 2 treatments.
• Cost model: depreciation.
• Revaluation model: fair value date of revaluation minus subsequent depreciation.
•
•
•
•
Must do entire class of assets.
Must revalue often.
Increases in value go to OCI; decreases reduce OCI to historical cost then reduce income.
Accumulated depreciation with revaluation.
• Proportional to new value.
• Eliminated with excess/shortage against asset account.
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IAS 16, Property, Plant, and
Equipment
2
Depreciation.
• Based on estimated lives, residual value, and method annually.
• Treat any changes prospectively.
• When comprised of significant parts, use component depreciation.
Derecognition.
• Derecognize carrying amount of property, plant, and equipment.
• When asset is disposed.
• When no future economic benefits are expected.
• Gain or loss is included in net income.
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IAS 40, Investment Property
Land or buildings held for rental, capital appreciation,
or both.
Same general principles as per IAS 16: choice of cost or
revaluation model:
• Changes in fair value is recognized in current income and not
revaluation surplus.
• Must show fair value in footnotes with cost model.
• U.S. GAAP generally requires use of cost model.
Disclose fair value in notes when using the cost model.
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Biological Assets
U.S. GAAP cost method…ignores growth of biological
asset; no income until final product sold.
IFRS fair value (less costs to sell at point of harvest)
changes in value over time go to income even before
harvesting.
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Relevance-Reliability Trade-Off
IASB: fair value, relevance over reliability.
FASB: cost method, reliability over relevance.
Reliability challenges with fair value.
• Illiquidity of markets so models instead of observed prices
used.
• Competing valuation frameworks and models…different
results.
• Subjectivity in estimates.
• Long forecasting horizon…uncertainty.
• Management incentives to exploit model choices.
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IAS 36, Impairment of Assets
1
Must test annually for impairment to plant, property and
equipment; intangible assets; goodwill; investments in
subsidiaries; associates, and joint ventures.
• Does not apply to inventory, construction in progress, deferred tax assets,
employee benefit assets or financial assets (e.g., accounts and notes
receivable).
Impairment under IAS 36 = carrying amount > recoverable
amount.
• Recoverable amount is the greater of net selling price and present value
of future net cash flows.
Impairment more likely under IFRS since discounted cash flows
are used.
• U.S. GAAP uses undiscounted future cash flows.
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IAS 36, Impairment of Assets
2
Reverse impairment loss when recoverable amount
exceeds new carrying amount:
• if changes in estimates used to determine original
impairment loss or change in how recoverable amount is
determined.
Reversal only up to original carrying amount.
Recognize reversal in income immediately.
U.S. GAAP allows no reversal.
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IAS 38, Intangible Assets
1
Applies to purchased intangibles, intangibles acquired in
business combination, internally generated intangibles.
• Goodwill is covered separately under IFRS 3.
Intangible asset is identifiable, nonmonetary asset without
physical substance:
• Held for production of goods or services, rental to others, or for
administrative purposes.
• Controlled by enterprise as result of past events from which future
economic benefits are expected to be realized.
Must be expensed immediately if it does not meet the definition.
• Except when obtained in business combination.
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IAS 38, Intangible Assets
2
Purchased intangibles measured at cost.
• Useful life could be assessed as finite or indefinite.
• Distinction between intangibles with finite life and
indefinite life is made in IAS 38.
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Intangibles Acquired in Business
Combination
Patents, trademarks, and customer lists recognized as
assets measured at fair value.
Even if not previously recognized by target.
Must have finite or infinite life.
Special treatments for in-process research and
development.
• Capitalize when certain criteria is met.
• Otherwise include in goodwill.
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Internally Generated Intangibles
1
Major difference with U.S. GAAP.
• IFRS allows some development costs to be
capitalized.
• U.S. GAAP expenses all research and virtually all
development.
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Internally Generated Intangibles
2
Criteria for development cost capitalization:
• Technical feasibility of completion.
• Intention to complete asset for use or sale.
• Ability to use or sell the asset.
• How probable future economic benefits will be generated.
• Market or internal use.
• Available adequate technical, financial, and other resources
to complete the asset for use or sale.
• Ability to reliably measure expenditures pegged to
development.
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Internally Generated Intangibles
3
Financial Statement Effects.
• Income Statement effects.
• With increasing R&D expenditures….higher income.
• Therefore inflates shareholder equity (retained earnings).
• Balance sheet effects.
• Inflates intangible assets net of accumulated amortization.
• Offset is higher shareholder equity (retained earnings).
• Cash Flow Statement effects.
• Reclassifies expenditure as capex (capital expenditure) outflow.
• Expenditure is investing instead of operating outflow.
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Internally Generated Intangibles
4
Other issues:
• Revaluation model is allowed with finite-lived intangibles.
• If there is a price on an active market.
• Impairment of intangibles.
• If carrying amount can’t be recovered on finite-lived assets—need to
look at changes in events or circumstances.
• For indefinite-lived intangibles and goodwill.
• Test annually.
• Under special circumstances can reverse as per IAS 36.
• Goodwill not subject to reversal of impairment.
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Acquisition Method of Combinations
Used by both IFRS and GAAP.
• Must have acquirer and acquiree.
• Acquiree’s assets and liabilities shown at FMV.
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Business Combinations
1
Recognize goodwill only in business combinations.
• Goodwill is Difference between:
• Consideration paid by acquirer plus noncontrolling interest.
• Fair value of net assets acquired.
Negative goodwill must be recognized as income.
Goodwill depends on the option selected to measure
any noncontrolling interest.
• Measured at either.
• A proportionate share of the fair value of the acquired firm’s net
assets excluding goodwill.
• Fair value, including the noncontrolling interest’s share of goodwill.
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Business Combinations
2
Not amortized as it is an indefinite-lived intangible
asset.
Impairment of goodwill must be tested annually.
Impairment is tested at the level of the cash-generating
unit (CGU).
• Compare carrying value of CGU, including goodwill, with
recoverable amount.
• U.S. GAAP is tested at level of the reporting unit which can
be different and typically larger than CGU.
U.S. GAAP only requires a bottom-up test.
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VIEs
VIE is an entity where equity investment at risk is
insufficient to finance operations.
Control over VIE exists when following conditions met:
• Direct or indirect ability to make decisions about entities’
activities.
• Obligation to absorb expected losses of entity if they occur.
• Right to receive expected residual returns of the entity if they
occur.
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Business Combinations
3
Parent must consolidate all subsidiaries over which they exercise
control.
•
Control.
• Ownership of more than 50% voting shares.
• Effective control.
•
•
•
•
•
•
Ability to direct investee to enter agreements that benefit investor.
Ability to direct operating activities of investee, such as selling and purchasing
goods.
Ability to direct investments, such as capital spending or R&D.
Ability to determine investee’s financial structure.
Investor’s right to obtain direct control of investee by buying additional voting
shares at a later date in response to certain triggering events.
Control exists when each of the following is present:
• Investor has power over investee.
• Investor has rights or exposure to downside risk from variable returns of
investee.
• Investor has ability to use power over investee to affect those returns.
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IAS 23, Borrowing Costs
1
Similar to U.S. GAAP in general approach.
Capitalize all borrowing costs to extent they are attributable to
acquisition, construction, or production of a qualifying asset.
Expense all other borrowing costs.
Borrowing costs include interest and other costs incurred in
connection with borrowing.
IAS 23 includes foreign currency exchange to the extent they
related to interest costs.
Under IAS 23, inventories qualify if they require substantial
period to manufacture.
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IAS 23, Borrowing
2
Capitalize interest that could have been avoided in
absence of expenditure on the qualifying asset.
Amount capitalized determined by multiplying
weighted-average accumulated expenditures by
appropriate interest rate.
• Can use actual interest rate if average expenditures are less
than specific borrowing total.
Interest income on temporary investment of specific
new borrowing offsets interest capitalized under
IFRS…no netting allowed under GAAP.
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End of Chapter 4
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