Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

IFRS vs. GAAP

13,278 views

Published on

June, 2011 presentation to IMA members regarding the reporting differences between GAAP and IFRS

  • Be the first to comment

IFRS vs. GAAP

  1. 1. Comparisons: IFRS vs GAAP Michael Kosinski, CPA Principal, Assurance Services mkosinski@ larsonallen.com (239) 280-3517 ©2011 LarsonAllen LLP ©2011 LarsonAllen LLP1
  2. 2. Objectives • Become familiar with the reasons and theories behind IFRS and convergence. • Compare differences between financial reporting presentation under IFRS and GAAP. • To compare the differences between IFRS and GAAP for significant accounting issues. ©2011 LarsonAllen LLP2
  3. 3. Why is there a need to converge? • Corporations are becoming increasingly multinational • Direct foreign investment • Interdependence • Global financing markets ©2011 LarsonAllen LLP3
  4. 4. What are the conceptual differences? • IFRS is driven by economics vs. historical cost • More focus on fair value – Agriculture – Investments – Others optional • Principals based: more reliance on judgment • Volume – 2,500 vs 25,000 pages of standards • Standards for SME’s ©2011 LarsonAllen LLP4
  5. 5. Why do you need to know? • Legal documents may need modified (leases and loans) • Timing differences for taxes will change (CAM) • Greater support for and rationale behind positions • Compensation methods may need modified • Training and learning requirements • Software issues ©2011 LarsonAllen LLP5
  6. 6. Implementation considerations • Initial year presentation requires three comparative years due to requirements for comparative financial statements • Parallel reporting for historical information ©2011 LarsonAllen LLP6
  7. 7. IFRS Balance Sheet - Assets ©2011 LarsonAllen LLP7
  8. 8. Balance Sheet – Equity and Liabilities ©2011 LarsonAllen LLP8
  9. 9. Balance Sheet Presentation Changes • GAAP – More flexibility for single year presentation • IFRS – If company was in violation of a covenant at year end liability is current – Many changes get recorded directly to equity – Listing of minimum items that must be presented ©2011 LarsonAllen LLP9
  10. 10. 10 Income Statement ©2011 LarsonAllen LLP
  11. 11. Income Statement Changes • IFRS – Other comprehensive income goes away – Extraordinary items are prohibited – If items are presented by function then they must be disclose by nature depreciation, amortization and employee benefits. ©2011 LarsonAllen LLP11
  12. 12. Statement of Equity ©2011 LarsonAllen LLP12
  13. 13. Statement of Equity • Other comprehensive income disappears • More equity classifications • For all categories of equity a reconciliation must be presented for changes ©2011 LarsonAllen LLP13
  14. 14. Statement of Cash Flows Changes • SOCF Categories– – Interest paid/received – Taxes paid – Dividends • Short term investments of three months of less from acquisition are cash and equivalents • Bank overdrafts may be cash equivalent if it is repayable on demand vs financing • Items for GAAP are presented by the predominant category and IFRS allocates ©2011 LarsonAllen LLP14
  15. 15. Revaluations • Concept in IFRS • GAAP write down = new cost • Mechanics – Write up – goes to equity – Then written down – reduces equity then P&L – Write down – goes to P&L – Then write up – goes to P&L then to equity • Increased volatility ©2011 LarsonAllen LLP15
  16. 16. Prior year impairment = Current year margin ©2011 LarsonAllen LLP16
  17. 17. Inventory • No floor or ceiling calculations for LCM; IFRS – lower of cost or net realizable value • LIFO is not permitted in IFRS • Tax requires LIFO for financial reporting purposes. • Inventory should be reviewed for impairment and written down if required • Requires impairment recovery • Grouping GAAP – any level vs. groups of related items • For extended production inventory IFRS requires borrowing costs allocated. ©2011 LarsonAllen LLP17
  18. 18. Property and Equipment • Permits revaluation option for property and equipment • Revaluations are permitted by class of asset • Concept of investment property IAS 40 – Property held for rents or capital appreciation – Valued at fair value; cost only if no fair value – Fair value changes go through income statement – No depreciation taken – Classified on a property by property basis • Requires assets having significant components ©2011 LarsonAllen LLP to be depreciated separately18
  19. 19. Intangibles • GAAP – Step 1 look at undiscounted cash flows – IF not recoverable then proceed to adjust to FV • IFRS – No Step 1 calculation, if the carrying amount is in excess of fair value impair. • Permit revaluation ©2011 LarsonAllen LLP19
  20. 20. Intangibles • Definite lives – amortize over useful life • Goodwill – Based on cash generating units – Reviewed for impairment – Allocated to the unit expected to receive the benefits – Testing will be at a lower level ©2011 LarsonAllen LLP20
  21. 21. Sale of Trade Receivables • GAAP – Sales without recourse where there is no control and no involvement – Sales with recourse are a sale if ◊ Transferor has no access ◊ Receiver can pledge or sell receivables ◊ No repurchase abilities • IFRS – must give up control or factor without recourse. ©2011 LarsonAllen LLP21
  22. 22. Leases • GAAP – Title passes – Period is in excess of 75% of the useful life – FMV of the PV of the minimum lease payments is >90% – Bargain purchase option • Allows for leases specifically designed to be operating leases ©2011 LarsonAllen LLP22
  23. 23. Leases • IFRS – transfers all risks and rewards incident to ownership of the asset – Transfer title – Bargain purchase – FMV of PV of Min lease payments is substantially all of the fair value – Term is for a major part of the economic life – Changes in fair value of the leased asset is absorbed by the lessee – If there is a cancellation provision, lessor’s costs are absorbed by the lessee – If the asset can only be used by the lessee – There is a below market value extension provision • More professional judgment – benchmarks to establish, understand, update, and follow • Jointly trying to eliminate operating lease ©2011 LarsonAllen LLP classification23
  24. 24. Leases – Other Items • Real Estate – buildings and land – GAAP - are a single lease unless fair value of land is 25% or bargain purchase – IFRS – bifurcate lease into land and building component – Can result in a capital lease for the building in more cases • Sales Leaseback – – GAAP – defer gain recognition and offset against rent unless leasing a minimal portion – IFRS ◊ if leaseback is operating, recognize gain if the lease is sold at or below fair value, defer and amortize if sold above fair value ©2011 LarsonAllen LLP ◊ If capital lease defer gain and amortize over the lease term24
  25. 25. Impairment • GAAP – – Reversals are not permitted – Requires changes in allowance account adjustments to run through income statement – Review for impairment when the loss appears permanent and not just a market fluctuation • IFRS – Permits recovery of impairment if there are changes in the asset or market value – Review for impairment if there is a loss event ©2011 LarsonAllen LLP25
  26. 26. Impact of Impairment • Inventory • Marketable securities (Available for sale and held to maturity) • Real estate • Property and equipment • Investment property (under GAAP) ©2011 LarsonAllen LLP26
  27. 27. Contingent Losses • Both scenarios, if there is a most likely result accrue that amount • Range of equal possibilities – US GAAP – accrue low range – IFRS – accrue middle • Present value discounting – US GAAP – not measured – IFRS – discount if material ©2011 LarsonAllen LLP27
  28. 28. Research and Development • GAAP – Expense unless it was part of the purchase of a target company • IFRS – Research – expense ◊ Formulation of a new item – Development - capitalize ◊ Feasible, can complete development, intend to complete, ability to use or sell ◊ Building prototype ©2011 LarsonAllen LLP28
  29. 29. Convertible Debt and Other Debt/Equity • Convertible bonds, redemption requirements, etc. • US GAAP – record liability unless convertible portion is split (detachable) • IFRS – Record liability at fair value and balance is equity. – Interest expense is recorded on income statement ©2011 LarsonAllen LLP29
  30. 30. Deferred Taxes • GAAP – Effective rate = enacted rate – Asset or liability giving rise to the difference is the basis for classification – Assets recorded with valuation allowance using 50% chance ©2011 LarsonAllen LLP30
  31. 31. Deferred Taxes • IFRS – Effective rate = the rate in effect or substantially in effect when the reversal will occur – All non current – Record net only if it is probable it will occur – Disclose the gross amount • Fin 48 – No IFRS equivalent = no roadmap to your tax return ©2011 LarsonAllen LLP31
  32. 32. Service Based Revenue • IFRS – When the results of the services can be reliably estimated – use percentage of completion ◊ Amount of revenue can be measured ◊ It is probable the economic benefit will flow to the provider ◊ Stage can be reasonably estimated ◊ Costs incurred and costs to complete can be reliably measured – Review of work performed, services as a %, and cost as a %. • GAAP – when service is completed ©2011 LarsonAllen LLP32
  33. 33. Other Revenue • GAAP – Generally goods must be delivered for passing of risks and rewards – If right of return without estimates of returns revenue can not be recognized • IFRS – Can be recognized prior to delivery – Revenue can be recognized despite right of return – Real estate sales are not dependant upon adequacy of buyers initial investment ©2011 LarsonAllen LLP33
  34. 34. Consolidations • Pooling of interest method is not allowed • Purchase method – IFRS • Acquisition method – GAAP • GAAP – Do you have a controlling interest? – Is the company underfunded aside from your investment? – Based on the outcome will you absorb the profits or losses? ©2011 LarsonAllen LLP34
  35. 35. Consolidations • IFRS – One company’s ability to control the others • Governance and economics considered – Voting rights, ability to appoint, modify bylaws – Dividends, guarantees, rights to future benefits • When economic and governance indicators exist consolidate unless there is a proven reason not to. ©2011 LarsonAllen LLP35
  36. 36. Business Combinations • GAAP – FV of shares at closing date – Revalue everything to fair value – Attribute value to goodwill • IFRS – Revalue of the majority interest • Will cause variations in the amount of goodwill allocations ©2011 LarsonAllen LLP36
  37. 37. Pension Plans • GAAP – Changes in past service costs – amortized over the remaining service period • IFRS – Changes in past service costs – recognized immediately ©2011 LarsonAllen LLP37
  38. 38. Stock Options • Increased complexity with graded vesting and installments • May need to establish different systems to account for the changes • Differences for cash and equity settlements – Cash – remeasure at each balance sheet date – Equity – measure FV at grant date and allocate over vesting period ©2011 LarsonAllen LLP38
  39. 39. Long term contracts • GAAP – – Grouping of contracts is optional – Completed contract method is acceptable under certain circumstances • IFRS – Requires groups of contracts to be accounted for as a single contract – Uses zero profit recognition in cases that lack estimates ©2011 LarsonAllen LLP39
  40. 40. Questions? Thank You!!! ©2011 LarsonAllen LLP40

×