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

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  1. 1. Comparisons: IFRS vs GAAP Michael Kosinski, CPA Principal, Assurance Services mkosinski@ (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