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Comparisons: IFRS vs GAAP

Michael Kosinski, CPA

Principal, Assurance Servicesmkosinski@ larsonallen.com

(239) 280-3517

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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.

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Why is there a need to converge?

• Corporations are becoming increasingly multinational

• Direct foreign investment• Interdependence• Global financing markets

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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

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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

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Implementation considerations

• Initial year presentation requires three comparative years due to requirements for comparative financial statements

• Parallel reporting for historical information

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IFRS Balance Sheet - Assets

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Balance Sheet – Equity and Liabilities

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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

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Income Statement

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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.

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Statement of Equity

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Statement of Equity

• Other comprehensive income disappears• More equity classifications• For all categories of equity a reconciliation must

be presented for changes

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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

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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

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Prior year impairment = Current year margin

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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.

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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 to be depreciated separately

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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

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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

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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.

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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

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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 classification

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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

◊ If capital lease defer gain and amortize over the lease term

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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

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Impact of Impairment

• Inventory• Marketable securities (Available for sale and

held to maturity)• Real estate• Property and equipment• Investment property (under GAAP)

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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

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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

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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

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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

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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

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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

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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

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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?

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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.

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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

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Pension Plans

• GAAP – Changes in past service costs – amortized over the

remaining service period

• IFRS– Changes in past service costs – recognized

immediately

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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

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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

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Questions?

Thank You!!!