Chapter 4:

International
Financial
Reporting
Standards:
Part I

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Learning Objectives
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; intangibles; and leased assets
Explain major differences between IFRS and
U.S. GAAP on the recognition and
measurement of assets
Describe the requirements of IFRS in a variety
of disclosure and presentation standards

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Learning Objectives
Explain major differences between IFRS and
U.S. GAAP on certain disclosure and
presentation issues
Analyze the impact that differences between
IFRS and U.S. GAAP can have on the financial
statements

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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
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
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 and
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
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IAS 16, Property, Plant, and

Equipment
Recognition of initial costs
Probable future benefits
Can be measured

Recognition of subsequent costs

Must follow initial recognition rules
Carrying amount of the replaced part should be
de-recognized

Measurement at initial recognition

Purchase price + costs to perform as intended +
costs of dismantling and removing the asset

Measurement subsequent to initial recognition

Can use cost model or revaluation model
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IAS 16, Property, Plant, and

Equipment
Depreciation
Review 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
U.S. GAAP generally requires use of cost mode

Disclose fair value in notes when using the

cost model

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IAS 36, Impairment of Assets

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 (eg: 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

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

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 expenses immediately if it does not meet

the definition
Except when obtained in business combination
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IAS 38, Intangible Assets

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

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

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

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 cant be recovered on finitelived assetsneed 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

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IFRS 3, Business Combinations

Recognize goodwill only in business combinations
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
firms net assets excluding goodwill
Fair value, including the noncontrolling interests share
of goodwill
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IFRS 3, Business Combinations

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 cashgenerating 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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IAS 23, Borrowing Costs

Revised in 2007 to be similar to U.S. GAAP as
part of convergence project
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 Costs

Capitalize interest that could have been
avoided in absence of expenditure on the
qualifying asset
Amount capitalized by multiplying weightedaverage accumulated expenditures by
appropriate interest rate
Can use actual interest rate if can associate
specific borrowing as being less than total
expenditures

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IAS 17, Leases

Distinguishes between finance (capitalized)
leases and operating leases
Provides rules for sale-leaseback transactions
Conceptually similar to U.S. GAAP but
provides less specific guidance
Finance leases transfer substantially all the
risks and rewards of ownership to lessee

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IAS 17, Leases

Situations normally leading to capitalization,
individually or in combination
Lease transfers ownership to lessee by end of lease
term
Lessee has option to purchase at less than FMV
Lease term is for major part of the assets economic life
U.S. GAAP says 75%

Present value of minimum lease payments at lease

inception is equal to substantially all of the fair value of
the leased asset
U.S. GAAP says 90%

Leased asset is specialized that only the lessee can use

it without major modifications
Not present in U.S. GAAP
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IAS 17, Leases

Other indicators leading to capitalization,
individually or in combination:
Lessee bears loss on lease cancellation
Lessee absorbs gain or loss from fluctuation in
market value of residual asset value
Lessee may extend lease for additional period at
substantially below market rent

Other finance lease considerations

Capitalize lease acquisition costs
IAS 36 impairment rules apply
Depreciate over shorter of useful life or lease term
Finance leases must be classified as such by lessor
and lessee
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IAS 17, Leases

Sale-LeasebackFinance Lease:
Must defer any gain on sale and recognize it in
income over the lease term
U.S. GAAP rules generally similar
If fair value less than carrying value, IAS 17
recognizes loss only if loss due to impairment

Sale-LeasebackOperating Lease:
IAS 17 recognizes gain immediately in income
U.S. GAAP amortizes gain over lease term

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IAS 17, Leases

Disclosures:
Lessees must disclose future minimum
payments related to finance leases and
operating leases separately as follows:
Amount to be paid in Year 1
Amount to be paid in Years 2-5 as a single amount
Amounts to be paid in Year 6 and beyond as single
amount
Present value of future minimum payments under
finance leases

U.S. GAAP requires disclosure payments for each

of years 15 separately by year and then lump
remaining years as single amount
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IAS 17, Leases

IASB/FASB Convergence Project:
Exposure draft issued in August 2010 for
proposed new standard on accounting for leases
Revised draft on leases in 2013
Significant changes proposed for lessors and
lessees
Lessee would recognize right-of-use asset and
liability to make lease payments for all leases

No more finance and operating lease distinction

All leases would be finance leases
Take furthest possible term
On sale-leaseback, seller would recognize as sale
or borrowing depending on certain conditions
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Disclosure and Presentation

Standards
IAS 7, Statement of Cash Flows:
Classified as operating, investing or financing
Operating cash flows may use direct or indirect
method
Interest, dividends, and income taxes must be
reported separately
Interest and dividends paid may be classified
operating or financing
Interest and dividends received may be classified
operating or investing
Income taxes are operating unless specifically
identified with investing or financing activities
Can only disclose noncash investing and financing
activities outside of this statement
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Disclosure and Presentation

Standards
IFRS/U.S. GAAP differences in statement of
cash flows:
Interest paid and received and dividends
received all operating cash flows
Dividends paid are financing cash flows
Indirect method
Reconciliation must begin with net income

Direct method
Must reconcile operating cash flows to net income

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Disclosure and Presentation

Standards
IAS 10, Events After Reporting Period:
Known under U.S. GAAP as subsequent events
Covers events between balance sheet date and
authorized date of issuance of financial
statements
U.S. GAAPthrough date of issuance
Types of after-the-reporting-period events
Adjusting events
Non-adjusting events

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Disclosure and Presentation

Standards
IAS 8, Accounting Policies, Changes in
Accounting Estimates, and Errors:
Hierarchy of authoritative pronouncements
IASB Standard or interpretation specific to the event
or transaction
IASB Standard or Interpretation dealing with similar
and related issues
Definitions, recognition criteria, and measurement
concepts in the IASB Framework
Most recent pronouncements of other standards
setting bodies that use similar framework (like FASB)

Changes in accounting policy only if the change:

Is required by IFRS
Results in more relevant and reliable information
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Disclosure and Presentation

Standards
IAS 8, Accounting Policies, Changes in
Accounting Estimates, and Errors:
Changes in estimates due to new developments
and new information accounted for in current or
future periods
Correction of errors material, prior-period errors
should be corrected retrospectively
When impractical to determine period-specific
effects of an error, the entity retrospectively
restates the opening balances for the earliest period
practicable

Related party disclosures must be disclosed in

the notes to financial statements
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Disclosure and Presentation

Standards
IAS 33, Earnings per Share:
Basic and diluted EPS must be on face of income
statement
U.S. GAAP has more detailed guidance on diluted
EPS:
But application appears consistent with IAS 33

IAS 34, Interim Financial Reporting:

No guidance as to who should prepare, how often, or
how soon after end of the period
Treats interim periods as discrete reporting periods
U.S. GAAP treats interim reporting as integral part of full
year

Describes minimum content and accounting

principles applied
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Disclosure and Presentation

Standards
Noncurrent assets held for sale reported
separately on balance sheet at lower of
carrying value or fair value less costs to sell
These assets are not depreciable
Similar to U.S. GAAP

After-tax profit/gain or loss on disposal of

discontinued operation must be reported as a
single amount
Details must be disclosed in the notes or on the
income statement

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Disclosure and Presentation

Standards
IFRS 8, Operating Segments, issued in 2006
Replaced IAS 14, Segment Reporting
Requires extensive disclosures for each separate
operating segment
Disclosures similar to U.S. GAAP except the
latter doesnt require disclosure of liabilities

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End of Chapter 4

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