enterprizeerp - finance transformation - ifrs series us gaap and ifrs - series-2

8/22/2019 EnterprizeERP - Finance Transformation - IfRS Series US GAAP and IFRS - Series-2

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Differences between

US GAAP and IFRS Series 2

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Slide | 2EnterprizeERP IFRS Web Series

Need for International standards

Growth of Capital markets Mobility of capital

FTSE (London Index) 55% foreign owned

10 years ago US owned more than 50% of theworlds equity today nearing 30%

China holding US Bonds

Need to reduce costs of consolidation Level the playing fieldaccounting arbitrage


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Balance Sheet Assets


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Assets

Inventories Marketable securities

Fixed Assets

Deferred Tax Assets Intangibles


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IAS 2 - Inventory Valuation

Applies to RM,WIP and Finished goods Cost vs. Net Realizable value (NRV)

NRV Selling price less cost to complete and

costs to be incurred to make the sale Line by Line basis or related group in some

cases but not in aggregate

FIFO

Weighted Average

LIFO not permitted


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Difference in Valuation and treatment

US GAAP Lower of Cost or Market

(LCM)

Subsequent write up NOT

permissible

IFRS Lower of Cost or Net

Realizable Value (NRV)

Subsequent write up

permissible


7/32Slide | 7EnterprizeERP IFRS Web Series

IAS 39 - Marketable Securities

Initially accounted for @ Cost Classified between

Held to Maturity (HTM)

Trading securities Available for sale (AFS)

Consider market value or amortized cost

based on category



Held to Maturity (HTM)

Investments

Bonds and Fixed income securities positiveintent & ability to hold to maturity

Amortization run thru the P & L

Must evaluate for impairment Use effective interest rate

Under IFRS Impairment losses can be

reversed up to amount of the originalimpairment Not Permitted by US GAAP



Trading Securities

Debt or Equity Held for sale in the shortterm

Includes hedges and derivatives

FMV and gains & losses run thru the P & L Similar in IFRS and US GAAP



Available for Sale (AFS)

Debt or Equity that do not fall into the above 2categories

FMV

Effective 1/1/09 IFRS changed to recognizedgain or loss thru OCI except for impairment

losses (which is the current USG practice)



IAS 16 Property, Plant and Eq.

Initially @ cost subsequent -choose FMV

(revaluations) or cost

If FMV (revaluations) is chosen should be used

for the entire class of assetsCannot cherry

pick

Revaluation surplus Stockholders Equity

Upward revaluations vs. downward revaluations

Deferred taxes on revaluations

Revaluations becoming relatively rare in practice

for public enterprises



Depreciation methods

Straight line method

Units of Production

Diminishing balance method

Depreciable amount (Cost residual value)

Depreciation = Depreciable amount over the

useful life of asset



Component Depreciation Required

Each material component with different useful

life.

Example: Airplane chassis, engine, and the

interior

Under IFRS -- Cost of a major inspection and

overhaul of the engine is capitalized the oldcomponent asset derecognized and the new

asset recognized



Component depreciation example

Land and Building with different useful lives

Land Infinite

Roof 25 years

Elevators 20 yearsFixtures 10 years

Remainder of Building 30 years



Impairment of Assets

US GAAP

Carrying Amount > undiscounted future cashflows

Carrying Amount - (FV or PV of future cash flows)

IFRS Carrying Amount (CA) > Recoverable Amount

(RA)

Impairment loss = CA-RA

Recoverable Amount greater of

Selling price

Value in use (PV of future cash flows)


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Reversal of prior Impairment

US GAAP Prohibited

IFRS Allowed except for Goodwill and other

indefinite lived intangible assets


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IAS 12 Income taxes

Deferred Tax Asset (DTA)

IFRS

DTA recorded only if it is probable (defined as

more likely than not) that sufficient future profit

will be available to utilize DTA

US GAAP

Recognized in full

Allowance required if it is more likely than not

that it will not be fully realized


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Balance Sheet

Liabilities & Equity


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Liabilities

Debt covenant violations

Provisions and contingencies

Deferred taxes

Convertible debt

Employee Benefits


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Debt covenant violations at the B/S date-

IAS 1.72 (b)

US GAAP If an entity obtains a waiver

of a debt covenant violationany time prior to issuanceof the F/S, the debt is NOT

reclassified to current as ofthe B/S date.

IFRS If the debt covenant

violation existed at the B/S

date, which results in the

debt being callable, thedebt is reclassified to

current as of the B/S date.

A subsequently obtained

waiver does not change the

classification.


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Provisions

Defined as:

A Present Obligation of a past event (legal

obligation or constructive obligation)

Outflow of resources to settle the obligation(cash or other assets)

Reliable estimate can be made of the amount


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IAS 37 Provisions

USG Present obligation resulting

from past event andoutflow of resourcesreasonably estimatable

Usually 75% probable

IFRS IFRS results in higher

liability being recorded

Usually >50% probable


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Contingencies

A contingent asset or liability is disclosed in

the F/S rather than being recorded in the

statement of Financial position, except in

business combinations

If the outflow is thought to be remote No

disclose required

USGLow end of range

IFRS Consider the mid-point


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Measurement

Management (judgment) best estimate of

likely outcome

Consider the probability of outcome

Legal guidance (lawsuits)

Risk and uncertainties

Use of experts (e.g. environment clean up)

Past experience or similar circumstances

(warranty provision e.g. 1% of all sales)

Note: Principles-based system in action


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Deferred Taxes

US GAAP Tax rates based on enacted

rates

Classified based on the

original asset/liability

IFRS Substantially enacted rates

in the year when the

difference will reverse

Always recorded as Non-Current


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Tax rates substantively enacted

IFRS allows to use tax rates that are

substantively enacted

e.g. In Dec congress has proposed 40% tax instead

of 35% and it is highly probable that it will pass

Under IFRS one could use 40%

US GAAP it would be 35%


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Convertible Debt

US GAAP Record as a liability unless

convertible portion can be

split up

e.g. Bonds with detachablewarrants

IFRS Liability @ FMV and

remainder considered

Equity


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Pension

US GAAP Minimum pension liability

required if underfunded

IFRS No such requirement


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Employee Stock compensation

US GAAP Awards with graded vesting

can be amortized on

straight line or accelerated

basis

IFRS Awards with graded vesting

are required to be

amortized on accelerated

basis (awards for each

vesting date is considered a

separate tranche)


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IFRS 2 Share-based Payments

Receipt of goods/services in exchange for

shares

Equity-settled shares issued

Cash-settled pays cash =share price = to the FV

of goods/services received

Cash Supplier has a choice to request Cash or

equivalent shares


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Long term Completed Contract method

US GAAP Allowed

IFRS Prohibited


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