ifrs and gaap convergence update

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IFRS and GAAP Convergence Update Presented May 25, 2011 at Penn State University Cooperative Extension, Doylestown, PA by Joel Wagoner, MBA, CPA, CMA, CFM Assistant Professor of Business Administration Arcadia University

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IFRS and GAAP Convergence Update. Presented May 25, 2011 at Penn State University Cooperative Extension, Doylestown, PA by Joel Wagoner, MBA, CPA, CMA, CFM Assistant Professor of Business Administration Arcadia University. IFRS and GAAP Convergence Update. Questions: - PowerPoint PPT Presentation

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Page 1: IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update

Presented May 25, 2011

at Penn State University

Cooperative Extension, Doylestown, PA

by Joel Wagoner, MBA, CPA, CMA, CFM

Assistant Professor of Business Administration

Arcadia University

Page 2: IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update

Questions:

• Is the SEC going to require us to use IFRS?

• If so, when?

• Why aren’t we hearing as much about this as we did a few years ago?

• Are we going to have to learn IFRS?

• What will become of the FASB if we adopt IFRS?

Page 3: IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update

Last year, the SEC established a work plan to determine whether to require American publicly traded corporations to present their financial statements in accordance with International Financial Reporting Standards (IFRS.)

Page 4: IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update

In a progress report dated October 29, 2010, the SEC stated that a decision on whether or not to require IFRS in America would depend in part on the progress that the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are marking towards the convergence of American Generally Accepted Accounting Principles (GAAP) and IFRS.

Page 5: IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update

The FASB and IASB have been working towards the convergence of American and International standards since 2002.

Page 6: IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update

The two boards have an ambitious agenda for 2011. Here is the status of the items on their agenda:

Page 7: IFRS and GAAP Convergence Update

Statement of Comprehensive Income

The FASB and IASB expect to issue a final pronouncement this summer.

Page 8: IFRS and GAAP Convergence Update

Statement of Comprehensive Income

What to expect: Net income and comprehensive income will either be presented on the same report, or on consecutive reports.

Page 9: IFRS and GAAP Convergence Update

Statement of Comprehensive Income

This will likely be effective by the end of this calendar year.

Page 10: IFRS and GAAP Convergence Update

Statement of Comprehensive Income

The boards recognize that there will remain differences in what constitutes “other comprehensive income” between GAAP and IFRS.

Page 11: IFRS and GAAP Convergence Update

Statement of Comprehensive Income

There will also be differences in the timing of reclassifications between other comprehensive income and net income.

Page 12: IFRS and GAAP Convergence Update

Fair Value Measurement

The FASB and IASB expect to issue a final pronouncement this summer.

Page 13: IFRS and GAAP Convergence Update

Fair Value Measurement

The two boards seek to “ensure that fair value has the same meaning” in GAAP as in IFRS, “other than minor necessary differences in wording or style.”

Page 14: IFRS and GAAP Convergence Update

Fair Value Measurement

What to expect:

For the most part, the tentative decisions that the FASB and IASB have made clarify, but do not change, GAAP.

Page 15: IFRS and GAAP Convergence Update

Fair Value Measurement

“The boards tentatively decided that an entity may apply the guidance on measuring the fair value of liabilities when measuring the fair value of its own equity instruments.”

Page 16: IFRS and GAAP Convergence Update

Fair Value Measurement

“. . .[T]he objective of measuring the fair value of a liability or an entity’s own equity instrument is to estimate an exit price from the perspective of a market participant who holds the corresponding asset at the measurement date, regardless of whether that asset is traded”

Page 17: IFRS and GAAP Convergence Update

Fair Value Measurement

What this means: The fair value of a company’s debt or equity is what the owner of the company’s bonds or stock would be able to sell them for in an open market.

Page 18: IFRS and GAAP Convergence Update

Fair Value Measurement

“An entity may measure the fair value of financial instruments that are managed on the basis of the entity’s net exposure to a particular market risk, or to the credit risk of a particular counterparty, on a net basis if there is evidence that the entity manages its financial instruments in this way.”

Page 19: IFRS and GAAP Convergence Update

Fair Value Measurement

The evidence can include a documented risk management or investment strategy, or “providing information about the entity’s net risk exposure resulting from the financial instruments to management.”

Page 20: IFRS and GAAP Convergence Update

Fair Value Measurement

The entity may only measure the fair value of the instruments this way if the instruments are measured at fair value on the balance sheet, and if the entity has a policy to measure the instruments consistently from period to period. The policy must be disclosed.

Page 21: IFRS and GAAP Convergence Update

Fair Value Measurement

“When measuring the fair value of. . .financial instruments on the basis of. . .net risk exposure, the objective is to estimate an exit price from the perspective of a market participant who holds that net risk position at the measurement date.”

Page 22: IFRS and GAAP Convergence Update

Fair Value Measurement

The Boards have “tentatively decided that the requirements for measuring the fair value of a liability issued with an inseparable third-party credit enhancement: (1) [o]nly apply to guarantees purchased by the issuer of the liability; and (2) [d]o not apply to liabilities guaranteed by other entities within the consolidated or combined group.”

Page 23: IFRS and GAAP Convergence Update

Fair Value Measurement

“[W]hen measuring the fair value of an asset of liability when a Level 1 input is not available, an entity may apply discounts and premiums only if those discounts or premiums are consistent with the unit of account specified in another standard and if market participants would take into account such discounts or premiums when pricing the asset or liability.”

Page 24: IFRS and GAAP Convergence Update

Fair Value Measurement

The Boards have “tentatively decided not to permit exceptions for nonpublic entities to the fair value principles and concepts applicable to the measurement of fair value. . .”

Page 25: IFRS and GAAP Convergence Update

Balance Sheet - Offsetting

The FASB issued an exposure draft on January 28 of this year. Comments were accepted through April 28.

Page 26: IFRS and GAAP Convergence Update

Balance Sheet - Offsetting

The FASB and IASB issued exposure drafts on January 28 of this year. Comments were accepted through April 28. The two boards expect to issue a final pronouncement by the end of this year.

Page 27: IFRS and GAAP Convergence Update

Balance Sheet - Offsetting

What to expect: A requirement to offset assets and liabilities when an entity “has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously.”

Page 28: IFRS and GAAP Convergence Update

Balance Sheet - Offsetting

The right to setoff must be legally enforceable “in all circumstances” and not contingent on a future event.

Page 29: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

The FASB and IASB intend to issue an

exposure draft in the near future and a final pronouncement by the end of this year.

Page 30: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

What you can expect: The FASB and IASB have tentatively decided to reverse an earlier decision and will “allow a general partner to consider its economics (fees and other interests) when evaluating whether it should consolidate a partnership.”

Page 31: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

The boards had earlier decided “to conform only how kick-out rights and participating rights affect the consolidation analysis of a partnership to the proposed for evaluating whether a decision maker of a variable interest entity is an agent or a principal.”

Page 32: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

The boards have also tentatively decided “to replace the existing rebuttable presumption of control in (Codification Database) Subtopic 810-20 with a presumption that the general partner has power (but not control) over the partnership.”

Page 33: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

The two boards have also tentatively decided the following requirements for reporting entities that must consolidate a previously nonconsolidated affiliate:

Page 34: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

“[Record] the assets, liabilities, and noncontrolling interests of the subsidiary as if the newly issued guidance had been effective at the time the entity first met the conditions for consolidation.”

Page 35: IFRS and GAAP Convergence Update

Consolidation: Policy and Procedures

“If it is not practicable for the reporting entity to determine the carrying amounts, it would measure the assets, liabilities, and noncontrolling interests of the subsidiary at their fair value at the date the newly issued requirements first apply…A reporting entity may elect the fair value in transition, as long as that option is elected for all of the subsidiary’s eligible financial assets and financial liabilities.”

Page 36: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

The FASB and IASB intend to issue an exposure draft in the near future and a final pronouncement by the end of this year.

The two boards have not met to discuss this topic since October, 2010.

Page 37: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

The FASB and IASB have decided that the current GAAP treatment (Topic 946 in the Codification Database) will be used as the basis for “developing the attributes of an investment company.”

Page 38: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

Tentatively, an investment company is an entity that meets all of the following criteria:

1 – Its express business purpose is “investing for current income, capital appreciation, or both.”

2 – It has “identified potential exit strategies and a defined time (or range of dates) at which it expects to exit the investment.”

Page 39: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

3 – All of its activities are “carried out for the purposes of generating current income, capital appreciation, or both. The entity and its affiliates shall not obtain benefits from its investees that would be unavailable to other investors or unrelated parties of the investee.”

4 – Ownership is represented by units of investments (shares).

Page 40: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

5 – The funds of the owners are pooled to avail owners of professional investment management.

6 – All of the investments are managed and evaluated on a fair value basis.

Page 41: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

7 – The entity must be a reporting entity.

8 – Any “providers of debt to the investees of the entity shall not have direct recourse to any of the entity’s other investees.”

Page 42: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

The FASB has tentatively decided that an investment company must measure all of its investments at fair value.

The IASB has tentatively decided that an investment company must measure investments in entities that it controls at fair value through profit or loss.

Page 43: IFRS and GAAP Convergence Update

Consolidation: Investment Companies

There is currently a disagreement between the FASB and IASB over whether a non-investment company that is a parent of an investment company subsidiary should retain the fair value accounting that is applied by a subsidiary.

Page 44: IFRS and GAAP Convergence Update

Discontinued Operations

The FASB and IASB intend to issue an exposure draft in the near future and a final pronouncement by the end of this year. However, there have been no meetings to discuss the topic since February, 2010.

Page 45: IFRS and GAAP Convergence Update

Discontinued Operations

The current discussion would have little effect on the reporting of discontinued operations other than increasing the required disclosures.

Page 46: IFRS and GAAP Convergence Update

Financial Instruments

The FASB and IASB hope to increase the usefulness and simplify the accounting requirements for financial instruments.

Page 47: IFRS and GAAP Convergence Update

Financial Instruments

“Although the project objective is comprehensive, it is also the Boards’ objective that the project should be completed expeditiously.”

Page 48: IFRS and GAAP Convergence Update

Financial Instruments

Three specific goals of this project are:

1 – Reconsider the recognition and measurement of financial instruments;

2 – Address issues related to impairment of financial instruments and hedge accounting;

3 – Increase convergence in accounting for financial instruments.

Page 49: IFRS and GAAP Convergence Update

Financial Instruments

On January 31, the FASB and IASB also issued a supplementary document, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments for Hedging Activities – Impairment.

Page 50: IFRS and GAAP Convergence Update

Financial Instruments

The two Boards have tentatively decided the following:

Page 51: IFRS and GAAP Convergence Update

Financial Instruments

Financial Instruments will be classified both on “the characteristics of the financial instrument and the entity’s business strategy for the instrument.”

Page 52: IFRS and GAAP Convergence Update

Financial Instruments

Financial instruments that do not meet the criteria of debt instruments (as it will be defined) will be measured at fair value.

Page 53: IFRS and GAAP Convergence Update

Financial Instruments

The measurement of debt instruments will depend on the business activity that the instruments’ holder uses to manage its financial instruments, not on the intention regarding the specific instrument.

Page 54: IFRS and GAAP Convergence Update

Financial Instruments

A bondholder could treat identical bonds under any of three separate ways, depending on the activity under which it holds the bonds.

Page 55: IFRS and GAAP Convergence Update

Financial Instruments

The first activity, similar to the current “held-to-maturity”, would have the debt instrument measured at amortized cost.

Page 56: IFRS and GAAP Convergence Update

Financial Instruments

A debt instrument should be measured at amortized cost only if it meets all three of the following criteria:

Page 57: IFRS and GAAP Convergence Update

Financial Instruments

1: The holder’s business strategy “is to manage the instruments through customer financing (lending or borrowing) activities. These activities primarily focus on the collection of substantially all of the contractual cash flows from the borrower or payment of contractual cash flows to the lender.”

Page 58: IFRS and GAAP Convergence Update

Financial Instruments

2: The holder of the instrument “has the ability to manage credit risk by negotiating any potential adjustment of contractual cash flows with the counterparty in the event of a potential credit loss. Sales or settlements would be limited to circumstances that would minimize losses due to deteriorating credit.”

Page 59: IFRS and GAAP Convergence Update

Financial Instruments

3 – The financial instruments are not held for sale or transfer.

Page 60: IFRS and GAAP Convergence Update

Financial Instruments

Debt instruments should be measured at fair value, with changes in value recognized in other comprehensive income, if all of the following conditions are met:

Page 61: IFRS and GAAP Convergence Update

Financial Instruments

1 – The financial instruments are issued or acquired in a business activity for which the entity’s business strategy “is to invest the cash of the entity to either

a: Maximize total return by collecting contractual cash flows or selling the instrument, or”

Page 62: IFRS and GAAP Convergence Update

Financial Instruments

b: “Manage the interest rate or liquidity risk of the entity by either holding or selling the instrument.”

2. Financial assets that are not held for sale.

Page 63: IFRS and GAAP Convergence Update

Financial Instruments

Debt instruments should be measured at fair value, with changes in fair value reflected in net income, if the business activity for the debt instruments meets either of the following conditions:

Page 64: IFRS and GAAP Convergence Update

Financial Instruments

1 - The debt instruments are held for sale or transfer;

2 – “The debt instruments are actively managed and monitored internally on a fair value basis but do not qualify” as debt instruments for which changes in value would be recognized in other comprehensive income.

Page 65: IFRS and GAAP Convergence Update

Financial Instruments

Once financial instruments are classified, they are not reclassified, regardless of changes in the entity’s business strategy.

Page 66: IFRS and GAAP Convergence Update

Financial Instruments

If debt instruments are being measured at amortized cost, then are subsequently identified for sale, they should continue to be measured at amortized cost (net of impairment) until the sale occurs.

Page 67: IFRS and GAAP Convergence Update

Financial Instruments

Impairment: The boards have added guidance that a financial asset that is uncollectible should be written off. An entity should “use the best available and supportable information at the date of estimation to estimate expected losses. . .”

Page 68: IFRS and GAAP Convergence Update

Financial Instruments

The Boards have tentatively decided “that the effect of unwinding the discounting of expected credit losses should be included in the credit losses line item on the statement of comprehensive income.”

Page 69: IFRS and GAAP Convergence Update

Financial Instruments

“Interest income should be determined by applying the effective interest rate to an amortized cost balance that is not reduced for credit impairment.”

Page 70: IFRS and GAAP Convergence Update

Financial Instruments

“[A]n entity should account for credit impairment of purchased financial assets for which the entity has no explicit expectation of losses based on an impairment analysis at the individual asset level, even when acquired as part of a portfolio. . .”

Page 71: IFRS and GAAP Convergence Update

Financial Instruments

Embedded derivative features of financial instruments will be bifurcated and “measured at fair value with all changes in fair value recognized in net income.”

Page 72: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

The IASB last year issued an Exposure Draft that would have the effect of diverging IFRS from GAAP on the treatment of hedge accounting if it became effective.

Page 73: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

The FASB issued a Discussion Paper on February 9, 2011 to solicit comments on an IASB Exposure Draft on Hedge Accounting. Comments on the Discussion Paper were accepted through April 25.

Page 74: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

The issuance of this Discussion Paper has effectively expanded the scope of the Financial Instruments project to include Hedging Activities.

Page 75: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

The goals of the Hedging Activities portion of the project are to:

1 – Simplify and resolve practice issues in acccounting for hedging activities;

Page 76: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

2 – Improve the financial reporting of hedging activities to make the accounting model and associated disclosures easier to understand for users of financial statements;

Page 77: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

3 – Address differences in the accounting for derivative instruments and hedged items or transactions.

Page 78: IFRS and GAAP Convergence Update

Financial Instruments - Hedging

The IASB’s goals in its Exposure Draft are to:

1 – Align Hedge Accounting with risk management;

2 – Produce more “objective-based” Hedge Accounting;

3 – “Address weaknesses and inconsistencies” in current Hedge Accounting.

Page 79: IFRS and GAAP Convergence Update

Financial Instruments

The IASB’s Exposure Draft would expand the types of financial instruments that can be included as hedging instruments to include non-derivative financial assets and liabilities.

Page 80: IFRS and GAAP Convergence Update

Financial Instruments

The IASB’s Exposure Draft would change the accounting for the time value of an option when only the instrinsic value of the option is designated as a hedging instrument.

Page 81: IFRS and GAAP Convergence Update

Financial Instruments

Risk components of both financial and non-financial items could be designated as hedging items. “Changes in the cash flows or fair value of an item attributable to a specific risk” may be designated as a hedged item if the risk component is separately identifiable.

Page 82: IFRS and GAAP Convergence Update

Financial Instruments

The IASB’s Exposure Draft would permit an entity to designate a “net nil” position when the hedged items in a group fully offset each others’ risks. The group of items would be considered to be hedged without a separate item serving as a hedging instrument.

Page 83: IFRS and GAAP Convergence Update

Financial Instruments

The IASB’s Exposure Draft would widen the criteria for qualifying for Hedge Accounting from a hedge being “highly effective” to merely meeting the objective of a hedge effectiveness assessment.

(The FASB has noted in its discussion paper the vagueness of this clause of the IASB’s Exposure Draft.)

Page 84: IFRS and GAAP Convergence Update

Financial Instruments

The IASB’s “Exposure Draft would remove the existing requirement to retrospectively test the effectiveness of a hedging relationship.”

Page 85: IFRS and GAAP Convergence Update

Financial Instruments

The IASB’s Exposure Draft would “permit and sometimes require an entity to adjust an existing hedging relationship and account for the revised hedging relationship as a continuation of an existing hedge. . .”

Page 86: IFRS and GAAP Convergence Update

Leases

The two boards published exposure drafts last year and accepted comments through December 15. They have also held roundtable meetings and published a questionaire. They expect to issue a final pronouncement later this year.

Page 87: IFRS and GAAP Convergence Update

Leases

The two boards have tentatively decided:

The distinction between an operating lease and a capital lease will be no more. All leases will be liabilities for the lessee and assets for the lessor.

Page 88: IFRS and GAAP Convergence Update

Leases

The lessee’s liability / lessor’s receivable should include:

1 – Lease payments that meet a high threshold (of probability of realization);

2 – Lease payments for which variability lacks economic substance;

3 – Lease payments that depend on an index or rate.

Page 89: IFRS and GAAP Convergence Update

Leases

There should be two accounting approaches, one for finance and one for non-finance leases.

Page 90: IFRS and GAAP Convergence Update

Leases

For all leases longer than one year, the lessee will recognize an asset and a liability for the present value of the lease payments. The liability will be amortized using the effective-interest method.

Page 91: IFRS and GAAP Convergence Update

Leases

For finance leases, the lessee will “amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits in accordance with. . . (Codification Database) Topic 350.”

Page 92: IFRS and GAAP Convergence Update

Leases

For other-than-finance leases, straight-line amortization of the asset will be used.

Page 93: IFRS and GAAP Convergence Update

Leases

For finance leases, the lessee will “amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits in accordance with. . . (Codification Database) Topic 350.”

Page 94: IFRS and GAAP Convergence Update

Leases

For sale-and-leaseback transactions, “the transaction would be accounted for as a sale and then a leaseback. If a sale has not occurred, the entire transaction would be accounted for as a financing.”

Page 95: IFRS and GAAP Convergence Update

Revenue Recognition

“[R]evenue recognition requirements in. . .GAAP differ from those in. . .[IFRS], and both sets of requirements are considered to be in need of improvement.”

Page 96: IFRS and GAAP Convergence Update

Revenue Recognition

GAAP “comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions.”

Page 97: IFRS and GAAP Convergence Update

Revenue Recognition

“Although IFRSs provide less guidance on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, can be difficult to understand and apply to transactions beyond simple.”

Page 98: IFRS and GAAP Convergence Update

Revenue Recognition

The objective of the Revenue Recognition project is to “clarify the principles for recognizing revenue and to develop a common revenue standard for U. S. GAAP and IFRSs that would:

(a) remove inconsistencies and weaknesses in existing revenue recognition standards and practices;

Page 99: IFRS and GAAP Convergence Update

Revenue Recognition

(b) provide a more robust framework for addressing revenue recognition issues;

(c) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and

(d) Simplify the preparation of financial statements by reducing the number of requirements to which entities must refer.”

Page 100: IFRS and GAAP Convergence Update

Revenue Recognition

The two boards intend to take a “balance sheet approach” to revenue. Every transaction is seen as placing requirements (performance obligations) on the parties in the transaction.

Page 101: IFRS and GAAP Convergence Update

Revenue Recognition

As a party satisfies its “performance obligations”, it is entitled to recognize revenue for the amount of the liability related to its performance obligation that is reduced.

Page 102: IFRS and GAAP Convergence Update

Revenue Recognition

The two boards expect to issue a final pronouncement by the end of this year. As of now, they have reached the following tentative decisions:

Page 103: IFRS and GAAP Convergence Update

Revenue Recognition

The objective for identifying separate performance obligations “is to depict the transfer of goods or services and the profit margin that is attributable to those goods or services.”

Page 104: IFRS and GAAP Convergence Update

Revenue Recognition

“An entity should account for a bundle of promised goods or services as one performance obligation if the entity provides a service of integrating those goods or services into a single item that the entity provides to the customer.”

Page 105: IFRS and GAAP Convergence Update

Revenue Recognition

An entity should account for a promised good or service as a separate performance obligation if either of the following criteria occur:

Page 106: IFRS and GAAP Convergence Update

Revenue Recognition

1 - The pattern of transfer of the good or service is different from the pattern of transfer of other promised goods or services in the contract; and 

2 - The good or service has a distinct function.

Page 107: IFRS and GAAP Convergence Update

Revenue Recognition

A good or service has a distinct function if either of the following criteria occur:

Page 108: IFRS and GAAP Convergence Update

Revenue Recognition

1 - The entity regularly sells the good or service separately; or  

2 - The customer can use the good or service either on its own or together with resources that are readily available to the customer. ”

Page 109: IFRS and GAAP Convergence Update

Revenue Recognition

“[A]n entity should recognize revenue when the customer obtains control of the good. The Boards also decided that the revenue standard should:

1 - Carry forward from the Exposure Draft most of the proposed guidance on control;

 

2 - Describe rather than define control. . .

Page 110: IFRS and GAAP Convergence Update

Revenue Recognition

“[T]o recognize revenue for a service, an entity must determine that a performance obligation is satisfied continuously and then must select a method of measuring progress toward complete satisfaction of that performance obligation.”

Page 111: IFRS and GAAP Convergence Update

Revenue Recognition

“The Boards tentatively decided that an entity satisfies a performance obligation continuously if at least one of the following two criteria is met:”

1 – “The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.”

Page 112: IFRS and GAAP Convergence Update

Revenue Recognition

2 - The entity’s performance does not create an asset with alternative use to the entity and at least one of the following is met: 

a. The customer receives a benefit as the entity performs each task; or

Page 113: IFRS and GAAP Convergence Update

Revenue Recognition

b. “Another entity would not need to reperform the task(s) performed to date if that other entity were to fulfill the remaining obligation to the customer; or 

c. “The entity has a right to payment for performance to date even if the customer could cancel the contract for convenience.”

Page 114: IFRS and GAAP Convergence Update

Revenue Recognition

“[A]n entity would recognize revenue for a service only if the entity can reasonably measure its progress toward successful completion of the service.”

Page 115: IFRS and GAAP Convergence Update

Revenue Recognition

The Boards have tentatively decided that the final revenue standard should emphasize that the objective of measuring progress is to faithfully depict the entity’s performance (that is, the pattern of transfer of goods or services to a customer).

Page 116: IFRS and GAAP Convergence Update

Revenue Recognition

“[I]f an entity promises to transfer both goods and services, the entity should first determine whether the goods and services are distinct (in accordance with the guidance on identifying separate performance obligations).”

Page 117: IFRS and GAAP Convergence Update

Revenue Recognition

If the goods and services are distinct, the entity would account for them as separate performance obligations.

If the goods and services are not distinct, the entity would account for the bundle of non-distinct goods and services as a service.

Page 118: IFRS and GAAP Convergence Update

Revenue Recognition

If a customer has the option to purchase a warranty separately from the entity, the entity should account for the warranty as a separate performance obligation. Hence, the entity would allocate revenue to the warranty service.

Page 119: IFRS and GAAP Convergence Update

Revenue Recognition

If a customer does not have the option to purchase a warranty separately from the entity, the entity should account for the warranty as a cost accrual unless the warranty provides a service to the customer in addition to assurance that the entity’s past performance was as specified in the contract (in which case the entity would account for the warranty service as a separate performance obligation).

Page 120: IFRS and GAAP Convergence Update

Revenue Recognition

An entity should recognize an asset for the incremental costs of obtaining a contract that the entity expects to recover. Incremental costs of obtaining a contract are costs that the entity would not have incurred if the contract had not been obtained.

Page 121: IFRS and GAAP Convergence Update

Revenue Recognition

An asset recognized for the costs of obtaining a contract should be presented separately on the statement of financial position and subsequently measured on a systematic basis consistent with the pattern of transfer of the goods or services to which the asset relates.

Page 122: IFRS and GAAP Convergence Update

Revenue Recognition

[A]n entity should combine, and account for as a single contract, two or more contracts that are entered into at or near the same time with the same customer (or related entities) if one or more of the following criteria are met:

Page 123: IFRS and GAAP Convergence Update

Revenue Recognition

1 - The contracts are negotiated as a package with a single commercial objective.

2 - The amount of consideration in one contract depends on the other contract.

3 - The goods and services in the contracts are interrelated in terms of design, technology, or function.

Page 124: IFRS and GAAP Convergence Update

Revenue Recognition

“[I]f a contract modification results only in the addition of a separate performance obligation at a price that is commensurate with that additional performance obligation, the entity should account for the contract modification as a separate contract. Otherwise, the entity should reevaluate the performance obligation and reallocate the transaction price to each separate performance obligation.”

Page 125: IFRS and GAAP Convergence Update

Revenue Recognition

“The Boards discussed the accounting for a customer’s nonrefundable prepayment for future goods or services and the portion of the customer’s rights that is not exercised (often referred to as breakage).”

Page 126: IFRS and GAAP Convergence Update

Revenue Recognition

“The Boards tentatively decided that if an entity can reasonably estimate the amount of expected breakage, the entity should recognize the effects of the expected breakage as revenue in proportion to the pattern of rights exercised by the customer.

Page 127: IFRS and GAAP Convergence Update

Revenue Recognition

“Otherwise, the entity should recognize the effects of the expected breakage when the likelihood of the customer exercising its remaining rights becomes remote.”

Page 128: IFRS and GAAP Convergence Update

Revenue Recognition

“The Boards tentatively decided that the unit of account for the onerous test should be the contract, specifically, the remaining performance obligations in the contract.”

Page 129: IFRS and GAAP Convergence Update

Revenue Recognition

“the onerous test should apply to all contracts, including those that are intentionally priced at a loss in expectation of profits to be generated on subsequent contracts with the customer (that is, “loss-leader” contracts).”

Page 130: IFRS and GAAP Convergence Update

Revenue Recognition

“[T]he costs to be included in the onerous test and in measuring an onerous liability should be the costs that relate directly to satisfying the remaining performance obligations. . .”

Page 131: IFRS and GAAP Convergence Update

Revenue Recognition

“The Boards tentatively decided that an entity should adjust the promised amount of consideration to reflect the time value of money if the contract includes a financing component that is significant to that contract.”

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Revenue Recognition

“[I]n assessing whether a contract has a significant financing component, an entity should consider various factors, including the following:

1 – “Whether the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service;”

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Revenue Recognition

2 – “Whether there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services;”

3 – “Whether the interest rate that is explicit or implicit within the contract is significant.”

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Revenue Recognition

“[A]s a practical expedient, an entity should not be required to assess whether a contract has a significant financing component if the period between payment by the customer and the transfer of the promised goods or services to the customer is one year or less.”

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Revenue Recognition

“An entity should not reflect the effects of a customer’s credit risk in the measurement of the transaction price and, hence, revenue upon transfer of a good or service to the customer. Consequently, an entity would recognize revenue at the promised amount of consideration (that is, at the stated contract price). That decision is a change from the Boards’ proposals in the Exposure Draft.”

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Revenue Recognition

“An entity should recognize an allowance for any expected impairment loss from contracts with customers. The corresponding amounts in profit or loss should be presented as a separate line item adjacent to the revenue line item (as contra revenue).”

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Revenue Recognition

“The final revenue standard should not include a revenue recognition criterion that requires an assessment of the customer’s ability to pay the promised amount of consideration.”

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Revenue Recognition

When the amount of consideration that a customer would pay to fulfill the contract is uncertain, “an entity should estimate either of the following amounts depending on which is most predictive of the amount of consideration to which the entity will be entitled:

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Revenue Recognition

“1: The probability-weighted amount, or

2: The most likely amount.”

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Revenue Recognition

“An entity should recognize revenue at the amount allocated to a satisfied performance obligation unless the entity is not reasonably assured to be entitled to the amount.”

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Revenue Recognition

In the case of bundled goods or services, the transaction price of each good or service should be allocated “on a relative selling price basis.”

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Revenue Recognition

If the standalone selling price of a good or service is highly variable, “the most appropriate technique to estimate a standalone selling price may be a residual technique.”

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Revenue Recognition

In a residual technique, the price of the bundle without the specific good or service is estimated. When the estimated price of the bundle (less the specific good or service) is subtracted from the full price of the bundle, the remaining amount is allocated to the specific good or service.

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Insurance Contracts

This project is in the early stages. The FASB issued a discussion paper in September, 2010, and accepted comments through last December.

The two Boards expect to issue an Exposure Draft by the end of 2011.

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Insurance Contracts

It should be noted that there is an extensive body of GAAP concerning Insurance Accounting, but relatively little IFRS has been developed.

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Insurance Contracts

IFRS 4, “Insurance Contracts”, issued in 2004 (two years after the convergence movement began with the Norwalk Agreement) was essentially a makeshift pronouncement.

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Insurance Contracts

The IASB issued an Exposure Draft in 2010 that would refine IASB 4. The discussions that led to the development of IASB 4 were held jointly with the FASB.

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Insurance Contracts

Current discussions between the IASB and FASB are on such issues as the unbundling of insurance contracts from non-insurance components of the contracts.

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Insurance Contracts

The FASB and IASB are discussing whether “an insurer should measure an insurance contract using an explicit, unbiased, and probability-weighted estimate (expected value) of the future cash outflows, less future cash inflows that will arise as the insurer fulfills the insurance contract.”

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Insurance Contracts

Future costs of fulfilling contracts (including legal costs related to claims) should be included in the liability. Costs that do not relate directly to “insurance contracts or contract activities” should be recognized during the period in which they are incurred.

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Insurance Contracts

Unbundling would serve the purpose of separating insurance-related performance obligations from non-insurance performance obligations for the purpose of appropriately recognizing revenue.

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Conceptual Framework

Other than the Revenue Recognition project that we discussed earlier, this has been tabled until at least December, 2011.

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Conceptual Framework

The other two active phases of the project, defining “Measurement” and “Reporting Entity”, will likely not see any activity until 2012.

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Financial Statement Presentation

This project has been tabled. “Further action not expected before December 2011.”

When this project is resumed, the potential effects will be very significant for anyone who prepares or uses financial statements.

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Emissions Trading Schemes

This project has been tabled. “Further action not expected before December 2011.”

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Financial Instruments with Characteristics of Equity

This project has been tabled. “Further action not expected before December 2011.”

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Earnings per Share

This has been removed from the active agenda.

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(Deferred) Income Taxes

This has been removed from the active agenda.

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Postretirement Benefit Obligations

This has been removed from the active agenda.