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

1. Comparisons: IFRS vs GAAP
Michael Kosinski, CPA
Principal, Assurance Services
mkosinski@ larsonallen.com
(239) 280-3517
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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.
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3. Why is there a need to converge?
• Corporations are becoming increasingly
multinational
• Direct foreign investment
• Interdependence
• Global financing markets
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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
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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
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6. 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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7. IFRS Balance Sheet - Assets
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8. Balance Sheet – Equity and Liabilities
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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
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10. 10
Income Statement
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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.
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12. Statement of Equity
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13. 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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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
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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
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16. Prior year impairment = Current year margin
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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.
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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
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to be depreciated separately
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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
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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
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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.
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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
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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
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classification
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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
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◊ If capital lease defer gain and amortize over the lease term
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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
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26. 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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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
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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
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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
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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
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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
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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
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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
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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?
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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.
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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
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37. 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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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
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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
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40. Questions?
Thank You!!!
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