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 can’t be recovered on finite-lived assets—
need 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 firm’s net
assets excluding goodwill
 Fair value, including the noncontrolling interest’s 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 cash-generating
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 weighted-average
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 asset’s 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-Leaseback—Finance 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-Leaseback—Operating 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 1–
5 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. GAAP—through 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 doesn’t
require disclosure of liabilities

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End of Chapter 4

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