Chapter 5:

International
Financial
Reporting
Standards: Part II

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Learning Objectives
 Describe and apply the requirements of IFRS
related to the financial reporting of current
liabilities, provisions, employee benefits,
share-based payment, income taxes, revenue,
and financial instruments
 Explain and analyze the effect of major
differences between IFRS and U.S. GAAP
related to the financial reporting of current
liabilities, provisions, employee benefits,
share-based payment, income taxes, revenue,
and financial instruments

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Current Liabilities
 IAS 1, Presentation of Financial Statements,
requires classification of liabilities
 Current liabilities
 Noncurrent liabilities
 Current liabilities
 Expected to settle in normal operating cycle
 Held for trading purpose
 Settled within 12 months of balance sheet date
 Not deferred until 12 months after balance sheet
date

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Differences in IFRS and U.S. GAAP: Current Liabilities

 Refinanced short-term debt

 IFRS: Long-term, if refinanced prior to balance sheet date
 U.S. GAAP: Long-term, if refinancing is agreed prior to
balance sheet
 Accounts payable on demand due to violation of debt
covenants
 IFRS: Current, unless lender issued waiver of 12 months
by balance sheet date
 U.S. GAAP: Current, unless lender issued waiver obtained
by annual report issuance date
 Bank overdrafts
 IFRS: Long-term, if integral part of cash management
netted against cash
 U.S. GAAP: Always treated as current liabilities

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Provisions, Contingent Liabilities, and Contingent Assets

 IAS 37, Provisions, Contingent Liabilities and

Contingent Assets, provides guidance for:
 Reporting liabilities and assets of uncertain
timing, amount, or existence
 Environmental and nuclear decommissioning
costs

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Contingent Liability
 Recognized under IFRS, when:
 There is a present obligations from past events
 It is probable that there will be an outflow of
resources
 A reliable estimate of the obligation can be
made
 Constructive obligation: arise from past
actions or current statements indicating that
a company will accept certain responsibilities
 No concept of constructive obligation in U.S.
GAAP

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Contingent Liability
 As defined by IAS 37
 Possible obligation confirmed by occurrence or
nonoccurrence of future event
 Present obligation not recognized because:
 No probable outflow of resources
 Amount cannot be measured reliably
 Recognized under U.S. GAAP when outflow is
probable
 Only disclosed if outflow possible, and not
probable

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Provisions
 IAS 37
 The best estimate of the expenditure required to
settle the present obligation
 Probability-weighted expected value
 Discounted to present value
 Recognized under U.S. GAAP at the low end of
the range of possible amounts
 Provision is reversed when outflow of
resources is not probable

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Onerous Contract
 Unavoidable costs of obligation exceed
economic benefits to be received
 Recognize provision for lower of
 Cost of fulfillment
 Penalty from non-fulfillment
 If onerous from entity's own action, no
recognition until that action happens

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Restructuring
 A program planned and controlled by
management that changes either:
 Scope of business
 Manner in which business is conducted
 Under IAS 37, a restructuring provision is
recognized when:
 Formal restructuring plan exists
 There is a valid expectation of the restructuring
 U.S. GAAP does not allow recognition until
liability has been incurred

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Employee Benefits
 IAS 19, Employee Benefits, covers all forms of
employee compensation and benefits
 Excludes share-based compensation
 Four types of employee benefits
 Short-term benefits (compensated absences and
bonuses)
 Post-employment (pensions and medical
benefits)
 Other long-term benefits (deferred
compensation and disability)
 Termination benefits (severance and early
retirement)

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Employee Benefits
 Short-term benefits recognize expense and
liability at the time employees provide service
 Amount recognized is undiscounted
 Compensated absences (for sick/vacation pay)
accrue when services are provided only if:
 The compensated absences accumulate over time
 They can be carried forward to future periods
 For nonaccumulating compensating balances, an
expense and liability are recognized
 Profit sharing and bonus plans
 An expense and a liability are accrued if:
 There are present legal or constructive obligation o make
such payments
 The amount can be reasonably measured

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Employee Benefits
 Post-employment benefits
 IAS 19 distinguishes between defined
contribution plans and defined benefit plans
 Defined contribution plan
 Benefits accrue when services are rendered
 Liability reduces when contributions are made
 Defined benefit plan
 Two major issues
 Calculation of the net defined benefit liability (or
asset)
 Calculation of the defined benefit cost

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Post-employment benefits
 Net defined benefit liability (asset)
 Balance sheet amount calculated as:
 + Present value of the defined benefit obligation
(PVDBO)
 − Fair value of plan assets (FVPA)
 Asset recognized is limited to the larger of
 Surplus
 Asset ceiling
 No asset ceiling under U.S. GAAP

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Post-employment benefits
Net income
 Defined benefit cost reported in income
 Components include
 Current service cost
 Past service cost and gains and losses on
settlements
 Net interest on the net defined benefit liability
(asset)
 Remeasurements of net defined benefit liability
(asset)
Other comprehensive income

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Other post-employment benefits
 IAS 19 does not provide separate guidance for
other post-employment benefits
 U.S. GAAP provides more guidance for
measurement of post-employment medical
benefits

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Share-based Payment
 IFRS 2, Share-based Payment, sets out
measurement principles and specific
requirements for three types of share-based
payment transactions
 Equity-settled share-based payment
 Cash-settled share-based payment
 Choice-of-settlement share-based payment
 IFRS 2 and U.S. GAAP are substantially similar

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Equity-Settled Share-Based
Payment
 Payments to non-employees for goods and
services
 IFRS measurement
 Fair value of goods or services, if determined
 Fair value of the equity instrument
 U.S. GAAP measurement
 Fair value of instrument at earlier of
 Commitment for performance
 When performance completed

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Equity-Settled Share-Based
Payment
 Payments to employees
 Measured at the fair value of the equity
instruments
 Consider vesting conditions
 Total compensation cost
 Recognized as compensation expense
 Estimate of options vested to be revised
throughout the vesting period
 Recognition of associated compensation
expense
 Straight-line over service period for cliff vesting
 Amortize each installment (tranche) over their
vesting period for Graded vesting
 U.S. GAAP allows choice of accelerated or straight-
line recognition 5-19
Modification of Stock Option Plans
 Types of modification
 Length
 Vesting conditions
 Result of fair value change
 Increase in fair value
 Increase compensation cost by the same amount
 Decrease in fair value
 No change in compensation cost deducted
 U.S. GAAP
 Fair value determines compensation expense
 No minimum compensation as under IFRS

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Cash-Settled Share-Based
Payment
 Cash payment on stock price increase above
predetermined level
 Recognize fair value as a liability using option-
pricing model
 Measure on each balance sheet date
 Under U.S. GAAP, classify certain cash-settled
payments as equity
 Under IFRS, classify as liability

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Choice-of-settlement Share-based
Payment
 Allow entity to choose equity settlement or
cash settlement
 If present obligation to settle in cash, treat as
cash-settled
 If obligation settled in equity, treat as equity-
settled
 Treat as compound financial instrument when
receiving entity chooses equity settlement or
cash settlement
 Fair value split into separate debt and equity
components
 Remeasure debt component must be
remeasured at fair value balance sheet date
 Apply cash settlement against debt 5-22
Income Taxes
 IAS 12, Income Taxes, similar to U.S. GAAP
 Asset-and-liability approach
 Deferred tax assets and liabilities
 For temporary differences
 For operating loss tax credit carry forwards
 Under IFRS, measure on the basis of tax laws and
rates enacted or substantively enacted
 Under U.S. GAAP, measure on the basis of actually
enacted tax laws and rates
 Account for double taxation effects and differences
in rates

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Income Taxes
 Recognition of Deferred Tax Asset
 Under IFRS, recognize if future realization probable
 IAS 12 provides a more stringent threshold
 U.S. GAAP, recognize if realization is more likely than not
 Disclosures
 IFRS requires
 Extensive disclosures of tax expense
 Explanation of hypothetical expense based on two
approaches
 Compare statutory tax expense in the home country and
effective tax expense
 Compare weighted-average statutory tax rate across
jurisdictions and tax expense based on the effective tax rate
 IFRS vs. U.S. GAAP
 IFRS application can cause temporary differences

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Income Taxes
 Financial Statement Presentation
 U.S. GAAP
 Deferred tax assets and liabilities
 Current
 Non-current
 Based on underlying asset or liability
 Tax loss or credit carry-forwards
 Timing of expected realization
 IAS 1
 Deferred tax assets and liabilities
 Only noncurrent

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Revenue recognition
 IAS 18, Revenue covers revenues from
 Sale of goods, rendering of services
 Interest, royalties
 Dividends
 U.S. GAAP
 200 authoritative pronouncements
 General Measurement Principle
 Fair value of consideration received or
 Receivable
 Multiple elements transaction
 Split transaction into multiple elements or
 Combine multiple transactions into one

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Revenue recognition
 Sale of Goods—5 Criteria
 Transfer of significant risks and rewards to buyer
 No effective control maintained or management
involvement
 Can measure revenue reliably
 Probable future economic benefits flow to seller
 Selling costs can be measured reliably
 Rendering of Service
 Revenue recognized in proportion to extent of
services rendered
 U.S. GAAP
 Percentage-of-completion for service contracts not
allowed
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Revenue recognition
 Interest, Royalties and Dividends
 Interest
 Recognized on effective yield basis
 Royalties
 Recognized on accrual basis
 Based on relevant agreement
 Dividends
 Recognized when shareholder’s right to payment
established
 Exchange of Goods or Services
 If similar—no gain or loss
 If dissimilar—recognize fair value of what is
received adjusted for cash paid or received
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Revenue recognition
 Construction Contracts
 Revenues and expenses recognized using the
percentage-of-completion method
 Two types
 Fixed-price contract
 Cost-plus contract
 Cost-plus contract
 Economic benefits flow to the entity
 Contract costs
 Clearly identified
 Reliably measured29
 Fixed-price contract
 Revenues measurable
 Costs and stage of completion measurable

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IAS 18, Revenue
 IASB-FASB Revenue Recognition Project
 Both boards working since 2002
 June 2010—joint Exposure Draft “Revenue from
Contracts with Customers”
 5 steps:
 Identify the contract
 Identify separate performance obligations in the
contract
 Determine the transaction price
 Allocate the transaction price to the separate
performance obligations
 Recognize the revenue allocated to each
performance obligation when the entity satisfies
each performance obligation
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Financial Instruments
 Standards
 IAS 32, Financial Instruments: Presentation
 IAS 39, Financial Instruments: Recognition and
Measurement
 IFRS 7, Financial Instruments: Disclosure
 IFRS 9, Financial Instruments—issued in
November 2009 to replace IAS 39—effective
2015
 Definitions
 IAS 32—a financial instrument is any contract
that gives rise to both a financial asset of one
entity and a financial liability or equity
instrument of another entity
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Financial Instruments
 Definitions
 IAS 32—a financial instrument gives rise to
 Financial asset of one entity
 Financial liability or equity instrument of another
entity
 Financial asset
 Cash
 Contractual right to:
 Receive cash or other financial asset
 Exchange financial assets or financial liabilities
 under potentially favorable conditions
 An equity instrument of another entity
 A contract that will or may be settled in entity’s own
equity instruments
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Financial Instruments
 Financial liability
 A contractual obligation to
 Deliver cash or another financial asset
 Exchange financial assets or financial liabilities
 Under potentially unfavorable conditions
 A contract that will or may be settled in the
equity’s own equity instruments

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Financial Instruments
 Liability or Equity
 IAS 32
 Financial instruments to be classified
 As financial liabilities or
 Equity or both
 Compound Financial Instruments
 Both a liability and equity element (e.g.
convertible bond)
 Split accounting
 With and without method

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Financial Instruments
 Classification of Financial Assets and
Liabilities
 Classification of financial asset:
 Fair value through profit or loss (FVPL)
 Held-to-maturity investments
 Loans and receivables
 Available-for-sale financial assets
 Financial liabilities:
 Fair value through profit or loss (FVPL)
 Measured at amortized cost
 Measurement of Financial Instruments
 Initial—fair value (normally = amount paid or
received)
 Subsequent—cost, amortized cost, or fair value
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Financial Instruments
 Available-for-Sale Financial Asset Denominated in
a Foreign Currency
 Two components
 The change in fair value in the foreign currency
 A foreign exchange gain or loss
 From exchange rate changes
 Impairment
 IAS 39 requires assessment of impairement
 Derecognition
 Appropriate if
 Contractual rights to the cash flows expired
 Financial asset has been transferred

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Financial Instruments
 Derivatives
 Financial instruments swaps
 Whose value changes with change in
 A specified interest rate,financial instrument price,
 Commodity price, foreign exchange rate,
 Index, credit rating, or other variable.
 IFRS 39
 Derivatives measured at fair value
 Receivables
 Measured
 Initially at fair value
 Subsequently, at amortized cost using effective
interest method

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End of Chapter 5

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