Chapter 4. IFRS Part 1

INTERNATIONAL SCHOOL
Ha Noi National University

http://is.vnu.edu.vn/
INTERNATIONAL ACCOUNTING
Ha Noi, 2020
Topic Three
International Financial
Reporting Standards
(IFRS): Part I
Copyright © 2012 The McGraw-Hill Companies,

All Rights Reserved
INTERNATIONAL FINANCIAL REPORTING
STANDARDS
HTTP://IS.VNU.EDU.VN - HTTP://IS.VNU.EDU.VN
August 2010, 41 International Accounting Standards (IAS) and 9

International Financial Reporting Standards (IFRS) had been
issued by IASB.
In 2017, 41 IAS and 17 IFRS
Ref:
1. https://www.ifrs.org/issued-standards/list-of-standards/
2. https://
en.wikipedia.org/wiki/List_of_International_Financial_Reporting_
Standards
• Ngày 22/2/2019, tại Hà Nội, Bộ Tài chính phối hợp với Cơ quan hợp tác quốc tế
Nhật Bản (JICA) tổ chức Hội thảo “Thực trạng, kinh nghiệm quốc tế và lộ trình
áp dụng chuẩn mực kế toán quốc tế (IFRS) tại Việt Nam”. Thứ trưởng Bộ Tài
chính Đỗ Hoàng Anh Tuấn tới dự và phát biểu chỉ đạo
http://thoibaotaichinhvietnam.vn/pages/thoi-su/2019-02-22/xay-dung-lo-trinh-ap-
dung-chuan-muc-ke-toan-quoc-te-vao-viet-nam-68063.aspx
International Financial Reporting Standards - Part I
Chapter Topics
• Differences between IFRS and US GAAP.
• Inventories. – IAS 2
• Property, Plant & Equipment. – IAS 16
• Investment Property. – IAS 40
• Impairment of Assets. – IAS 36
• Intangible Assets. – IAS 38
• Goodwill.
• Borrowing Costs. – IAS 23
• Leases. – IAS 17
• Disclosure and Presentation Standards. INTERNATIONAL SCHOOL
International Financial Reporting Standards - Part I
Learning Objectives
1. Discuss the differences between IFRS and U.S. GAAP.
2. Describe IFRS requirements for recognition and measurement
of inventories; property, plant and equipment; intangibles and
leased assets.
3. Explain the major differences between IFRS and U.S. GAAP
on the recognition and measurement of assets.
4. Describe the IFRS requirements in a variety of disclosure and
presentation standards.
5. Explain the major differences between IFRS and U.S. GAAP
on certain disclosure and presentation issues.
6. Analyze the impact that the differences between IFRS and
U.S. GAAP can have on financial statements.
Types of Differences Between IFRS and U.S. GAAP
• Definitions.
• Recognition.
• Measurement.
• Alternatives.
• Lack of requirements or guidance.
• Presentation.
• Disclosure.
Learning Objective 1 INTERNATIONAL SCHOOL

Types of Differences Between IFRS and U.S. GAAP
IFRS more flexible in many cases:

• Choice of alternatives.
• Less guidance leads to more judgment in applying IFRS.

IAS 2, Inventories
• Initial cost.
• Cost formulas to allocate cost of inventories to
expense.
• Subsequent balance sheet measurement.

IAS 2, Inventories
•Costs included:
–Cost of purchase (purchase price and direct acquisition costs).
–Conversion costs (labor and overhead).
–Other costs (design, interest if takes time to bring to saleable condition).
•Costs excluded:
–Abnormal waste.
–Storage unless necessary for production process.
–Purely administrative overhead.
–Selling costs.

IAS 2, Inventories
Cost formulas:
•No LIFO!
•Must use same cost formula for similar inventory items.
IAS2 (IFRS) U.S. GAAP

Report on Balance Sheet: Report on Balance Sheet:
Value = Lower value (Cost, Net Value = Lower value (Cost, Market)
Realizable Value) Market = Replacement cost
NRV = estimated selling price less
costs of completion and other costs
to make sale
Historic cost is constant over the life of the inventory
Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

IAS 2, Inventories
• Ceiling = NRV
– Floor = NRV –normal profit margin
– Any write-down establishes new cost for subsequent
periods
• IFRS and U.S. GAAP both yield same expense over
entire life.

IAS 2, Inventories. Example
•
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• Teams Code: 5gcs38i
You can find materials in files
IAS 16, Property, Plant & Equipment
1. Recognition of initial costs—when yield probable future

benefits which can be measured.
2. Recognition of subsequent costs—i.e. replacements—
follow initial recognition rules and then remove cost and a/d
of the replaced part.
• Example (Page 119) Replacement of part of an Assets

3. Measurement at initial recognition—purchase price plus

costs to put into service. (Costs as duties, taxes, etc)
4. Measurement after initial recognition —can use cost or---
unlike U.S. GAAP, can use revaluation model.
5. Depreciation—review estimated lives, residual value and
method annually—any changes are “prospective”---also, unlike
U.S. GAAP—separate any significant components. (Example
page 126)
IAS16 (IFRS) U.S. GAAP
Component Depreciation Component depreciation is not
commonly
Learning Objectives 2 and 3
Example: Component Depreciation
On January 1, Year 1, an entity acquires a new piece of

machinery with an estimated useful life of 10 years for
$120,000. The company has determined that the straight-
line method. The component as following:
1. Calculate Depreciation Year 1 follow IFRS?

2. Calculate Depreciation Year 1 follow U.S. GAAP
6. Derecognition--retirements and disposals—no more

future benefit.
7. Revaluation Model:
• U.S. GAAP do not allow to revaluation
• IAS 16 requires that all assets of the same class be revalued
at the same time

EXERCISE
IAS 40, Investment Property
• Land or buildings held for rental, capital appreciation or

both.
• Same general principles as IAS 16 re: choice of cost or

revaluation:
– EXCEPT gains or losses from changes in Fair value (FV) recognized
in current income and not revaluation surplus
• Even using cost model—disclose FV in notes to financial
statements.
• U.S. GAAP generally requires use of cost model for

investment property.

IAS 36, Impairment of Assets
• Must test annually for impairment to P,P & E; 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).
• Some differences with U.S. GAAP.
• Impairment indicators—external events (eg economic,

legal, technological) or internal events (eg damage,
obsolescence).
IFRS U.S. GAAP

Impairment means carrying amount > Impairment means carrying amount >
recoverable amount: undiscounted future cash flows (net
Recoverable amount = greater of net selling price not considered).
selling price and value in use
Net selling price = price in active
market less disposal costs
Value in use = PV of future net cash
flows (cover maximum of 5 years
unless longer period is justified)—
based on approved budgets and
using appropriate discount rate
• Impairment more likely under IFRS since discounted

cash flows used.
Measurement of Impairment Loss
Reverse if recoverable amount > new carrying amount---if

changes in estimates used to determine original impairment
loss or change in how recoverable amount is determined.
• Can only reverse up to original carrying amount.
• Recognize reversal in income immediately.
• U.S. GAAP—no reversal!

Example: Determination and Measurement of
Impairment Loss
IAS 38, Intangible Assets
Applies to:
• (i) Purchased intangibles.
• (ii) Intangibles acquired in business combination.
• (iii) Internally-generated intangibles.

Definition:
• Identifiable, nonmonetary asset .
• No physical substance.
• Held for production of goods or services, rental to others,
or for administrative purposes.
• Must be controlled by enterprise as result of past events
from which future economic benefits are expected to be
realized.
• Example: Patents, brands (trademarks), copyrights….

(i) Purchased intangibles:

• Similar to U.S. GAAP treatment.
• Initially measured at cost and life is either finite or

infinite .
• Finite—amortize over useful life—usually assume

zero residual value unless 3rd party agreement to
purchase or active market exists.

(ii) Intangibles acquired in business combination:

• Like U.S. GAAP—intangibles as patents, trademarks and
customer lists acquired in a business combination should be
separate from goodwill and recognized as long as fair value is
measurable (even if not previously recognized by target).
• Must have finite or infinite life.
• Special situation: target’s development costs incurred prior to
its being acquired---if meet certain criteria—capitalize—
otherwise include in goodwill.
• Recent changes in U.S. GAAP converged treatment of in-
process development costs with IFRS.

(iii) Internally generated intangibles:

• Examples of Internally Generated Intangible Assets:
Items that might qualify for capitalization as internally generated intangible assets
under IAS 38 include:
• Computer software costs
• Patents, copyrights
• Motion picture films
• Mortgage servicing rights
• Fishing licenses
• Franchises
• Customer or supplier relationships
• Customer loyalty
• Market share
• Marketing rights

(iii) Internally generated intangibles:

• Major difference with U.S. GAAP
IFRS: some development costs may be capitalized whereas U.S.
GAAP expenses all research and virtually all development
• If can’t separate R & D—must treat all as research

expenditures immediately.
• In contrast, development cost are recognized as an intangible

asset when meet some criteria.

Must demonstrate the following criteria for

development cost capitalization:
• Technical feasibility so asset can be available for use or sale.
• Intention to complete asset for use or sale.
• Ability to use or sell the asset.
• How probable future economic benefits will be generated (eg—
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.

Must demonstrate the following criteria for

development cost capitalization:
• Technical feasibility so asset can be available for use or sale.
• Intention to complete asset for use or sale.
• Ability to use or sell the asset.
• How probable future economic benefits will be generated (eg
—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.

IAS 23 . Borrowing Costs
• Revised in 2007 to be similar to U.S. GAAP, provided

two methods of accounting for borrowing costs:
1 . Expense all borrowing costs in the period incurred.
2. be capitalized borrowing costs to the extent they are:
• attributable to the acquisition, construction, or production
of a qualifying asset;
• other borrowing costs are expensed in the period
incurred.

IAS 23 . Borrowing Costs
• Borrowing costs are interest and other costs incurred in

connection with borrowing—broader in scope than U.S.
GAAP definition of interest cost.
• IAS 23 includes foreign currency exchange gain/loss if
regarded as adjustment to interest cost.
• Qualifying asset takes substantial time to get ready for
intended use or sale.
• Under IAS 23 (and not U.S. GAAP) specifically includes
inventories that requires require a substantial period to
bring them to a marketable condition.

SUMMARY
• Differences exist between IFRS and U.S. GAAP with

respect to recognition, measurement, presentation,
disclosure, and choice among alternatives. In some
cases, IFRS are more flexible than U.S. GAAP. Several
IFRS allow firms to choose between alternative
treatments in accounting for a particular item. Also, IFRS
generally have less bright-line guidance than U.S. AAP;
therefore, more judgment is required in applying
Individual IFRS. However, in some cases, IFRS are
more detailed tan U.S. GAAP
SUMMARY
• IAS 2 requires inventory to be reported on the balance

sheet at the lower of cost and net realizable value. Write-
downs to net realizable value must be reversed when the
selling price increases. Under U.S. GAAP, inventory is
carried at the lower of cost or replacement cost (with a
ceiling and floor), and the reversal of write-downs is not
permitted. Unlike U.S. GAAP, IAS 2 does not allow the
use of last-in, first-out (LIFO) in determining the cost of
inventory.
SUMMARY
• IAS 16 allows property, plant, and equipment to be

carried at cost less accumulated depreciation and
impairment losses or at a revalued amount less any
subsequent accumulated depreciation and impairment
losses. Specific guidance is provided for those firms that
choose the revaluation option. U.S. GAAP does not
permit use of the revaluation model.
• IAS 16 requires an item of property, plant, and quipment
comprised of significant parts for which different useful
lives or depreciation methods are appropriate to be split
into component for purposes of depreciation. Component
depreciation is uncommon in U.S. GAAP.
SUMMARY
• IAS 38 requires development costs to be capitalized as an

intangible asset when six specific criteria are met. Development
costs can include personnel costs; materials and services;
depreciation of property, plant, and equipment; amortization of
patents and licenses; and overhead costs, other than general
administrative costs. Development costs generally are not
capitalized under U.S. GAAP.
• Intangible assets (including deferred development costs) are
classified as having a finite or indefinite useful life. Finite-lived
intangibles are amortized over their useful lives using a straight-
line method; indefinite-lived intangibles are reviewed each year to
determine if the useful life still is indefinite. If not, the intangible is
reclassified as having a finite life and mortization begins.
SUMMARY
• IAS 36 requires impairment testing of property, plant, and

equipment; intangibles, including goodwill; and long-term
investments. An asset is impaired when its carrying value
exceeds its recoverable amount, which is the greater of net
selling price and value in use. An impairment loss is the
amount by which carrying value exceeds recoverable
amount. If, subsequent to recognizing an impairment loss, the
recoverable amount of an asset exceeds its new carrying
amount, the impairment loss is reversed and the asset is
written back up to the carrying amount that would have
existed if the impairment had never been recognized. U.S.
GAAP employs a different impairment test, and impairment
losses may not be reversed.
SUMMARY
• IAS 23 requires borrowing costs to be capitalized to the

extent they are attributable to the acquisition of a
qualifying asset; other borrowing costs are expensed
immediately. Borrowing costs include interest and other
costs, such as foreign exchange gains and losses on
foreign currency borrowings, incurred in connection with
a borrowing. The amount of borrowing cost to be
capitalized is reduced by any interest income earned
from the temporary investment of the amount borrowed.
IAS 17, Leases
• Distinguishes between finance (capitalized) leases and

operating leases.
• Also provides rules for sale-leaseback transactions.
• Conceptually similar to U.S. GAAP but less specific

guidance (one of the best examples of “principles-based”
vs. “rules-based” provisions of IFRS and GAAP,
respectively).
• IAS 17 says lease is finance when substantially all the risks

and rewards of ownership have been transferred to lessee.

IAS 17. Leases
Examples of situations normally leading to

capitalization, individually or in combination normally
would lead to a lease being classified as a finance leas
(for U.S. GAAP—any one of the first four criteria will
trigger capitalization):
• Lease transfers ownership to lessees by end of lease term.

• Lessee has option to purchase at less than Fair market value.
• Lease term is for major part of the asset’s economic life (U.S.
GAAP says 75%).
• Present value of future 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 assets specialized so only usable by lessee without
major modifications (not present in U.S. GAAP).
Learning Objectives 2 and 3
IAS 17, Leases
IAS 17 provides three additional indicators of

situations that individually or in combination could
lead to a lease being classified as a finance lease:
• 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.
Example: Classification of Leases (Page 144)

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, whereas US GAAP
requires immediate recognition of loss regardless of
source.
Sale-Leaseback—Operating Lease:
• IAS 17 recognizes gain immediately in income.
• U.S. GAAP amortizes gain over lease term.

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—more detailed info—disclose payments for each

of Years 1-5 separately by year and then lump remaining
years as single amount.

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
(indirect method: can reconcile to operating income or
any measure of income).
• Interest, dividends and income taxes must be reported
separately.

Example
IAS 7, Statement of Cash Flows:
• 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.

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
• Cash/cash equivalents line must reconcile with same line on
balance sheet.

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).
• Adjusting events—existed at balance sheet date, such as
estimated legal settlement—finalized before authorized date
of issuance—must adjust as of balance sheet date!
• Non-adjusting events—events arose after balance sheet date
but before issuance authorized—disclose nature of event and
estimate of financial effect or that estimate can’t be made.

IAS 8, Accounting Policies, Changes in

Accounting Estimates, and Errors:
• Hierarchy of authoritative pronouncements:
– IASB Standard or Interpretation specific to 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 required by IFRS
– Results in more relevant and reliable information
– Apply retrospectively if practical—adjust carrying
value of affected assets and liabilities and beginning
retained earnings—do not report cumulative effect of
change in net income!


• Changes in estimates are handled prospectively
• Correction of errors—if material—handle retrospectively
and change all affected comparative periods and
beginning retained earnings
• If can’t determine period-specific effects—just change
earliest period and restate opening balances where
practical (U.S. GAAP has no such option—all material
errors must be corrected through restatement)


Accounting Estimates, and Errors (continued):
Related Party Disclosures:
• Similar to U.S. GAAP
• Must disclose transactions in notes if one party has
ability to significantly influence or control another party

IAS 33, Earnings per Share:

• Basic and diluted EPS must be on face of income
statement
• U.S. GAAP has more detailed guidance re: diluted EPS,
but appears consistent with IAS 33

IAS 34, Interim Financial Reporting:

• Treat interim periods fundamentally as discrete reporting
periods vs. U.S. GAAP which treats interim periods as
integral part of full year
• No guidance as to who should prepare, how often and
how soon after end of the period
• Describes minimum content and accounting principles
applied

Noncurrent Assets Held for Sale and Discontinued

Operations:
• Report separately on balance sheet at lower of carrying
value or fair value less costs to sell—similar to U.S.
GAAP.
• Not depreciable.
• Discontinued operations:
– After-tax profit or loss and after-tax gain on disposal of assets
shown as single amount on face of income statement.
– Disclose details in notes or on the face of the income statement.
– Similar to U.S. GAAP except for U.S. GAAP need to show pre
and post tax profit or loss on the income statement.
– Definition of what constitutes discontinued operation narrower
under IFRS.
IFRS 8, Operating Segments (issued in 2006—

replaced IAS 14):
• Part of short-term convergence project with FASB.
• Extensive disclosures required.
• Must meet any of three quantitative tests—revenue, profit or
loss, asset.
• Disclosures similar to U.S. GAAP except the latter doesn’t
require disclosure of liabilities.
• If revenue reporting by operating segments less than 75% of
total revenues, then report additional segments otherwise not
required under the three quantitative tests, until 75% reached.

SUMMARY AND REVIEW
• Summary: Page 155

• Review questions:
1. What are the types of differences that exist between
IFRS and U.S. GAAP?
2. Find out 10 differences between IFRS and U.S GAAP?
EXERCISES AND PROBLEMS
• Page 158

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INTERNATIONAL SCHOOL

Ha Noi National University

Copyright © 2012 The McGraw-Hill Companies,

August 2010, 41 International Accounting Standards (IAS) and 9

Learning Objective 1 INTERNATIONAL SCHOOL

IFRS more flexible in many cases:

Learning Objective 1 INTERNATIONAL SCHOOL

Learning Objective 2 INTERNATIONAL SCHOOL

Learning Objective 2 INTERNATIONAL SCHOOL

IAS2 (IFRS) U.S. GAAP

Historic cost is constant over the life of the inventory

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

You can find materials in files

1. Recognition of initial costs—when yield probable future

• Example (Page 119) Replacement of part of an Assets

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

3. Measurement at initial recognition—purchase price plus

On January 1, Year 1, an entity acquires a new piece of

1. Calculate Depreciation Year 1 follow IFRS?

6. Derecognition--retirements and disposals—no more

Learning Objective 2 INTERNATIONAL SCHOOL

• Land or buildings held for rental, capital appreciation or

• Same general principles as IAS 16 re: choice of cost or

• U.S. GAAP generally requires use of cost model for

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

• Must test annually for impairment to P,P & E; intangible

• Does not apply to inventory, construction in progress,

• Some differences with U.S. GAAP.

• Impairment indicators—external events (eg economic,

IFRS U.S. GAAP

• Impairment more likely under IFRS since discounted

Measurement of Impairment Loss

Reverse if recoverable amount > new carrying amount---if

• Can only reverse up to original carrying amount.

• Recognize reversal in income immediately.

• U.S. GAAP—no reversal!

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

Learning Objective 2 INTERNATIONAL SCHOOL

Learning Objective 2 INTERNATIONAL SCHOOL

(i) Purchased intangibles:

• Initially measured at cost and life is either finite or

• Finite—amortize over useful life—usually assume

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

(ii) Intangibles acquired in business combination:

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

(iii) Internally generated intangibles:

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

(iii) Internally generated intangibles:

• If can’t separate R & D—must treat all as research

• In contrast, development cost are recognized as an intangible

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

Must demonstrate the following criteria for

Learning Objective 2 INTERNATIONAL SCHOOL

Must demonstrate the following criteria for

Learning Objective 2 INTERNATIONAL SCHOOL

• Revised in 2007 to be similar to U.S. GAAP, provided

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

• Borrowing costs are interest and other costs incurred in

Learning Objectives 2 and 3 INTERNATIONAL SCHOOL

• Differences exist between IFRS and U.S. GAAP with

• IAS 2 requires inventory to be reported on the balance

• IAS 16 allows property, plant, and equipment to be

• IAS 38 requires development costs to be capitalized as an