UEU Akuntansi Internasional Pertemuan 4

International Financial
Reporting Standards
(IFRSs)
PERTEMUAN #4
EBA 604
PROGRAM STUDI AKUNTANSI

AKUNTANSI FAKULTAS EKONOMI DAN BISNIS
INTERNASIONAL UNIVERSITAS ESA UNGGUL
International Financial Reporting
Standards (IFRSs)
Chapter Topics
• Basics of recognition and measurement.
• IFRSs: Recognition and measurement of
assets.
• IFRS / U.S. GAAP differences: Recognition and
measurement.
• IFRS / U.S. GAAP differences: Presentation
and disclosure.
4-2
Standards (IFRSs)
Learning Objectives
1. Describe the requirements of IFRSs on the
recognition and measurement of assets.
2. Explain the differences between IFRSs and
U.S. GAAP on recognition and measurement
issues.
3. Describe the requirements of IFRSs related to
the disclosure of financial information.
4-3
Standards (IFRSs)
Learning Objectives
4. Explain the differences between IFRSs and
U.S. GAAP on disclosure issues.
5. Use numerical examples to highlight the
differences between IFRSs and U.S. GAAP.
4-4
Recognition and Measurement:
Some background
Review of important terminology

Assets – resources controlled by the enterprise
from which future economic benefits are expected
to flow to the enterprise.
Recognition – inclusion of items (e.g., assets,
liabilities) into the financial statements with the
amount included in statement totals.
Learning Objective 1 4-5

Some background
Measurement – choice of the attribute by which

to quantify a recognized item. The most
commonly used attributes:
– Historical cost
– Net realizable value
– Current (replacement) cost
– Current market value
– Present value of future cash flows

Some background
• Historical cost – amount paid to acquire an

asset or, for liabilities, the amount received
when the obligation is incurred.
• Net realizable value – amount of cash
(sometimes the present value) minus collection
and other costs incurred.

Some background
• Current (replacement) cost – amount needed to

acquire an equivalent asset.
• Current market value – amount of cash
received from an immediate sale of the asset.
• Present value of future cash flows – amount of
cash to be received, discounted at the
appropriate interest rate.

Recognition and Measurement: IFRSs
IFRSs
• Substantially similar to U.S. GAAP.
• However, significant differences do exist.
• An effective way to understand IFRSs is to
compare to U.S. GAAP.
• Describe IFRSs in terms of significant
differences from U.S. GAAP.

Recognition and Measurement: IFRSs and U.S. GAAP
compared
Types of Differences
– Definitions
– Recognition
– Measurement
– Alternatives
– Lack of requirements or guidance
– Presentation
– Disclosure

compared
Form 20-F
• Some firms filing Form 20-F initially use IFRSs
to prepare financial statements.
• The Form 20-F of some of these firms can be
used to gain an understanding of IFRS / U.S.
GAAP differences.
Learning Objectives 2 and 4 4-11

compared
Areas with significant differences

– Inventory (IAS 2)
– Property, Plant, and Equipment (PP&E) (IAS
16)
– Intangible Assets (IAS 38)
– Impairment of Assets (IAS 36)
– Borrowing Costs (IAS 23)
– Leases (IAS 17)

compared
IAS 2, Inventories – compared to U.S. GAAP

• Requires lower of cost or net realizable value
(U.S. GAAP uses lower of cost or market).
• IAS 2 does not allow use of last-in, first-out
(LIFO).
• IFRSs would tend to lead to
– Higher inventory balances.
– Lower cost of goods sold.
– Higher net income compared to U.S. GAAP
if LIFO is used.

compared
IAS 2, Inventories – compared to U.S. GAAP

• Allows for capitalization of interest on
borrowings for some inventories.
• Capitalization of interest on inventories will
lead to
– Higher inventory balances.
– Lower cost of goods sold.
– Higher net income compared to U.S. GAAP.

compared
IAS 2, Inventories – numerical comparison to U.S.

GAAP
Application of lower of cost of net realizable value.
Assume the following:
Historical cost $500
Replacement cost 400
Estimated sales price 450
Estimated disposal costs 25
Normal profit margin 20% of sales price

compared
IAS 2, Inventories – numerical comparison to

U.S. GAAP
Lower of cost or net realizable value using IAS 2
Historical cost = $500
Net realizable value (NRV)

= estimated sales price – estimated selling costs
= $450 - $25 = $425 (lower of cost or NRV)

compared
IAS 2, Inventories – numerical comparison to U.S.

GAAP
Lower of cost or market under U.S. GAAP
Historical cost = $500
Designated market is middle value of NRV

($425), Replacement cost ($400), and NRV –
normal profit margin ($425 - $90 = $335).
Designated market is $400 and lower of cost or
market = $400

compared
IAS 2, Inventories – numerical comparison to

U.S. GAAP
The recognized inventory amount under IAS 2 is
$425 and under U.S. GAAP is $400.
Note: under U.S. GAAP the $400 now

represents historical cost. Under IAS 2,
historical cost remains at $500 which might be
used as lower of cost or NRV in future years.

compared
IAS 16, PP&E – compared to U.S. GAAP

• Subsequent to initial measurement, IAS 16
allows the two different measurement
approaches.
• Historical cost -- (the benchmark treatment)
recognizes the asset at cost less accumulated
depreciation, required by U.S. GAAP.

compared

• Revaluation -- (the alternative treatment)
requires that all assets within a class be
revalued periodically
– A major difference between IFRSs and U.S.
GAAP as fixed assets are often substantial.
– Revaluation is generally not allowed under
U.S. GAAP.

compared

Accounting for revaluations
• Revaluation increases require a journal entry to
increase the asset to fair value:
Property, plant, and equipment xxxx
Revaluation surplus xxxx
Note: The revaluation surplus is an equity account.

compared

Accounting for revaluations
• Revaluation decreases require a journal entry to
decrease the asset to fair value:
Expense xxxx
Property, plant, and equipment xxxx

compared
IAS 16, PP&E – numerical comparison to U.S.

GAAP
• Accounting for accumulated depreciation at time of
revaluation. Assume the following as of 12/31/X2:
Historical cost $10,000
Accumulated depreciation 2,000
Current market value 18,000
Ratio of carrying value to cost 80%

compared

GAAP, Revaluation adjustment to accumulated
depreciation: Treatment 1
• Asset and accumulated depreciation are restated.
• Restated carrying amount equals current market value.
• The ratio of carrying value to gross carrying amount is
maintained.

compared

GAAP: Treatment 1
Original Revaluation Total

Cost
Gross carrying amount $10,000 + 12,500 = $22,500
Accumulated depreciation 2,000 + 2,500 = $4,500
Carrying value $ 8,000 + 10,000 =
$18,000

compared

GAAP, Revaluation adjustment to
accumulated depreciation: Treatment 2
• Asset is first decreased by the amount of
accumulated depreciation.
• Asset account is then increased by the amount
of the revaluation (current market value –
carrying value).

compared

GAAP: Treatment 2
Accumulated Depreciation 2,000

Asset 2,000
Asset 10,000
Revaluation surplus 10,000

compared
IAS 38, Intangible Assets

• Purchased intangibles.
• Intangibles acquired in a business combination.
• Internally generated intangibles.
• Does not address Goodwill (see IAS 3).

compared
IAS 38, Intangible Assets – compared to U.S.

GAAP
• Purchased intangibles – consistent with U.S.
GAAP except that fair value is used in some
cases.
• Intangibles acquired in a business combination
– consistent with U.S. GAAP except that in-
process development costs are capitalized.

compared
IAS 38, Intangible Assets – compared to U.S.

GAAP internally generated intangibles
• Major difference with U.S. GAAP.
• U.S. GAAP (SFAS 2) requires expensing of
almost all Research and Development (R&D)
costs.
• IAS 38 allows capitalization, also called
deferral, of many development costs.

compared
IAS 38, Intangible Assets – numerical

comparison to U.S. GAAP
Internally generated intangibles –
Development Costs. Assume the following:
– Development costs of $100,000 during 2005
– 70% of costs qualify for capitalization
– Product sales begin on January 2, 2006
– Five years of sales expected
– Capitalized costs amortized on a straight-
line basis

compared
IAS 38, Intangible Assets – numerical

Internally generated intangibles – Development
Costs
2005: Accounting treatment under IAS 38
Development expense 30,000
Deferred development costs 70,000
Cash, payables, etc. 100,000

compared
IAS 38, Intangible Assets – numerical comparison to U.S.

GAAP
Internally generated intangibles – Development Costs
2006: Accounting treatment under IAS 38
Amortization expense 14,000
Deferred development costs 14,000

compared
IAS 38, Intangible Assets – numerical comparison to

U.S. GAAP
Internally generated intangibles – Development
Costs
2005: Accounting treatment under U.S. GAAP
Development expense 100,000
Cash, payables, etc. 100,000
2006: Accounting treatment under U.S. GAAP
No entry

compared
IAS 36, Impairment of Assets – compared to

U.S. GAAP
• Has lower threshold for impairments, sometimes
results in impairments when U.S. GAAP does not.
• For assets considered impaired under U.S. GAAP,
impairment is carrying amount minus fair value.
• Impairment is carrying amount minus the greater
of net selling price or value in use. This is likely to
differ from fair value.

compared
IAS 36, Impairment of Assets – compared to

U.S. GAAP
• Allows for reversal of impairment loss in
subsequent periods when recoverable amount
exceeds carrying value.
• U.S. GAAP prohibits such reversals.
• Impairment test for goodwill requires both a
bottom-up and top-down test.
• U.S. GAAP requires only a bottom-up test.

compared
IAS 36, Impairment of Assets – numerical

Assume the following:
Carrying value
$440
Selling price 400
Cost of disposal 25
Expected future cash flows
450
Present value of expected future cash flows 380

compared

Impairment under IAS 36
Value in use $380
Net selling price 375
Recoverable amount$380 (greater of these two)
Impairment loss = carrying amount – recoverable
amount = $440 – 380 = $60

compared

• Impairment under U.S. GAAP
• Carrying amount of $440 is less than expected
future (undiscounted) cash flows of $450.
• No impairment.

compared
IAS 23, Borrowing Costs

• U.S. GAAP (SFAS 34) requires capitalization of
interest on borrowings attributable to
construction, acquisition, or production of
qualifying assets.
• Capitalization of interest is the benchmark
treatment under IAS 23. However, an alternative
treatment allows for expensing of all interest.

compared
IAS 23, Borrowing Costs

• Explicitly allows for capitalization of interest on
borrowing for the production of some
inventories.
• U.S. GAAP explicitly prohibits the
capitalization of interest on borrowings for
production of most inventories.

compared
IAS 17, Leases

• Distinguishes between operating and finance (capital)
leases in much the same way as U.S. GAAP (SFAS 13).
• The criteria for classifying a lease as either operating
or finance is less detailed than U.S. GAAP
• Leases is often used as an example in arguing that
U.S. GAAP is rules-based and IFRSs are principles-
based.

compared
• Finance lease criteria, IAS 17 • Capital lease criteria, SFAS 13

• Lease transfers ownership. • Lease transfers ownership.
• Bargain purchase option. • Bargain purchase option.
• Lease term is for the major part of • Lease term is for 75 percent of
the leased asset’s economic life. the leased asset’s economic life.
• Present value of minimum lease • Present value of minimum
payments equals substantially all lease payments equals 90
of the fair value of the asset.
percent of the fair value of the
• The leased asset is specialized so
asset.
that only the lessee can use it.

compared
IFRSs and U.S. GAAP differ somewhat in each

of the following areas
• Cash Flow Statements (IAS 7) – Classification of
dividends and interest paid is more flexible under IFRS.
• Segment Reporting (IAS 14) – U.S. GAAP requires
management approach, IFRS is more flexible as of
March 2005. This item is part of short-term convergence
project.
• Interim Financial Reporting (IAS 34) – U.S. GAAP
treats interim periods as integral part of the full year.
Learning Objectives 2 and 3 4-44

SEKIAN
DAN
TERIMA KASIH
EBA 604 Akuntansi Internasional 45

UEU Akuntansi Internasional Pertemuan 4

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International Financial

PROGRAM STUDI AKUNTANSI

Review of important terminology

Learning Objective 1 4-5

Measurement – choice of the attribute by which

Learning Objective 1 4-6

• Historical cost – amount paid to acquire an

Learning Objective 1 4-7

• Current (replacement) cost – amount needed to

Learning Objective 1 4-8

Learning Objective 1 4-9

Learning Objective 2 4-10

Learning Objectives 2 and 4 4-11

Areas with significant differences

Learning Objective 2 4-12

IAS 2, Inventories – compared to U.S. GAAP

Learning Objective 2 4-13

IAS 2, Inventories – compared to U.S. GAAP

Learning Objective 2 4-14

IAS 2, Inventories – numerical comparison to U.S.

Learning Objective 5 4-15

IAS 2, Inventories – numerical comparison to

Net realizable value (NRV)

Learning Objective 5 4-16

IAS 2, Inventories – numerical comparison to U.S.

Designated market is middle value of NRV

Learning Objective 5 4-17

IAS 2, Inventories – numerical comparison to

Note: under U.S. GAAP the $400 now

Learning Objective 5 4-18

IAS 16, PP&E – compared to U.S. GAAP

Learning Objective 2 4-19

IAS 16, PP&E – compared to U.S. GAAP

Learning Objective 2 4-20

IAS 16, PP&E – compared to U.S. GAAP

Note: The revaluation surplus is an equity account.

Learning Objective 2 4-21

IAS 16, PP&E – compared to U.S. GAAP

Learning Objective 2 4-22

IAS 16, PP&E – numerical comparison to U.S.

Learning Objective 5 4-23

IAS 16, PP&E – numerical comparison to U.S.

Learning Objective 5 4-24

IAS 16, PP&E – numerical comparison to U.S.

Original Revaluation Total

Learning Objective 5 4-25

IAS 16, PP&E – numerical comparison to U.S.

Learning Objective 5 4-26

IAS 16, PP&E – numerical comparison to U.S.

Accumulated Depreciation 2,000

Learning Objective 5 4-27

IAS 38, Intangible Assets

Learning Objective 2 4-28

IAS 38, Intangible Assets – compared to U.S.

Learning Objective 2 4-29

IAS 38, Intangible Assets – compared to U.S.

Learning Objective 2 4-30

IAS 38, Intangible Assets – numerical

Learning Objective 5 4-31

IAS 38, Intangible Assets – numerical

Learning Objective 5 4-32

IAS 38, Intangible Assets – numerical comparison to U.S.