Download International Financial Reporting Standards

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
5-2
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
5-3
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
5-4
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
5-5
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
5-6
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
5-7
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
5-8
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
5-9
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
5-10
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)
5-11
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
5-12
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
5-13
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
5-14
Post-employment benefits
 Defined benefit cost reported in income
Net 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
5-15
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
5-16
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
5-17
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
5-18
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
5-20
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
5-21
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 component
 Transfer equity settlement to equity
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
5-23
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
5-24
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
5-25
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
5-26
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
5-27
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
5-28
Revenue recognition
 Construction Contracts
 Revenues and expenses recognized using the percentageof-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
5-29
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
5-30
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
5-31
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
5-32
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
5-33
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
5-34
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
5-35
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
5-36
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
5-37
End of Chapter 5
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