BECOME A SUBSCRIBER! Did you purchase this product from a bookstore? If you did, it’s important for you to become a subscriber John Wiley & Sons, Inc may publish, on a periodic basis, supplements and new editions to reflect the latest changes in the subject matter that you need to know in order stay competitive in this ever-changing industry By contacting the Wiley office nearest you, you’ll receive any current update at no additional charge In addition, you’ll receive future updates and revised or related volumes on a 30-day examination review If you purchased this product directly from John Wiley & Sons, Inc., we have already recorded your subscription for this update service To become a subscriber, please call 1-877-762-2974 or send your name, company name (if applicable), address, and the title of the product to: mailing address: Supplement Department John Wiley & Sons, Inc One Wiley Drive Somerset, NJ 08875 e-mail: fax: online: subscriber@wiley.com 1-732-302-2300 www.wiley.com For customers outside the United States, please contact the Wiley office nearest you: Professional & Reference Division John Wiley & Sons, Ltd John Wiley & Sons Canada, Ltd The Atrium 22 Worcester Road Southern Gate, Chichester Etobicoke, Ontario M9W 1L1 West Sussex, PO19 8SQ CANADA ENGLAND Phone: 416-236-4433 Phone: 44-1243-779777 Phone: 1-800-567-4797 Fax: 44-1243-775878 Fax: 416-236-4447 Email: customer@wiley.co.uk Email: canada@wiley.com John Wiley & Sons Australia, Ltd John Wiley & Sons (Asia) Pte Ltd 33 Park Road Clementi Loop #02-01 P.O Box 1226 SINGAPORE 129809 Milton, Queensland 4064 Phone: 65-64632400 AUSTRALIA Fax: 65-64634604/5/6 Phone: 61-7-3859-9755 Customer Service: 65-64604280 Fax: 61-7-3859-9715 Email: enquiry@wiley.com.sg Email: brisbane@johnwiley.com.au Portions of this book have their origins in copyrighted materials from the International Accounting Standards Board These are noted by reference to the specific pronouncements, except for certain of the definitions introduced in bold type, which appear in a separate section at the beginning of each chapter Complete copies of the international standards are available from the IASB Copyright © International Accounting Standards Board, 30 Cannon Street, London EC4M 6XH, United Kingdom Copyright © 2008 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmittedin any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978)750-8400, fax (978)750-4470, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201)748-6011, fax (201)748-6008, or online at http://www.wiley.com/go/permission Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implies warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, please contact our Customer Care Department within the US at 800-762-2974, outside the US at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at www.wiley.com ISBN: 978-0470-13516-7 Printed in the United States of America 10 ABOUT THE AUTHORS Barry J Epstein, PhD, CPA, a partner in the firm Russell Novak & Company, has forty years’ experience in the public accounting profession, as auditor, technical director/partner for several national and local firms, and as a consulting and testifying accounting and auditing expert on over eighty litigation matters to date His current practice is concentrated on providing technical consultations to CPA firms and corporations on US GAAP and IFRS accounting and financial reporting matters; on US and international auditing standards; matters involving financial analysis; forensic accounting investigations; and on corporate governance matters He regularly serves as an accounting, auditing, financial reporting, and financial analysis expert in litigation matters, including assignments for both the private sector entities and governmental agencies Dr Epstein is a widely published authority on accounting and auditing His current publications include Wiley GAAP, now in its 24th edition, for which he is the lead coauthor He has also appeared on over a dozen national radio and television programs discussing the crises in corporate financial reporting and corporate governance, and has presented hundreds of educational programs to professional and corporate groups in the US and internationally He previously chaired the Audit Committee of the AICPA’s Board of Examiners, responsible for the Uniform CPA Examination, and has served on other professional panels at state and national levels Dr Epstein holds degrees from DePaul University (Chicago—BSC, accounting and finance, 1967) University of Chicago (MBA, economics and industrial relations, 1969), and University of Pittsburgh (PhD, information systems and finance, 1979) He is a member of American Institute of Certified Public Accountants, Illinois CPA Society, and American Accounting Association Eva K Jermakowicz, PhD., CPA, has taught accounting for twenty-five years and has served as a consultant to international organizations and businesses She is currently a Professor of Accounting and Chair of the Accounting and Business Law Department at Tennessee State University Her previous positions were on the faculties of the University of Southern Indiana and Warsaw Tech University in Poland, and she has taught accounting courses in several additional countries Dr Jermakowicz was a Fulbright scholar under the European Union Affairs Research Program in Brussels, Belgium, for the academic year 2003-2004, where her project was “Convergence of National Accounting Standards with International Financial Reporting Standards.” She was also a Fulbright scholar in Poland in 1997 Dr Jermakowicz has consulted on international projects under the auspices of the World Bank, United Nations, and Nicom Consulting, Ltd Her primary areas of interest are international accounting and finance Dr Jermakowicz has had numerous articles published in academic journals and proceedings, including the Journal of International Accounting, Auditing & Taxation, Journal of International Financial Management & Accounting, Multinational Finance Journal, Journal of Accounting and Finance Research, Bank Accounting & Finance, Financial Executive, and Strategic Finance She is a member of many professional organizations, including the American Accounting Association, European Accounting Association, American Institute of Certified Public Accountants, the Indiana CPA Society Leadership Cabinet, and the Institute of Management Accountants PREFACE IFRS: Interpretation and Application of International Financial Reporting Standards provides analytical explanations and copious illustrations of all current accounting principles promulgated by the IASB (and its predecessor, the IASC) The book integrates principles promulgated by the Board—international financial reporting standards (IFRS) and the earlier international accounting standards (IAS)—and by the Board’s body for responding to more narrowly focused issues—the International Financial Reporting Interpretations Committee (IFRIC), which succeeded the Standing Interpretations Committee (SIC) These materials have been synthesized into a user-oriented topical format, eliminating the need for readers to first be knowledgeable about the names or numbers of the salient professional standards The focus of the book is the practitioner and the myriad practical problems faced in applying IFRS Accordingly, the paramount goal has been to incorporate meaningful, real-world-type examples in guiding users in the application of IFRS to complex fact situations that must be dealt with in the actual practice of accounting In addition to this emphasis, a major strength of the book is that it does explain the theory of IFRS in sufficient detail to serve as a valuable adjunct to, or substitute for, accounting textbooks Not merely a reiteration of currently promulgated IFRS, it provides the user with the underlying conceptual basis for the rules, to enable the reasoning by analogy that is so necessary in dealing with a complex, fast-changing world of commercial arrangements and structures It is based on the authors’ belief that proper application of IFRS demands an understanding of the logical underpinnings of its technical requirements This is perhaps more true of IFRS than of various national GAAP sets of standards, since IFRS is by design more “principles based” and hence less prescriptive, leaving practitioners with a proportionately greater challenge in actually applying the rules Each chapter of this book, or major section thereof, provides an overview discussion of the perspective and key issues associated with the topics covered; a listing of the professional pronouncements that guide practice; and a detailed discussion of the concepts and accompanying examples A comprehensive checklist following the main text offers practical guidance to preparing financial statements in accordance with IFRS Also included is a revised, detailed, tabular comparison between IFRS and US national GAAP, keyed to the chapters of this book The book features copious examples of actual informative disclosures made by companies reporting under IFRS The authors’ wish is that this book will serve practitioners, faculty, and students as a reliable reference tool, to facilitate their understanding of, and ability to apply, the complexities of the authoritative literature Comments from readers, both as to errors and omissions and as to proposed improvements for future editions, should be addressed to Barry J Epstein, c/o John Wiley & Sons, Inc., 155 N 3rd Street, Suite 502, DeKalb, Illinois 60115, prior to May 15, 2008 for consideration for the 2009 edition Barry J Epstein Eva K Jermakowicz December 2007 INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS The year 2005 marked the start of a new era in global conduct of business, and the fulfillment of a thirty-year effort to create the financial reporting rules for a worldwide capital market For during that year’s financial reporting cycle, as many as 7,000 listed companies in the 25 European Union member states, plus many others in countries such as Australia, New Zealand, Russia, and South Africa were expected (in the EU, required) to produce annual financial statements in compliance with a single set of international rules—International Financial Reporting Standards (IFRS) Many other business entities, while not publicly held and not currently required to comply with IFRS, will also so, either immediately or over time, in order to conform to what is clearly becoming the new worldwide standard Since there are about 15,000 SEC-registered companies in the USA that prepare financial statements in accordance with US GAAP (plus countless nonpublicly held companies also reporting under GAAP), the vast majority of the world’s large businesses will now be reporting under one or the other of these two comprehensive systems of accounting and financial reporting rules Most other national GAAP standards have been reduced in importance or are being phased out as nations all over the worlds are now embracing IFRS For example, Canada has announced that Canadian GAAP (which was very similar to US GAAP) will be eliminated and replaced by IFRS by 2011 More immediately, China will require listed companies to employ IFRS in 2007 It is quite predictable that only US GAAP will (for the foreseeable future) remain as a competitive force in the accounting standards arena, and even that situation will be more a formality than a substantive reality, given the formal commitment (and substantial progress made to date) to “converge” US GAAP and IFRS The impetus to convergence of presently disparate financial reporting standards has been, in the main, to facilitate the free flow of capital so that, for example, investors in the United States will be willing to finance business in, say, China or the Czech Republic Having access to financial statements that are written in the same “language” would eliminate what has historically been a major impediment to engendering investor confidence Additionally, the ability to list a company’s securities on a stock exchange has generally required filings with national regulatory authorities that have insisted on either conformity with local GAAP or formal reconciliation to local GAAP Since either of these procedures was tedious and time consuming, and the human resources and technical knowledge to so were in short supply, many otherwise anxious would-be registrants forwent the opportunity to broaden their investor bases and potentially lower their cost of capital These difficulties may be coming to an end, however The historic 2002 Norwalk Agreement between the US standard setter, FASB, and the IASB called for “convergence” of the two sets of standards, and indeed a number of revisions of either US GAAP or IFRS have already taken place to implement this commitment, with more changes expected in the immediate future More recently (late 2007), the US Securities and Exchange Commission waived the longstanding requirement that foreign private issuers (i.e., registrants) filing financial statements prepared in accordance with full IFRS (i.e., not European or other national versions of IFRS) reconcile those financial statements to US GAAP Additionally, the SEC is weighing a rule change that would permit US domestic registrants to choose between compliance with US GAAP and IFRS These current and prospective changes, coupled with ongoing convergence efforts, seemingly portend a greatly expanded usage of IFRS in world commerce It thus is expected that, by the end of the current decade, all or virtually all distinctions between US GAAP and IFRS will be eliminated, although there remain challenging issues to be resolved For one example, while IFRS has banned the use of LIFO costing for inventories, it remains a popular financial reporting method under US GAAP because of a “conformity rule” that permits entities to use the method for tax reporting only if it is also used for general-purpose external financial reporting In times of increasing costs, LIFO almost inevitably results in tax savings (actually, deferrals), and is thus widely used Origins and Early History of the IASB Financial reporting in the developed world evolved from two broad models, whose objectives were somewhat different The earliest systematized form of accounting regulation developed in continental Europe, starting in France in 1673 Here a requirement for an annual fair value balance sheet was introduced by the government as a means of protecting the economy from bankruptcies This form of accounting at the initiative of the state to control economic actors was copied by other states and later incorporated in the 1807 Napoleonic Commercial Code This method of regulating the economy expanded rapidly throughout continental Europe, partly through Napoleon’s efforts and partly through a willingness on the part of European regulators to borrow ideas from each other This “code law” family of reporting practices was much developed by Germany after its 1870 unification, with the emphasis moving away from market values to historical cost and systematic depreciation It was used later by governments as the basis of tax assessment when taxes on profits started to be introduced, mostly in the early twentieth century This model of accounting serves primarily as a means of moderating relationships between the individual company and the state It serves for tax assessment, and to limit dividend payments, and it is also a means of protecting the running of the economy by sanctioning individual businesses that are not financially sound or were run imprudently While the model has been adapted for stock market reporting and group (consolidated) structures, this is not its main focus The other model did not appear until the nineteenth century and arose as a consequence of the industrial revolution Industrialization created the need for large concentrations of capital to undertake industrial projects (initially, canals and railways) and to spread risks between many investors In this model the financial report provided a means of monitoring the activities of large businesses in order to inform their (nonmanagement) shareholders Financial reporting for capital markets purposes developed initially in the UK, in a common-law environment where the state legislated as little as possible and left a large degree of interpretation to practice and for the sanction of the courts This approach was rapidly adopted by the US as it, too, became industrialized As the US developed the idea of groups of companies controlled from a single head office (towards the end of the nineteenth century), this philosophy of financial reporting began to become focused on consolidated accounts and the group, rather than the individual company For different reasons, neither the UK nor the US governments saw this reporting framework as appropriate for income tax purposes, and in this tradition, while the financial reports inform the assessment process, taxation retains a separate stream of law, which has had little influence on financial reporting The second model of financial reporting, generally regarded as the Anglo-Saxon financial reporting approach, can be characterized as focusing on the relationship between the business and the investor, and on the flow of information to the capital markets Government still uses reporting as a means of regulating economic activity (e.g., the SEC’s mission is to protect the investor and ensure that the securities markets run efficiently), but the financial report is aimed at the investor, not the government Neither of the two above-described approaches to financial reporting is particularly useful in an agricultural economy, or to one that consists entirely of microbusinesses, in the opinion of many observers Nonetheless, as countries have developed economically (or as they were colonized by industrialized nations) they have adopted variants of one or the other of these two models IFRS are an example of the second, capital market-oriented, systems of financial reporting rules The original international standard setter, the International Accounting Standards Committee (IASC), was formed in 1973, during a period of considerable change in accounting regulation In the US the Financial Accounting Standards Board (FASB) had just been created, in the UK the first national standard setter had recently been organized, the EU was working on the main plank of its own accounting harmonization plan (the Fourth Directive), and both the UN and the OECD were shortly to create their own accounting committees The IASC was launched in the wake of the 1972 World Accounting Congress (a five-yearly get-together of the international profession) after an informal meeting between representatives of the British profession (Institute of Chartered Accountants in England and Wales—ICAEW) and the American profession (American Institute of Certified Public Accountants—AICPA) A rapid set of negotiations resulted in the professional bodies of Canada, Australia, Mexico, Japan, France, Germany, the Netherlands, and New Zealand being invited to join with the US and UK to form the international body Due to pressure (coupled with a financial subsidy) from the UK, the IASC was established in London, where its successor, the IASB, remains today The actual reasons for the IASC’s creation are unclear A need for a common language of business was felt, to deal with a growing volume of international business, but other, more political motives abounded also For example, some believe that the major motivation was that the British wanted to create an international standard setter to trump the regional initiatives within the EU, which leaned heavily to the Code model of reporting, in contrast to what was the norm in the UK and almost all English-speaking nations In the first phase of its existence, the IASC had mixed fortunes Once the International Federation of Accountants (IFAC) was formed in 1977 (at the next World Congress of Accountants), the IASC had to fight off attempts to become a part of IFAC It managed to resist, coming to a compromise where IASC remained independent but all IFAC members were automatically members of IASC, and IFAC was able to nominate the membership of the standard-setting Board Both the UN and OECD were active in international rule making in the 1970s but the IASC successfully persuaded them that they should leave recognition and measurement rules to the IASC However, having established itself as the unique international rule maker, IASC had great difficulty in persuading anyone to use its rules Although member professional bodies were theoretically committed to pushing for the use of IFRS at the national level, in practice few national bodies were influential in standard setting in their respective countries, and others (including the US and UK) preferred their national standards to whatever IASC might propose In Europe, IFRS were used by some reporting entities in Italy and Switzerland, and national standard setters in some countries such as Malaysia began to use IFRS as an input to their national rules, while not necessarily adopting them as written by the IASC or giving explicit recognition to the fact that IFRS were being adopted in part as national GAAP IASC’s efforts entered a new phase in 1987, which led directly to its 2001 reorganization, when the then-Secretary General, David Cairns, encouraged by the US SEC, negotiated an agreement with the International Organization of Securities Commissions (IOSCO) IOSCO was interested in identifying a common international “passport” whereby companies could be accepted for secondary listing in the jurisdiction of any IOSCO member The concept was that, whatever the listing rules in a company’s primary stock exchange, there would be a common minimum package which all stock exchanges would accept from foreign companies seeking a secondary listing IOSCO was prepared to endorse IFRS as the financial reporting basis for this passport, provided that the international standards could be brought up to a quality and comprehensiveness level that IOSCO stipulated Historically, a major criticism of IFRS had been that it essentially endorsed all the accounting methods then in wide use, effectively becoming a “lowest common denominator” set of standards The trend in national GAAP had been to narrow the range of acceptable alternatives, although uniformity in accounting had not been anticipated as a near-term result The IOSCO agreement energized IASC to improve the existing standards by removing the many alternative treatments that were then permitted under the standards, thereby improving comparability across reporting entities The IASC launched its Comparability and Improvements Project with the goal of developing a “core set of standards” that would satisfy IOSCO These were complete by 1993, not without difficulties and spirited disagreements among the members, but then—to the great frustration of the IASC—these were not accepted by IOSCO Rather than endorsing the standard-setting process of IASC, as was hoped for, IOSCO seemingly wanted to cherry-pick individual standards Such a process could not realistically result in near-term endorsement of IFRS for cross-border securities registrations Ultimately, the collaboration was relaunched in 1995, with IASC under new leadership, and this began a further period of frenetic activities, where existing standards were again reviewed and revised, and new standards were created to fill perceived gaps in IFRS This time the set of standards included, amongst others, IAS 39, on recognition and measurement of financial instruments, which was endorsed, at the very last moment and with great difficulty, as a compromise, purportedly interim standard At the same time, the IASC had undertaken an effort to consider its future structure In part, this was the result of pressure exerted by the US SEC and also by the US private sector standard setter, the FASB, which were seemingly concerned that IFRS were not being developed by “due process.” While the various parties may have had their own agendas, in fact the IFRS were in need of strengthening, particularly as to reducing the range of diverse but accepted alternatives for similar transactions and events The challenges presented to IASB ultimately would serve to make IFRS stronger If IASC was to be the standard setter endorsed by the world’s stock exchange regulators, it would need a structure that reflected that level of responsibility The historical Anglo-Saxon standard-setting model—where professional accountants set the rules for themselves—had largely been abandoned in the twenty-five years since the IASC was formed, and standards were mostly being set by dedicated and independent national boards such as the FASB, and not by profession-dominated bodies like the AICPA The choice, as restructuring became inevitable, was between a large, representative approach—much like the existing IASC structure, but possibly where national standard setters appointed representatives—or a small, professional body of experienced standard setters which worked independently of national interests The end of this phase of the international standard setting, and the resolution of these issues, came about within a short period in 2000 In May, IOSCO members voted at their annual meeting to endorse IASC standards, albeit subject to a number of reservations (see discussion later in this chapter) This was a considerable step forward for the IASC, which itself was quickly exceeded by an announcement in June 2000 that the European Commission intended to adopt IFRS as the requirement for primary listings in all member states This planned full endorsement by the EU eclipsed the lukewarm IOSCO approval, and since then the EU has appeared to be the more influential body insofar as gaining acceptance for IFRS has been concerned Indeed, the once-important IOSCO endorsement has become of little importance given subsequent developments, including the EU mandate and convergence efforts among several standard-setting bodies In July 2000, IASC members voted to abandon the organization’s former structure, which was based on professional bodies, and adopt a new structure: beginning in 2001, standards would be set by a professional board, financed by voluntary contributions raised by a new oversight body The New Structure The formal structure put in place in 2000 has the IASC Foundation, a Delaware corporation, as its keystone The Trustees of the IASC Foundation have both the responsibility to raise the $19 million a year currently needed to finance standard setting, and the responsibility of appointing members to the International Accounting Standards Board (IASB), the International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Council (SAC) The Standards Advisory Council (SAC) meets with the IASB three times a year, generally for two days The SAC consists of about 50 members, nominated in their personal (not organizational) capacity, but are usually supported by organizations that have an interest in international reporting Members currently include analysts, corporate executives, auditors, standard setters, and stock exchange regulators The members are supposed to serve as a channel for communication between the IASB and its wider group of constituents, to suggest topics for the IASB’s agenda, and to discuss IASB proposals The International Financial Reporting Interpretations Committee (IFRIC) is a committee comprised mostly of technical partners in audit firms but also includes preparers and users It succeeded the Standards Interpretations Committee (SIC), which had been created by the IASC IFRIC’s function is to answer technical queries from constituents about how to interpret IFRS—in effect, filling in the cracks between different rules In recent times it has also proposed modifications to standards to the IASB, in response to perceived operational difficulties or need to improve consistency IFRIC liaises with the US Emerging Issues Task Force and similar bodies liaison as standard setters, to try at preserve convergence at the level of interpretation It is also establishing relations with stock exchange regulators, who may be involved in making decisions about the IFRS 2008 chapter Topic US GAAP treatment under limited circumstances, with net-of-tax permitted presentation, and unusual items can also be segregated within operating income (but not tax effected); will be revised to mirror IFRS Broader definition of discontinued operations More g than under IFRS, either a reportable business or operation geographical segment, or reporting unit, geograph subsidiary, or asset group Other comprehensive income items can be presented in separate statement, combined with income statement, or in changes in stockholders’ equity statement Statement of Cash Flows Other c presented with inco to statem Interest paid and dividends received must be Choice a classified as operating cash flows, and dividends 1.Divide paid must be classified as financing cash flows operati 2.Interes flows investin Overdrafts cannot be included in cash (show as Overdraf financing source of cash) condition Cash, Receivables, and Financial Instruments No specific guidance offered under US GAAP No speci or IFRS standards Derecognition of financial assets based on loss of control, which requires isolation from transferor, transferee ability to pledge or sell, and absence of repurchase obligation by transferor Stricter definition of “sales” resulting in more frequent recognition of secured borrowing transactions Derecogn on risks control, definition Basis adjustment arising from firm commitments and forecasted transactions not in initial measurement of hedged item; hedging gains and losses on cash flow hedges recorded in other comprehensive income when they occur, reclassed to income together with hedged item Hedging of firm transactio measurem hedged it Hedging for part of term of hedged item not Hedging permitted permitted Hedging of portion of cash flows of hedged item Hedging not permitted is permit Hedging effectiveness can be assumed in limited Hedging i t ( i “ h t t th d”) IFRS 2008 chapter Topic US GAAP treatment circumstances (using “shortcut method”) Fair value option has been adopted, mirroring Option IFRS liability changes “Macrohedging” not permitted “Macroh Reclassifications to “trading” required under New, un certain conditions, but reclassification from to all fin trading not permitted by financ Inventory Nonderivative instruments can be used to hedge currency risk associated with net investment in foreign entity or a fair value hedge of unrecognized firm commitment Recognition in interim periods of inventory losses from market declines that reasonably can be expected to be restored in the fiscal year not required Nonderiv foreign c Recognit losses fro be expec required; accountin offered Allowable methods include FIFO, average cost, LIFO co and LIFO Presentation at lower of cost or market required Presentat value req Recent rule change so that certain costs (idle Certain c capacity, spoilage) cannot be added to overhead added to charge in inventory cost, conforming to IFRS rule Lower of cost or market adjustments cannot be Lower o reversed reversed Only in rare instances (mining of gold, etc.) is Certain d presentation at fair value in excess of cost products permitted actual co Revenue Recognition, Including Construction Contracts No standard on revenue recognition in general, More but SEC requirements offer guidance recogniti Generally must amortize revenue over service Revenue period, no up-front recognition under GAAP transferre Revenue recognition deferred on delivered part of multi-element contract if refund would be triggered by failure to deliver remaining elements Use of completed contract method Revenue multielem by failu delivery for If percen IFRS 2008 chapter Topic US GAAP treatment construction projects under certain cost reco circumstances is required; revenue-cost and approach gross-profit approaches to for const percentage-of-completion both allowed Assorted guidance offered for specific situations Specific principle Joint project with IASB may result in completely new conceptual foundation for revenue recognition based on “asset and liability recognition” approach Joint pr complete revenue recogniti Property, Plant, and Change in depreciation method now handled Change i Equipment prospectively under recently imposed standard Mandatory capitalization of construction period Mandato interest costs, only interest (i.e., no ancillary) interest costs subject to capitalization capitalize Costs of major overhauls generally expensed Costs of Impairment suggested when book value exceeds Impairm gross expected future cash flows; second step to greater o measure impairment uses discounted present or fair va value of cash flows Impairments recognized in current income Impairments reversed once recognized cannot Cost basis required If cost m in incom treated exceeds impairme be Impairm condition Alternati fair value Like-kind exchanges of productive assets Like-kin measured at fair value, with gain or loss with gain recognized, in change made to converge to IFRS method Investment property depreciated cost must be carried at Investme depreciat Decommissioning (asset retirement) obligations Decomm not recomputed after initial computation, recompu generally balance s Component-level depreciation expected; asset IFRS retirement obligations recognized as part of asset with US IFRS 2008 chapter Topic US GAAP treatment cost; changes in estimated amount of obligation accrual o effectively amortized over remaining term IFRS gui general; obligatio cost mod is immed Intangible Assets Research and development costs are all Research expensed, related cash flows in “operating”; capitalize goodwill not amortized, but tested for as “inves impairment; trigger for impairment recognition excess over fair value Cost basis required for intangibles Revaluat Impairment implied when book value is greater Impairm than undiscounted cash flows to be derived from than hig use of asset costs to s Measurement of impairment done with reference Measurem to fair value (often operationalized using to higher discounted cash flows) to sell Estimated residual often defined by present Estimate value of expected disposal proceeds selling p of expect Measurement of goodwill impairment uses 2-step approach, requires first comparing fair value of cash generating unit to its carrying amount (book value including goodwill), then comparing implied goodwill to carrying value; measured at level of reporting unit (business segment or one level below) No reversals impairments 10 Interests in Financial Instruments, Associates, Joint Ventures, and Investment Property of previously Measurem other lon computat can be as recognized Impairm condition Classification as trading, available-for-sale, or Classific held-to-maturity limited to securities; equity held-to-m method required for investee accounting assets, n cost, fair No current parallel under US GAAP to the IFRS “Fair val “fair value option,” but this has been proposed liability accounte in curren Equity method of accounting similar under US Equity m GAAP and IFRS GAAP an IFRS 2008 chapter Topic US GAAP treatment If held-to-maturity securities are sold, use of this If held-to category is prohibited thereafter category Investments in unlisted securities valued at cost Investme at fair va Derecognition of financial assets based on Derecogn risks-and-rewards analysis; partial derecognition risks-and prohibited; Qualifying SPEs permitted derecogn rules und Joint ventures generally accounted for by equity Joint ven method, but select industries (e.g., construction) proportio use proportional consolidation No need to conform investor and investee Need t accounting policies accountin Investment property must be accounted for by Investme cost (and depreciation) method cost (and method w 11 Business Combinations and Consolidated Financial Statements Poolings prohibited by FAS 141; consolidation rules effectively based on majority ownership criterion, but special consolidation requirements apply to Variable Interest Entities (VIE); closing date generally used for recognizing acquisitions (purchases) Poolings consolida control d (purchas Acquisition date based on closing of transaction Acquisiti VIEs not Recognize postacquisition obligations only for Recogniz exiting activities begun before merger, to be provision completed in one year Accrued expense (reserves) can be recognized if Restructu postacquisition restructuring of acquiree is unless ac planned before tra “Qualifying” SPEs to be consolidated if QSPE Special-p exceptions not satisfied controlle Consolidation of majority owned subsidiaries Consolid required unless control is not exercised by exercised parent temporar No promulgated rules governing “parent In “par company only” financial statements, but use of investme equity method would be acceptable joint ven rules for method c Consolid IFRS 2008 chapter Topic US GAAP treatment Not necessary to conform parent and subsidiary Need t accounting policies accountin Minority interest in consolidated subsidiary can Minority be presented in liabilities, in equity, or in special category Contingent consideration recognized later when Fair valu condition is met (but proposed change would in purcha conform to IFRS approach) Goodwill not amortized, tested for impairment Similar t testing pr One year permitted to finalize purchase price Similar t allocation process, including resolution of preacquisition contingencies Purchased in-process R&D expensed Purchase Subsequent expenditures on acquired in-process Subseque R&D expensed R&D gen Negative goodwill from acquisition credited Negative against nonfinancial assets acquired, with excess gain imm as gain Use pooling-type accounting for mergers of Use poo entities under common control entities u Acquiree deferred tax recognized only after date of acquisition (i.e., having full valuation allowance at acquisition date) used to offset goodwill, then offset intangible assets, finally to offset tax expense Acquiree of acqu allowanc current p goodwill Subsequent creation of allowance for tax asset acquisitio recognized in acquisition transaction effected via charge to tax expense Current accounting for step acquisitions treats Similar each purchase separately, no remeasurement of currently previously recognized goodwill (proposed and IFRS changes would revalue when control achieved) 12 Current Liabilities, Provisions, Contingencies, and Events After the Balance Sheet Date Different recognition threshold for timing of recognition of liabilities associated with a restructuring than under IFRS; recognize under GAAP only if event occurs making this a present obligation A variet items tha provision GAAP; announce Short-term debt refinanced before statement Short-ter issuance date can often be shown as noncurrent date can (b f i IFRS 2008 chapter Topic US GAAP treatment (before i may be a Provisions (estimated liabilities) measured by Provision reference to low end of range of amounts needed estimate to settle, sometimes but not always discounted to present value Fair value of guarantee obligations must be Fair val recognized apart from contingent aspect recogniz Specific rules for certain provisions (e.g., for Only gen environmental liabilities) 13 Financial Instruments—LongTerm Debt Contingent gains not recognized IFRS p contingen Convertible debt classified as liability Converti equity, b and resid Noncurrent presentation of defaulted debt if Noncurre waiver granted before statement issuance date waiver g New re disposal Embedded derivatives generally must bifurcated and accounted for separately be Embedde bifurcate Equity-like instruments giving holder right to Equity-li demand cash settlement, or with defined cash demand settlement terms, must be classed as liabilities settlemen 14 Leases Capital lease accounting is required if one of Similar t four defined conditions are met; otherwise, risks and operating lease if proper Similar to IFRS, but with more guidance on Very sim specialized topics; deferral of profit on sale-leas sale-leasebacks Separate accounting for land and building in Separatio combined lease depends on terms and lease is n materiality of land Third-party guarantees cannot be included in Third-pa minimum lease payments to determine whether minimum capital lease criteria are met capital le Present value of lease payments computed using Present v incremental borrowing rate implicit r Output contracts are leases Output c IFRS 2008 chapter Topic US GAAP treatment Leasehold interest in land accounted for as Leasehol prepayment as invest changes prepaym Gain on sale/leaseback not recognized in current Gain on earnings, but instead are deferred and amortized Lease obligations disclosures more extensive Lease ob than under IFRS under GA 15 Income Taxes Comprehensive interperiod allocation using Compreh liability method (balance sheet orientation) liability required under US GAAP required Benefit of uncertain tax positions can only be No speci recognized to the extent that there is at least a (apply ge 50% likelihood of being sustained on exam Recognize effect of rate changes when enacted Recogniz Prohibits recognition of effects of temporary “substant GAAP re differences related to Foreign currency nonmonetary assets when the reporting currency is the functional currency, and Intercompany transfers of inventory or other assets remaining within the company Deferred tax assets and liabilities are current or Deferred noncurrent based on related asset or liability Post–business combination recognition of Post–bus deferred tax asset eliminates goodwill, then deferred other intangible assets, with any excess taken to excess ta income Several specific exemptions to general No exce requirement to provide deferred tax on all temporar temporary differences are set forth assets an Recognize deferred tax asset in all cases, provide Recogniz reserve when realization is not “more likely than probable not.” per IFRS Effect of change in rates or change in assessed likelihood of realization on deferred tax related to item originally recognized in stockholders’ equity must be reported in current earnings Effect of likelihoo to item equity m Subsequent year realization of tax benefit from Subseque business combination reduces goodwill, then business other intangible assets, and only then excess excess re t di t i IFRS 2008 chapter Topic US GAAP treatment reported in current earnings Rate reconciliation based on domestic federal Rate rec rate times pretax profit from continuing times acc operations only Tax effect of intercompany transactions Tax ef recognized at seller entity’s tax rate recogniz 16 Employee Benefits Defined benefit plans; use of projected unit credit method required to match expense to periods of service; smoothing is accomplished by deferred recognition of actuarial gains and losses, amortization of prior service costs, et al Methodo GAAP, gains or plan ado immedia Past service costs amortized over service period Past serv or life expectancy of workers Actuarial gains and losses cannot be recognized in equity; are to be deferred and amortized to pension expense over expected term of plan participants to the extent that defined “corridor” is exceeded Actuaria recogniz 19 effec immedia US GAA Recognition of a minimum liability on the No mini balance sheet to at least the unfunded balance s accumulated pension benefit obligation No limitation on recognition of pension assets Limitatio Curtailment gains recognized only when Curtailm employees terminate or plan suspension is announce adopted, computed differently than under IFRS GAAP Anticipating changes in the law that would Anticipat affect variables such as state medical or social benefits b security benefits expressly prohibited Termination benefits expensed when employees Terminat accept and amount can be estimated, recognize is commi contractual benefits when it is probable that employees will accept 17 Stockholders’ Equity Mandatorily redeemable preferred shown as Mandato liability with dividends deducted as expense liability w Fair value method required for share-based Mandato compensation plans; special simplified method effect of for nonpublic companies fair value Fair value measurement of goods and services Fair valu acquired for stock from nonemployees using acquired counterparty’s commitment or actual modified f d t IFRS 2008 chapter Topic US GAAP treatment performance date Income tax benefits related to share-based payment (measured by spread between current fair value and exercise price) credited to equity; any payroll taxes recognized in expense at time of exercise Tax ben credited compens recogniz recogniti Tax benefits related to share-based payments Tax ben credited to equity credited compens Tax benefits related to share-based payments Tax ben based on GAAP expense, later adjusted when based on actual tax effects are realized Modifications of awards require new Modifica measurement based on date of modification of fair va 18 Earnings Per Share Very similar to IFRS, but with more detailed Similar t guidance on calculations Report basic and diluted EPS on continuing operations, discontinued operations, extraordinary items, cumulative effect of change in accounting, and net income Calculati previous GAAP EPS data presented in the income statement EPS d compreh statemen Report b operation For interim reporting, average the interim For inter periods’ incremental shares to compute EPS on year approach 19 Interim Financial Reporting Some timing differences in recognition of Some ti interim revenues and expenses vs IFRS interim r Basic principle is that interim period is integral Basic pri to full year, but actual requirements depart from period, b this in many instances in many 20 Segment Reporting “Management approach” provides flexibility in Approach defining segments; segment results using adopted internal managerial approach OK, even if these differ from financial statements Disclosures based on primary classification, with some additional “entity-wide” items (major customers, etc.), not necessarily lines of business or geographical areas however Defines entity th results re maker, i f t IFRS 2008 chapter Topic US GAAP treatment informat threshold met No segment result definition given Segment geograph No requirement for capital expenditures, Capital liabilities disclosure by segments disclosur 21 Changes in Accounting Policies and Estimates, and Corrections of Errors A first-time adoption of US GAAP would First-tim require retrospective restatement retrospec as of beg Correction of errors must be prior Correctio period/opening retained earnings adjustment; restateme retrospective restatement method for changes in accounting principle, with limited exceptions, under new rules converging to IFRS treatment Changes in estimate accounted for prospectively Changes Change in depreciation method is treated as Change change in accounting estimate effected by a change in change in principle, handled prospectively only Voluntary changes in principles require Voluntar restatement of prior years’ financials, if restateme practicable practicab 22 Foreign Currency Selection of functional currency is open to judgment, but in practice there is a greater emphasis on cash flows than on currency that influences pricing of output In sele emphasis influence and servi Choice of reporting (presentation) currencies, Very sim and if other than functional currency translate assets and liabilities at balance sheet date exchange rate, income and expense at rate at dates of transactions (or average for period, if not materially different) Current exchange rate used to translate all Same as balance sheet items, including goodwill and fair value adjustments Equity accounts are translated at historical rates Translati under IFR In highly inflationary economy (having In hype cumulative three year price change of 100%), avoid re IFRS 2008 chapter Topic US GAAP treatment parent’s currency (US dollar) must be used as stable cu functional currency as its fun Highly inflationary economy is one that has Hyperinf cumulative inflation of approximately 100% or the econ more over a 3-year period include t the local and the c is approa 23 Related-Party Disclosures Similar to IFRS, but disclosures of relationships Extensiv in absence of transactions is often missing including in the ab 24 Specialized Industry Accounting No primary guidance for government grants, Guidance agriculture, mineral exploration agricultu contracts 25 Inflation and Hyperinflation 26 Government Grants Specialized guidance on inventories related to the motion picture, software, and agricultural industries, and others, found in “secondary” GAAP sources such as AICPA Guides, SOP, etc Does not generally permit inflation-adjusted financial statements; SEC rules allow foreign issuers reporting under IFRS (IAS 21, 29) to omit disclosure of any differences that would have resulted from application of SFAS 52 Wiley Accounting Catalog http://www.wiley.com/accounting Come and see our exciting line of accounting products! http://www.wiley.com/cpa In hyper be prese measurin statemen No rules promulgated under US GAAP, but Governm IFRS-like approach would be acceptable expenses income o grants incurred; depreciat Wiley Web Links Wiley CPA Examination Review Site No guid covered Guides a “seconda Come and check out what's new in the CPA Exam Review Choose from a variety of books, audio, and software to help you study for the CPA Exam Wiley Higher Education Site http://www.wiley.com/college/busin/accnt Come review the Wiley Higher Education Accounting line of products! Wiley GAAP Site http://www.wiley.com/gaap Find out information about the GAAP that guides the industry, including updates and software demos Wiley Kieso Site http://www.wiley.com/college/kieso Come find out about the Tenth Edition of this classic intermediate accounting book! There are Student and Faculty Resource Centers with useful information, as well as Wiley's Accounting Workshop Quick Start Reference Navigating through the Browse Screen Save Ctrl + S Saves any changes you made to the infobase Print Ctrl + P Prints all or a selected part of the document Cut Shift + Del Copies selected contents to the clipboard and then deletes the selected contents from the document Copy Ctrl + C Copies selected contents to the clipboard Paste Ctrl + V Inserts the contents of the clipboard where the cursor is located in the document Go Back F6 Navigates backward through the queries and links you have executed Go Forward Shift + F6 Navigates forward through the queries and links you have executed Advanced F2 Brings up the Advance Query dialogue box which Advanced Query F2 Brings up the Advance Query dialogue box which allows you to perform searches in the infobase Clear Query None Clears the last query that was executed Any words that were highlighted from a previous search will return to normal text Query Tool None A simple way to search for a word or phrase in the infobase Simply type in word(s) and press ENTER Previous Hit Shift + F4 After a query is performed, use Previous Hit to navigate backward through the hits Next Hit F4 After a query is performed, use Next Hit to navigate forward through the hits Indexed Term Search None Brings up the query template to search for Indexed Terms Key Concept Search None Brings up the query template to search for Key Concepts Bookmark Ctrl + M Allows you to mark your place in the infobase You can have an unlimited amount of Bookmarks Note Ctrl + N Allows you to insert a "sticky note" in the document to make notes You can have one Note for each paragraph Highlighter Ctrl + H Allows you to apply a highlighter to selected text Text in highlighters can be searched separately from the full infobase contents Endnotes (Popup - Popup) Insert c02land on blank page following (Popup - Popup) There is coding on this paragraph that actuall y belongs on the following table – please keep them together (Popup - Popup) Alternatively, interest and dividends received may be classified as investing cash flows rather than as operating cash flows because they are returns on investments In this important regard, the IFRS differs from the corresponding US rule, which does not permit this elective treatment, making the operating cash flow presentation mandatory (Popup - Popup) Alternatively, IAS permits interest paid to be classified as a financing cash flow, because this is the cost of obtaining financing As with the foregoing, the availability of alternative treatments differs from the US approach, which makes the operating cash flow presentation the only choice It is not clear at this time how the alternative approaches under US GAAP and IFRS will be converged (Popup - Popup) Needs to be changed for software version (Popup - Popup) A direct financing lease must have its cost or carrying value equal to the fair value of the asset at the inception of the lease Thus, even if the amounts are not significantly different, leveraged lease accounting should not be used (Popup - Popup) Cash flows of financial institutions may be reported on a net basis under the following cases: Cash flows from the acceptance and repayment of deposits with fixed maturity dates; Placement of deposits with and withdrawal of deposits from other financial institutions; and Cash advances and loans made to customers and the repayment of those advances and loans (IAS 7, Para 24) ... integrates principles promulgated by the Board international financial reporting standards (IFRS) and the earlier international accounting standards (IAS) and by the Board’s body for responding... IFRS demands an understanding of the logical underpinnings of its technical requirements This is perhaps more true of IFRS than of various national GAAP sets of standards, since IFRS is by design... consultations to CPA firms and corporations on US GAAP and IFRS accounting and financial reporting matters; on US and international auditing standards; matters involving financial analysis; forensic