CHAPTER 4
INTERNATIONAL FINANCIAL REPORTING STANDARDS:
PART I
Chapter Outline
I. The International Accounting Standards Board (IASB) had 28 International Accounting
Standards (IAS) and 13 International Financial Reporting Standards (IFRS) in force in
2013.
A. In 2002, the IASB and U.S. Financial Accounting Standards Board (FASB) agreed to
work together to reduce differences between IFRS and U.S. GAAP.
II. There are several types of differences between IFRS and U.S. GAAP.
A. Definition differences. Differences in definitions can occur even though concepts are
similar. Definition differences can lead to differences in recognition and/or
measurement.
B. Recognition differences. Differences in recognition criteria and/or guidance related to
(a) whether an item is recognized, (b) how it is recognized, and/or (c) when it is
recognized (timing difference).
C. Measurement differences. Differences in approach for determining the amount
recognized resulting from either (a) a difference in the method required, or (b) a
difference in the detailed guidance for applying a similar method.
D. Alternatives. One set of standards allows a choice between two or more alternative
methods; the other set of standards requires one specific method to be used.
E. Lack of requirements or guidance. IFRS do not cover an issue addressed by U.S.
GAAP, and vice versa.
F. Presentation differences. Differences in the presentation of items in the financial
statements.
G. Disclosure differences. Differences in information presented in the notes to financial
statements related to (a) whether a disclosure is required and/or (b) the manner in
which a disclosure is required to be made.
III. A variety of differences exist between IFRS and U.S. GAAP with respect to the recognition
and measurement of assets.
A. Inventory – IFRS require inventory to be reported on the balance sheet at the lower of
cost or net realizable value; U.S. GAAP requires the lower of cost or replacement cost,
with net realizable value as a ceiling and net realizable value less a normal profit
margin as the floor. U.S. GAAP allows the use of LIFO; IFRS do not.
B.Property, plant and equipment – subsequent to acquisition, IFRS allow fixed assets to
be reported on the balance sheet using a cost model (historical cost less accumulated
depreciation and impairment losses) or a revaluation model (fair value at the balance
sheet date less accumulated depreciation and impairment losses); U.S. GAAP requires
the use of the cost model. Component depreciation must be applied under IFRS when
items of property, plant and equipment are comprise of significant parts; this is not the
case under U.S. GAAP
C. Impairment of assets – an asset is impaired under IFRS when its carrying amount
exceeds its recoverable amount, which is the greater of net selling price and value in
use. Value in use is calculated as the present value of future cash flows expected from
continued use of the asset and from its disposal. An asset is impaired under U.S.
GAAP when its carrying amount exceeds the undiscounted future cash flows expected
from the asset’s continued use and disposal.
1. Measurement of impairment loss – the impairment loss under IFRS is the
difference between carrying amount and recoverable amount; under U.S. GAAP,
the impairment loss is the amount by which carrying amount exceeds fair value.
Recoverable amount and fair value are likely to be different.
2. Reversal of impairment loss – if subsequent to recognizing an impairment loss, the
recoverable amount of an asset is determined to exceed its new carrying amount,
IFRS require the original impairment loss to be reversed; U.S. GAAP does not
allow the reversal of a previously recognized impairment loss.
D. Development costs – when certain criteria are met, IFRS require development costs to
be capitalized as an asset and then amortized over their useful life; U.S. GAAP
requires development costs to be expensed as incurred. An exception exists in U.S.
GAAP for software development costs.
E. Borrowing costs – similar to U.S. GAAP, IFRS requires borrowing costs to be
capitalized to the extent they are attributable to the acquisition, construction, or
production of a qualifying asset. Other borrowing costs are expensed as incurred.
However, the amount of borrowing costs to be capitalized differs between IFRS and
U.S. GAAP.
F. Leases – under standards in effect at the time this book went to press both IFRS and
U.S. GAAP distinguished between operating and finance (capitalized) leases. U.S.
GAAP provides “bright line” tests to determine when a lease must be capitalized; IFRS
do not. Note: In 2013, the IASB and FASB jointly issued a revised Exposure Draft that
would substantially converge the accounting for leases. The ED provides no
information about a possible effective date if a new standard should become approved.
IV. A number of IASB standards deal primarily with disclosure and presentation issues, and in
some cases requirements differ from U.S. GAAP.
A. In the statement of cash flows, IAS 7 allows interest and dividends received to be
classified as operating or investing, whereas these are always classified as operating
under U.S. GAAP. IAS 7 allows interest and dividends paid to be classified as
operating or financing, whereas interest paid is operating and dividends paid is
financing under U.S. GAAP.
B. IAS 10 requires financial statements to be adjusted for so-called adjusting events that
occur up to the point that the financial statements have been authorized for issuance.
U.S. GAAP uses the date the financial statements are issued or are available to be
issued as the cutoff date for adjusting events.
C. IAS 8 establishes a hierarchy of authoritative pronouncements to be considered in
selecting an accounting policy. The lowest level in the hierarchy would allow the use of
U.S.GAAP. Once selected, accounting policies must be applied consistently unless a
change is required by IFRS or would result in more relevant information being reported
in the financial statements.
D. IFRS 5 provides a more liberal definition of what qualifies as a discontinued operation
than does U.S. GAAP.
E. IAS 34 requires interim periods to be treated as discrete accounting periods, whereas
U.S. GAAP treats interim periods as an integral part of the full year.