Conversion of Financial Statements from GAAP to IFRS
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1 Conversion of Financial Statements from GAAP to IFRS
Transcript of Conversion of Financial Statements from GAAP to IFRS
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Conversion of
Financial Statements
from GAAP to IFRS
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IFRS
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IFRS
◼ European Union◼ SEC◼ Other countries◼ China◼ USA
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Publicly Accountable Enterprises (P.A.E.’s)
❑ Public companies
❑ Companies that hold assets in a fiduciary capacity on a broad basis
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Benefits of IFRS
Standardization
Investors
Capital flow
Foreign stock exchanges
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Goals of IFRS
❑ Measure ability to generate cash
❑ Timing of cash generation
❑ Certainty of cash generation
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Polling question #1
Which of the following is an example of a P.A.E.?
1. Banks.
2. Insurance companies.
3. Retirement plans companies.
4. All of the above.
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Qualitative characteristics
❑ Clarity
❑ Relevance
❑ Reliability
❑ Comparability
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“True and Fair”
❑ Cost/benefit constraints
❑ Trade-offs
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Polling question #2
Which of the following is a qualitative characteristic of IFRS?
1. Clarity.
2. Relevance.
3. Reliability.
4. Comparability.
5. All of the above.
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Assets
❑ Resource
❑ Past events
❑ Present Value of Expected outflow of Net Future Benefits
❑ “Impairment”
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Mixed assetmeasurement model
❑ Historical
❑ Present value of net expected future cash flows
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Polling question #3
Which of the following is related to assets in IFRS?
1. Past events.
2. Present Value of Expected outflow of Net Future Benefits.
3. “Impairment.”
4. All of the above.
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Fair value (market value)
❑ Financial instruments
❑ Biological assets
❑ Business combinations
❑ Investment properties
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Hierarchy of IFRS application
1. Specific
2. Judgment
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Polling question #4
Which of the following can be reported atfair value?
1. Financial instruments.
2. Biological assets.
3. Business combinations.
4. Investment properties.
5. All of the above.
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Specific issues
◼ Complexity
◼ Implementation
◼ Compensation plans
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Specific issues
◼ Disclosures
◼ Subsidiaries
◼ Reconciliation
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Specific issues
◼ Covenants
◼ FIFO
◼ Weighted-average
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Polling question #5
Which of the following is an issue to consider in IFRS?
1. Complexity.
2. Implementation.
3. Compensation plans.
4. All of the above.
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Stating that IFRS is the accounting policy
◼ IFRS met
◼ Fairness
◼ GAAP = fair presentation
◼ IFRS = “true and fair”
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IFRS allows departure from standard if
◼ Management agrees
◼ Other IFRS have been met
◼ Disclosure of nature and reason for the departure
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Fixed assets
◼ Tangible and intangible
◼ PPE
◼ Development costs
◼ Intellectual property
◼ Goodwill
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Polling question #6
Which of the following is a condition for allowing a departure from the IFRS standard?
1. Management agrees.
2. Other IFRS have been met.
3. Disclosure of nature and reason for the departure.
4. All of the above.
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Long-lived assets
◼ Operational
◼ Not passive
◼ Non-monetary
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Long-lived assets
◼ Initial
◼ Administrative
◼ Interest
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Long-lived assets
◼ Self-construction
◼ Overhead
◼ Identifiable incremental amounts
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Polling question #7
Which of the following is a characteristic of a long-lived asset in IFRS?
1. Operational.
2. Not passive.
3. Non-monetary.
4. All of the above.
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Long-lived assets
◼ Subsequent to construction
◼ Measurable
◼ Ordinary repairs
◼ Intended use
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Depreciation – PPE
◼ Matching
◼ Useful life
◼ Usefulness
◼ Change of use
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Compound assets
◼ Buildings◼ Separate accounts◼ Preferred◼ Components
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Compound assets
3-year convertible bond called ABC Bond
Price: $1200 with $1000 face value
Nominal interest rate 5% starting January 1, 20X1
Conversion feature estimated 20% of price
Beginning of End of End of End of
20X1 20X2 20X3 20X4
Face value 1000 1000 1000 1000
Interest (5%) 50 50 50
Value of conversion feature 200 220 210 235
Price end of year 1200 1220 1210 1235
Previous year's price 1200 1220 1210
Revaluation gain (loss) (conversion feature) 20* (10)* 25*
Revaluation Entries: End of End of End of
DR 20X2 20X3 20X4
ABC Bond (before revaluation) 1000 1220 1210
Revaluation 20 -10 25
ABC Bond (after revaluation) 1220 1210 1235
CR
Interest revenue 50 50 50
Revaluation gain/loss (Compehensive
Income Statement- Revaluation
Gain/Loss) 20* (10)* 25*
Total Compehensive Revenue 70 40 75
***Explanatory note every year that includes details and reconcilation year to year
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Polling question #8
Which of the following is related to depreciation of PPE in IFRS?
1. Matching.
2. Usefulness.
3. Change of use.
4. All of the above.
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Other depreciation methods
◼ IAS 16
◼ Retirement
◼ Replacement
◼ Group (composite method)
◼ Revenue
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Residual value
◼ GAAP
◼ IAS 16
◼ IFRS
◼ Disposal
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Polling question #9
Which of the following is acceptable as a depreciation method in IFRS?
1. Retirement.
2. Replacement.
3. Revenue.
4. All of the above.
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Leasehold improvements
◼ IFRS
◼ Left behind
◼ Classification
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Fair value
◼ IAS 16
◼ Knowledgeable
◼ Arm’s length
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Revaluation of PPE
◼ IAS 16
◼ Write-down
◼ Subsequent change
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Revaluation of PPE
◼ IAS:16: write-up
◼ Re-measurement
◼ Regular reassessment
◼ Subsequent change
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Revaluation of PPE
◼ IAS 16 requirement: Reevaluation applied to all assets in the class
◼ Prevents selective revaluation
◼ Prevents misleading or confusing mix of assets
◼ Reevaluation at least every balance sheet by year-end date
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“Impairment” of long-lived assets
◼ Impairment vs. Revaluation
◼ IAS 36
◼ CGU’s
◼ Impairment
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Possible signs of impairment
◼ Decline
◼ Significant changes
◼ Interest rate
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Possible signs of impairment
◼ Market capitalization
◼ Obsolescence/damage
◼ Usefulness
◼ Performance
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Reversal of “impairment”
◼ IFRS allows reversal
◼ Goodwill
◼ Yearly revaluation
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Polling question #10
Which of the following is a possible sign of asset impairment in IFRS?
1. Reduction in market capitalization.
2. Obsolescence/damage.
3. Reduction of usefulness.
4. Reduction of performance.
5. All of the above.
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Impairment due to natural disasters
◼ IAS 36
◼ Insurance recovery
◼ No offset
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Retirement and disposals
◼ IFRS 5
◼ Approval
◼ Presentation
◼ Decision year
◼ Subsequent
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Disclosure requirements
◼ IAS 16 and IAS 36
◼ Each class
◼ PPE
◼ CGU’s
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Disclosure requirements
◼ Measurement
◼ Depreciation
◼ Residual
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Disclosure requirements
◼ Rate
◼ Carrying amounts
◼ Accumulated depreciation
◼ Policy
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Polling question #11
Which of the following is a disclosure requirement?
1. Measurement.
2. Depreciation.
3. Residual value.
4. All of the above.
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Disclosure requirements
◼ Reconciliation of carrying amount:
◼ Business combinations
◼ Revaluations
◼ Impairment
◼ Depreciation
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Disclosure requirements
◼ Title
◼ Assets pledged
◼ PPE restoration
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Disclosure requirements
◼ PPE expenditures
◼ PPE construction costs
◼ PPE acquisitions
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Balance sheet conversion
◼ IFRS #1
◼ Opening IFRS balance sheet
◼ Prepare vs. publish
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Scope
◼ What is IFRS #1?
◼ The “statement”
◼ Exception
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Date
◼ Transition
◼ Adjustments
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Adjustments
1. IFRS asset/liability recognition2. Asset/liability “derecognition” per IFRS3. Reclassify GAAP➔IFRS
4. Asset/liability measurement per IFRS
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Asset/liability recognition
◼ Defined benefit pension plans◼ Share-based payments◼ Legal and constructive obligations
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Asset/liability recognition
◼ Deferred taxation◼ Acquired intangible assets◼ Derivative financial instruments◼ Finance leases
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Asset “derecognition”
◼ Internally generated intangible assets◼ Deferred tax assets◼ Provisions…no legal and constructive
obligations
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Reclassification
◼ Financial instruments
◼ Investments
◼ Non-current assets held-for-sale
◼ Offset assets
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Asset/liability measurement
◼ IAS 19◼ IAS 36◼ IAS 37◼ IFRS 5
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Polling question #12
Which of the following should be considered for reclassification?
1. Financial instruments.
2. Investments.
3. Non-current assets held-for-sale.
4. Offset assets.
5. All of the above.
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Asset/liability measurement
◼ IAS 12◼ IFRS 2◼ IAS 18◼ IFRS 9
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First time adoptionaccounting policies
◼ Consistent
◼ Transition date
◼ New standards
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Transitional provisions
◼ Exemptions under IFRS #1:◼ Business combinations◼ Measurement of some assets◼ Employee benefits◼ Cumulative transaction differences◼ Compound financial instruments◼ Items of subsidiaries, associates, and
joint ventures
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Business combinations
◼ Retrospective◼ Classifications◼ Recognition/derecognition rules
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Business combinations
◼ Transition date value◼ Goodwill◼ Minority interests
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Deemed cost of PPEand investment propertychoices
◼ Fair value at transition date◼ Previous GAAP revaluation◼ Previous GAAP cost◼ Subject to impairment testing in
subsequent years
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Employee benefits
◼ Actuarial gains/losses◼ IAS 19◼ Recognition election
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Cumulativetranslation differences
◼ IAS 21 choice:◼ Separate◼ If not= $ 0◼ Subsequent
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Compoundfinancial instruments
◼ IAS 32
◼ Election:◼ Not split equity and interest
components◼ Condition:
Liability component not outstanding at transition date
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Items of subsidiaries,associates, and joint ventures
◼ Consistent reporting◼ Timing
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No choice under IFRS #1
◼ “Re-recognition”◼ Hedge◼ Estimates
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Presentation
1. Full set of restated financial statements◼ Balance sheet◼ Income statement◼ Cash flow statement◼ Statement of changes in shareholders’
equity
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Presentation
2. Notes3. Accounting policies
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First time required disclosures
◼ One year of comparative (2 years)◼ Explanation of effect of transition on the
financial statements
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First time required disclosures
◼ PPE◼ Investment properties◼ Interim reports following same rules
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First time required disclosures
◼ Extraordinary◼ Acquisitions and disposals◼ Significant cash not available for use
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First timerecommended disclosures
◼ Unused borrowing facilities◼ Operating capacity cash flow ◼ Segment reporting
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GAAP
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More than one
◼ For private enterprises
GAAP
IFRS
Cost/benefit decision
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The plan
❑ Intention
❑ 5-year evaluation
❑ IFRS for updating GAAP
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Private enterprises
Choose IFRS:
IPO
Acquisition target
Equity investor
IFRS parent
IFRS subsidiary
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“Callable” loan
Current assets and current liabilities
Option of the holder
Management's expectations
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“Callable” loans
Current classifications Useful Long-term arrangement Expanded notes
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Asset retirement obligations
Fair value nil? Example
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Asset retirement obligations
Best estimate
Uncertainties
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Financial instruments
❑ Amortized cost
❑ Fair value
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Development costs
Capitalized or expensed
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Employee future benefits
Pension obligations
Opening retained earnings
Revision
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Goodwill
Event-driven
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Stock-based compensation
Probability/volatility
Minimum and zero volatility
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What has NOT changed
Inventory
PPE
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What has NOT changed
Disposals
Discontinued operations
Tax
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What has NOT changed
Non-monetary transactions
Leases
Subsequent events
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What we are saying goodbye to…
Differential
Segment
Interim
Future oriented
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Considerations
Update to fair value
Current value
Depreciation
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Intended benefits of newGAAP statements
Credibility
Goal
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Going forward
New IFRS
Difference reduced
Not-for-profit
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Summary
Single opportunity only in adoption year
Understand implications of choices
Plan accordingly
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Practice Case
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Conversion of
Financial Statements
from GAAP to IFRS
