EnterprizeERP - Finance Transformation - IfRS Series US GAAP and IFRS - Series-2
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Transcript of EnterprizeERP - Finance Transformation - IfRS Series US GAAP and IFRS - Series-2
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Differences between
US GAAP and IFRS Series 2
www.Enterprizeerp.com
EnterprizeERP Consulting Services
IFRS Webinar Services - 102
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Slide | 2EnterprizeERP IFRS Web Series
Need for International standards
Growth of Capital markets Mobility of capital
FTSE (London Index) 55% foreign owned
10 years ago US owned more than 50% of theworlds equity today nearing 30%
China holding US Bonds
Need to reduce costs of consolidation Level the playing fieldaccounting arbitrage
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Balance Sheet Assets
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Assets
Inventories Marketable securities
Fixed Assets
Deferred Tax Assets Intangibles
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Slide | 5EnterprizeERP IFRS Web Series
IAS 2 - Inventory Valuation
Applies to RM,WIP and Finished goods Cost vs. Net Realizable value (NRV)
NRV Selling price less cost to complete and
costs to be incurred to make the sale Line by Line basis or related group in some
cases but not in aggregate
FIFO
Weighted Average
LIFO not permitted
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Difference in Valuation and treatment
US GAAP Lower of Cost or Market
(LCM)
Subsequent write up NOT
permissible
IFRS Lower of Cost or Net
Realizable Value (NRV)
Subsequent write up
permissible
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IAS 39 - Marketable Securities
Initially accounted for @ Cost Classified between
Held to Maturity (HTM)
Trading securities Available for sale (AFS)
Consider market value or amortized cost
based on category
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Held to Maturity (HTM)
Investments
Bonds and Fixed income securities positiveintent & ability to hold to maturity
Amortization run thru the P & L
Must evaluate for impairment Use effective interest rate
Under IFRS Impairment losses can be
reversed up to amount of the originalimpairment Not Permitted by US GAAP
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Trading Securities
Debt or Equity Held for sale in the shortterm
Includes hedges and derivatives
FMV and gains & losses run thru the P & L Similar in IFRS and US GAAP
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Available for Sale (AFS)
Debt or Equity that do not fall into the above 2categories
FMV
Effective 1/1/09 IFRS changed to recognizedgain or loss thru OCI except for impairment
losses (which is the current USG practice)
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IAS 16 Property, Plant and Eq.
Initially @ cost subsequent -choose FMV
(revaluations) or cost
If FMV (revaluations) is chosen should be used
for the entire class of assetsCannot cherry
pick
Revaluation surplus Stockholders Equity
Upward revaluations vs. downward revaluations
Deferred taxes on revaluations
Revaluations becoming relatively rare in practice
for public enterprises
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Depreciation methods
Straight line method
Units of Production
Diminishing balance method
Depreciable amount (Cost residual value)
Depreciation = Depreciable amount over the
useful life of asset
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Component Depreciation Required
Each material component with different useful
life.
Example: Airplane chassis, engine, and the
interior
Under IFRS -- Cost of a major inspection and
overhaul of the engine is capitalized the oldcomponent asset derecognized and the new
asset recognized
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Component depreciation example
Land and Building with different useful lives
Land Infinite
Roof 25 years
Elevators 20 yearsFixtures 10 years
Remainder of Building 30 years
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Impairment of Assets
US GAAP
Carrying Amount > undiscounted future cashflows
Carrying Amount - (FV or PV of future cash flows)
IFRS Carrying Amount (CA) > Recoverable Amount
(RA)
Impairment loss = CA-RA
Recoverable Amount greater of
Selling price
Value in use (PV of future cash flows)
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Reversal of prior Impairment
US GAAP Prohibited
IFRS Allowed except for Goodwill and other
indefinite lived intangible assets
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IAS 12 Income taxes
Deferred Tax Asset (DTA)
IFRS
DTA recorded only if it is probable (defined as
more likely than not) that sufficient future profit
will be available to utilize DTA
US GAAP
Recognized in full
Allowance required if it is more likely than not
that it will not be fully realized
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Balance Sheet
Liabilities & Equity
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Liabilities
Debt covenant violations
Provisions and contingencies
Deferred taxes
Convertible debt
Employee Benefits
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Debt covenant violations at the B/S date-
IAS 1.72 (b)
US GAAP If an entity obtains a waiver
of a debt covenant violationany time prior to issuanceof the F/S, the debt is NOT
reclassified to current as ofthe B/S date.
IFRS If the debt covenant
violation existed at the B/S
date, which results in the
debt being callable, thedebt is reclassified to
current as of the B/S date.
A subsequently obtained
waiver does not change the
classification.
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Provisions
Defined as:
A Present Obligation of a past event (legal
obligation or constructive obligation)
Outflow of resources to settle the obligation(cash or other assets)
Reliable estimate can be made of the amount
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IAS 37 Provisions
USG Present obligation resulting
from past event andoutflow of resourcesreasonably estimatable
Usually 75% probable
IFRS IFRS results in higher
liability being recorded
Usually >50% probable
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Contingencies
A contingent asset or liability is disclosed in
the F/S rather than being recorded in the
statement of Financial position, except in
business combinations
If the outflow is thought to be remote No
disclose required
USGLow end of range
IFRS Consider the mid-point
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Measurement
Management (judgment) best estimate of
likely outcome
Consider the probability of outcome
Legal guidance (lawsuits)
Risk and uncertainties
Use of experts (e.g. environment clean up)
Past experience or similar circumstances
(warranty provision e.g. 1% of all sales)
Note: Principles-based system in action
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Deferred Taxes
US GAAP Tax rates based on enacted
rates
Classified based on the
original asset/liability
IFRS Substantially enacted rates
in the year when the
difference will reverse
Always recorded as Non-Current
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Tax rates substantively enacted
IFRS allows to use tax rates that are
substantively enacted
e.g. In Dec congress has proposed 40% tax instead
of 35% and it is highly probable that it will pass
Under IFRS one could use 40%
US GAAP it would be 35%
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Convertible Debt
US GAAP Record as a liability unless
convertible portion can be
split up
e.g. Bonds with detachablewarrants
IFRS Liability @ FMV and
remainder considered
Equity
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Pension
US GAAP Minimum pension liability
required if underfunded
IFRS No such requirement
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Employee Stock compensation
US GAAP Awards with graded vesting
can be amortized on
straight line or accelerated
basis
IFRS Awards with graded vesting
are required to be
amortized on accelerated
basis (awards for each
vesting date is considered a
separate tranche)
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IFRS 2 Share-based Payments
Receipt of goods/services in exchange for
shares
Equity-settled shares issued
Cash-settled pays cash =share price = to the FV
of goods/services received
Cash Supplier has a choice to request Cash or
equivalent shares
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Long term Completed Contract method
US GAAP Allowed
IFRS Prohibited
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Contact Details
2262, Petworth Court, Unit 202 C
Phone : 1 (630) 649 9235, Fax : 1 (630) 689 9455
Ram RishiPartner - Americas
346 BALESTIER ROAD
#10-04 RITZ MANSION, SINGAPORE 329776
C: (+65) 91064170
Mangalam RamaswamyPartner Asia Pacific
2J,Suraj Tower, 128/A L B Road,
Thiruvanmiyur, Chennai-600041
C: [+91] [email protected]
Ramesh RamaswamyPartner India MENA