McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.






Current Liabilities
Provisions, Contingent Liabilities, and Contingent Assets
Employee Benefits
Share-Based Payment
Income Taxes


Revenue Recognition
Financial Instruments
5-2

1.
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.
2.
Explain and analyze the effect of major differences between IFRS and U.S. GAAP related to the reporting of current liabilities, provisions, employee benefits, sharebased payment, income taxes, revenue, and financial instruments.
5-3



Requires liabilities to be classified as current or noncurrent
Current:
 Expects to settle in its normal business cycle
 Holds primarily for the purpose of trading
 Expects to settle within 12 months of the balance sheet date
 Does not have the right to defer until 12 months after the balance sheet date
Learning Objective 1
5-4

 Refinanced short-term debt– only long-term if completed prior to balance sheet date vs. U.S. GAAP which allows long-term if an agreement has been reached prior to balance sheet date, even if not completed by then.
 Accounts payable on demand due to violation of debt covenants— must be current unless lender issues waiver of at least 12 months by balance sheet date. The waiver must be obtained, under U.S.
GAAP, by annual report issuance date.
 Bank overdrafts—netted against cash if an integral part of cash management—otherwise current liabilities. U.S. GAAP always treats as current liabilities.
Learning Objective 2
5-5

 Liabilities and assets of uncertain timing, amount, or existence.
 Onerous contracts and restructuring costs.
 Examples of environmental costs and nuclear decommissioning costs.
Learning Objective 1
5-6

 Contingent liability is either:
 Possible obligation from past events to be confirmed by presence or absence of future event OR
 Present obligation not recognized because no probable outflow of resources or amount can’t be measured reliably
Learning Objective 1
5-7

 Contingent liability is not recognized on balance sheet while a provision is.
 Provision is a liability of uncertain timing or amount:
 Present legal or constructive obligation resulting from past event
(constructive—e.g. manufacturer announces will honor defunct retailer rebates).
 Probable (more likely than not) outflow of resources.
 Can be estimated reliably.
Learning Objective 1
5-8

 U.S. GAAP doesn’t recognize constructive obligations—only legal.
 For contingencies U.S. GAAP does not define probable, although research shows most accountants use 70%-90% probability. IAS 37 uses “more likely than not”, which implies a threshold of just over 50%.
Learning Objective 2
5-9

 Unavoidable costs of meeting the obligation exceed economic benefits to be realized.
 Recognize lower of cost of fulfillment or penalty from nonfulfillment.
 If onerous from entity's own action--no recognition until that action happens.
Learning Objective 1
5-10

 A program planned and controlled by management that materially changes either scope of business or manner in which business is conducted.
 Such as sale or termination of line of business, closure of location, change in management structure, material reorganization which changes nature and focus of operations.
 U.S. GAAP doesn’t allow restructuring provision until liability incurred, so may occur later than under IFRS.
Learning Objective 1, 2
5-11

 Probable asset arising from past events whose existence will be confirmed by occurrence or non-occurrence of future event.
 Don’t recognize—disclose when probable inflow of economic benefits.
 Recognize as asset when virtually certain.
 Earlier recognition of contingent asset and related gain than U.S.
GAAP, which generally requires realization before recognition.
Learning Objective 1, 2
5-12

 Criterion of “probable outflow of resources” for provision would be removed---i.e.—recognize as long as reasonably measurable.
 “Best estimate” rule would be replaced with liability measurement at what would be a rational expectation of payment to relieve present obligation---in many cases the present value of required resources.
Learning Objective 1
5-13

 Covers all forms of employee compensation and benefits other than share-based compensation (e.g. stock options).
 Four types:
 Short-term (compensated absences and bonuses).
 Post-employment ( pensions, medical benefits, etc.).
 Other long-term benefits (deferred compensation and disability).
 Termination benefits (severance and early retirement).
Learning Objective 1
5-14

 Recognize expense and liability at time services provided— undiscounted.
 Accrue compensated absences (sick/vacation pay) only if accumulate over time and can be carried over—otherwise expense as incurred.
 Profit sharing and bonus plans—accrue only if legal or constructive obligation from past events and can be reasonably measured or estimated.
Learning Objective 1
5-15

 Distinguishes between defined benefit and defined contribution plans.
 Defined contribution—accrue when services rendered for amount required to be contributed and reduce liability when contributions are made.
 Defined benefit (and medical and life insurance benefits) more complicated issues---same or similar to U.S. GAAP:
 Calculation of net current pension expense or revenue.
 Calculation of net pension liability or asset for balance sheet.
Learning Objective 1, 2
5-16




Up to 6 components:
+ Current service cost + interest cost – expected return on plan assets +/-
actuarial gains and losses (recognized currently) + past service cost
(recognized in current period) +/- curtailment of settlement gains or losses.
Actuarial gains/losses—corridor approach used to smooth impact—recognize currently if > 10% of greater of present value of previous year end defined benefit obligation or fair value of previous year end plan assets.
Current actuarial g/l is recognizable amount divided by average remaining working lives of covered employees.
Learning Objective 1
5-17





Actuarial g/l re: inactive or retired employees expensed immediately.
Similar corridor approach under U.S. GAAP except amortize expense of inactive/retired employees over life expectancy.
Also permitted– any systematic method of amortization resulting in faster recognition of actuarial g/l (even immediate) if applied to both g/l consistently each period.
If recognize immediately—either in net income or separate component of shareholders’ equity (U.S. GAAP must report only in net income).
Learning Objective 1, 2
5-18




Past service cost—from improvement to benefits from defined benefit plan. PSC to retired employees and vested employees expensed immediately .
PSC to non-vested employees amortized straight-line over remaining vesting period.
U.S. GAAP says past service cost (called prior service cost) for retired employees amortized over remaining life expectancy while active employees amortized over remaining service period.
Learning Objective 1, 2
5-19

 Curtailments and settlements—when material reduction in covered employees (e.g. from closure or restructuring) or when future service by current employees will no longer qualify for pension benefits or only qualify for reduced pension benefits.
 Gains/losses recognized in income when entity is demonstrably committed and curtailment or settlement is announced.
 U.S. GAAP is different—losses generally recognized earlier than gains and curtailment gain not recognized until related employees terminate or the plan has been adopted.
Learning Objective 1, 2
5-20

 Can either be net liability or asset.
• + Present value of defined benefit obligation (PVDBO) – fair
value of plan assets +/- unrecognized actuarial gains and losses
– unrecognized past service cost.
• If result is negative (i.e. net asset) report the lesser of:
• PVDBO +/- unrecognized actuarial gains/losses – unrecognized past service costs – fair value of plan assets or
 Sum of unrecognized actuarial losses and past service cost and the present value of available plan refunds and available future reductions in employer contributions.
Learning Objective 1, 2
5-21

• PVDBO assumptions re: turnover, life expectancy and future salary levels.
• Discount rate refers to end of period yield on high-quality corporate bonds.
• U.S. GAAP recognizes difference between PVDBO and fair value of plan assets (i.e. “funded status”)—no adjustment for unrecognized actuarial g/l and psc—also no limitation on recognized amount of pension asset.
Learning Objective 1, 2
5-22


No separate guidance provided for medical and life insurance benefits.
 U.S. GAAP provides much more guidance re: assumptions and measurement for post-employment medical benefits.
 IFRS allows reference to U.S. GAAP guidance for postemployment measurement for other than pensions.
 IFRS says liability should be recognized for difference between present value of defined benefit obligation and fair value of any plan assets.
Learning Objective 1, 2
5-23


Recognize as expense and liability when demonstrable commitment to either terminating the employee or group of employees or providing termination benefits as a result of offer to encourage voluntary termination (based on # of affected employees expected to accept offer discounted to present value if benefits to be paid > 12 months after balance sheet date (U.S.
GAAP based on actual # who accept and no discounting required).
 U.S. GAAP—3 types of termination benefits—different timing recognition criteria for each:
 Recognize special termination benefits when accepted.
 Recognize contractual obligations when entitlement is probable.
 Termination benefits under restructuring recognized when management approves plan.
Learning Objective 1, 2
5-24

 IASB and FASB worked closely on standards.
 # of minor differences, but both standards substantially similar
 IFRS 2 sets out measurement principles and specific guidance for three types of transactions:
 Equity-settled—entity receives goods or services in exchange for equity instruments (e.g. stock options).
 Cash-settled—entity receives goods or services by incurring liability to supplier based on price or value of shares or other equity instruments (e.g. share appreciation rights).
 Choice of settlement of above two options.
Learning Objective 1, 2
5-25



Non-employees– if fair value of goods or services can’t be determined—use fair value of the equity instrument as of each date goods or services are received vs. U.S. GAAP where fair value of instrument used and measured at earlier of commitment for performance or when performance completed.
Employees—use fair value of instrument since fair value of services not reliably measurable—value at date of grant—need to estimate # of options expected to vest multiplied by fair value to determine compensation expense over vesting period (offset is paid-in capital).
 If single vesting date (cliff vesting)—straight-line over service period.
 If installments (graded vesting)—amortize each installment (tranche) over their vesting period.
 U.S. GAAP re: graded vesting—choice of accelerated or straight-line recognition.
Learning Objective 1, 2
5-26

 Modification of stock option plans—length or price may change—recognize, at minimum, original compensation cost at grant date.
 If fair value reduced---no change in compensation deduction.
 If fair value increased—increase compensation by the like amount.
 U.S. GAAP—if modifications—fair value at modification date determines compensation expense---no minimum compensation as under IFRS.
Learning Objective 1, 2
5-27

 Stock appreciation rights—recognize liability for future cash outflow at fair value of appreciation rights using an option pricing model.
 Remeasure at each balance sheet date until settled.
 U.S. GAAP—certain cash-settled payments classified as equity, whereas liability under IFRS.
Learning Objective 1, 2
5-28

 Treat as cash-settled only if present obligation to settle in cash—otherwise, treat as equity-settled.
 Remeasure at each balance sheet date until settled.
 If supplier can choose—entity has compound instrument with debt and equity components:
 Debt component measured at each balance sheet date (recognize change in value in income).
 Equity component remains in equity and if supplier chooses debt settlement in equity—transfer debt piece to equity.
Learning Objective 1
5-29

 Similar approach with U.S. GAAP.
 Both have deferred tax assets and liabilities re: timing differences and operating loss and tax credit carryovers.
 March 2009 IASB exposure draft “Income Tax” intended to eliminate differences with U.S. GAAP.
 Final standard replacing IAS 12 still not published as of
Spring 2011.
Learning Objective 1, 2
5-30

 Current and deferred taxes based on rates enacted or substantively enacted (when future steps can’t change outcome) by balance sheet date.
 U.S. GAAP must use actually enacted rates.
 To minimize double taxation some countries apply lower rate to distributed profits vs. retained profits.
Learning Objective 1, 2
5-31

 If future realization probable (undefined) vs. U.S. GAAP where realization takes place if more likely than not ---IAS 12 is more stringent if probability interpreted to mean greater than “more likely than not”.
 IAS 12 requires extensive disclosures, including current and deferred components of tax expense and relationship between hypothetical expense based on statutory vs. effective tax rates using 2 approaches (statutory rate in home country or weighted average statutory rate between jurisdictions).
Learning Objective 1, 2
5-32

 IFRS can cause temporary differences not existing under
U.S. GAAP (e.g. revaluation model for p, p & e under IAS 16).
 Differences in impairment standards.
 Under U.S. GAAP—deferred tax assets and liabilities current or non-current based on underlying asset or liability or, if for loss or credit carryforwards, timing of expected realization.
 IAS 1, Presentation of Financial Statements”—only noncurrent.
Learning Objective 1, 2
5-33

 Single standard covering most revenues (sale of goods, rendering of services, interest, royalties and dividends).
 U.S. GAAP has no single standard—instead over 200 different authoritative pronouncements, so difficult to compare IAS 18 and U.S. GAAP .
 Revenue must be measured at fair value of consideration received or receivable.
 May need to split transaction into multiple elements (e.g. sale of software and maintenance contract) or may need to combine multiple transactions into one for true economic substance.
Learning Objective 1, 2
5-34

•
•
•
•
•
Transfer of significant risks and rewards to buyer (IAS has various examples of how seller may retain risks).
No effective control maintained or management involvement.
Can measure revenue reliably.
Probable future economic benefits flow to seller.
Selling costs can be measured reliably.




Estimate reliably amount of revenue, costs incurred or to be incurred, and stage of completion (see IAS 11, Construction Contracts, which can also apply to service contracts).
Probable benefits will flow to enterprise.
U.S. GAAP doesn’t allow percentage-of-completion for service contracts.
If outcome can’t be measured reliably, only estimate revenue to extent expenses are probably recoverable—otherwise, recognize only expense and not revenue.
Learning Objective 1, 2
5-35

(if reliably measurable)



Interest recognized on effective yield basis.
Royalties recognized on accrual basis based on relevant agreement.
Dividends recognized when shareholder’s right to receive payment is established.
Exchange of Goods or Services—no gain or loss if similar—if dissimilar—recognize fair value of what is received adjusted for cash paid or received
Learning Objective 1
5-36




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.
Learning Objective 1, 2
5-37




IAS 32, Financial Instruments: Presentation.
IAS 39, Financial Instruments: Recognition and Measurement.
IFRS 7, Financial Instruments: Disclosure.
Also—IFRS 9, Financial Instruments—issued in November 2009 to replace IAS 39—effective November 2013
 IAS 32 says 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.
Learning Objective 1
5-38

(continued)
 Financial asset (e.g. cash, receivables, loans to others, etc.):
 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 the equity’s own equity instruments and is not classified as an equity instrument of the entity
 Financial liability (e.g. payables, loans from other entities, bonds, etc.):
 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 .
Learning Objective 1
5-39

(continued)
 Equity instrument—any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.
 Both a liability and equity element (e.g. convertible bond).
 Split accounting required using with and without method.
Learning Objective 1
5-40



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)
 Financial liabilities measured at amortized cost


Initial—fair value (normally = amount paid or received).
Subsequent—cost, amortized cost, or fair value.
Learning Objective 1
5-41