Fair Value
GAAP vs. IFRS
Convergence or Conversion of GAAPIFRS
 World is going towards one set of accounting
standards but is IFRS truly uniform?
 United States conceded that IFRS is more widely
used, so U.S. will change – but when?
 Canada changed as of January 1, 2011
 Securities and Exchange Commission:
Starting in 2010-11 voluntary adoption of IFRS by
U.S. Companies
Starting in 2014-15 mandatory adoption of IFRS by
all public companies – private companies will follow!
Problems with Convergence
Principles vs. Rules
Business complexity = complex rules
Will IFRS have to adopt ‘Rules’ over time?
What happens if our SEC disagrees with
IFRS?
Transition
Training of preparers – option for early
adoption by large companies
Training of auditors
Fair Value vs. Fair Market Value
There are real differences among:
Fair Market Value (not used for financial
reporting)
Fair Value – GAAP
Fair Value – IFRS
Difference in concept of Fair Value
between GAAP and IFRS has not been
resolved
Exit Value – GAAP Concept
Fair value is the price that would be
received to sell an asset or paid to
transfer a liability in an orderly transaction
between market participants at the
measurement date.
This concept works for financial
instruments and does not work for tangible
and intangible assets
Fair Value – IFRS Concept
Fair Value is the amount for which an
asset could be exchanged, a liability
settled, or an equity instrument granted
could be exchanged between
knowledgeable, willing parties in an arm’s
length transaction.
Exit Value
GAAP concept of valuing something at
what it could be sold for today, to a ‘market
participant’ works only if there is a market
with market participants
U.S. and EU experience recently with subprime securities indicates that often there
is no market, and no market participants
willing to make a market
Fair Value and Impairment:
Key Differences ISRF vs. GAAP
 Real Estate
 Investment property
 Agricultural/biological
 IFRS permits/requires periodic revaluation up or down
 U.S. GAAP absolutely prohibits write up
 In U.S. this is a one-way street. Can take impairment loss but never
an impairment gain – or even write back up to previous amount
IFRS Permits Revaluations
 A literal reading of IFRS suggests that if
they want to, companies can revalue other
assets – for example intangibles
Brand Names
Patents
 Will Canadian companies take advantage of
this?
Fair Value Option
Companies are permitted to revalue
LIABILITIES if they wish
Banks and financial institutions have had
to write down investments because of
credit problems in the economy
So if a company’s credit rating drops, they
can record a ‘GAIN’ which may offset the
Fair Value loss on the investments – Bear
Stearns example
Asset Impairment
 Impairment indicators are essentially the same
between GAAP and IFRS
 IFRS writes down to Fair Value when FV is less
than carrying value
 No intermediate cash flow test
 IFRS looks to the higher of:
Net selling price (exit value)
Value in Use (entity specific)
Research & Development
 ‘Research’ expensed in both systems
 ‘Development’ is capitalized in IFRS and
expensed in GAAP
 Basic question:
Is the true Fair Value of R&D properly
measured based on costs incurred?
Valuing Liabilities and
Contingencies
 Rules calling for what you could pay someone to
take on your liabilities makes no sense
 Should allow companies to determine the
Present Value or Expected Value of what they
anticipate paying to settle liabilities and
contingencies
 GAAP values contingencies only in a Business
Combination
Can We Value Contingencies?
Contingent payment in a Business
Combination
Settle Environmental Liabilities
‘Fair Value’ of lawsuits
Revenue Recognition
GAAP has over 200 items in the literature
IFRS is very general
Revenue Recognition is a big item at least
in the U.S.
FASB looks to ‘Fair Value’ as one way of
measuring Revenue Recognition.
Is There Such a Thing as
The Fair Value?
 The value of an asset depends on who is going
to use it, and for what purpose
 How can anyone write a set of rules that
provides ‘consistency’ among preparers and yet
reflects economic reality?
 FASB and IASB would like a “one size fits all”
solution in terms of defining Fair Value
Where Are We Going?
Recent problems in valuing subprime
assets will slow down move to increased
Fair Value
Convergence of IFRS and GAAP will be
much harder (and slower) than anticipated
LIFO problem
Different versions of IFRS
Demand for Fair Value by Security Analysts will
continue and even increase
Further Study
Using the Internet, compare some of the
Canadian GAAP with Canadian IFRS
From your textbook, find at least six
GAAP’s and revise them according to the
new Canadian IFRS