Elective Proposal for Executive Programs, Sept 2009
Roman L. Weil
International Financial Reporting Standards (IFRS) for the non-Accounting Executive
In September 2008, the SEC announced a plan to allow, then, using a time schedule that
varies according to various parameters, to require U.S. corporations to switch from U.S.
GAAP to IFRS—International Financial Reporting Standards, as issued by the International Accounting Standards Board.
This (new) course will teach you the differences between these two bodies of authoritative guidance, as I think you need to understand them in order for you to be effective
executives. While I hope that the financial executives among you will find this helpful,
I’m designing the course for those whose only previous accounting teaching has been the
accounting courses you’ve had in the Executive Program.
I’ll be a bit flexible in the curriculum in the following sense. Had I proposed this course
a year ago, in October 2007, and offered it in September 2008, two things would have
been true.
•
I’d not have been able to anticipate the financial turmoil of the second
week of September 2008, and
•
You’d have wanted me to change the plans for the course to discuss the
accounting issues pertinent for the current situation, in particular
whether mark-to-market is part of the problem or part of the solution.
[I hope you understand by now why I think it is part of the solution but that, until the
FASB clarified the meaning of a fair value, the auditors, who don’t always have a good
grasp of economics, were implementing fair value guidance incorrectly.]
And I would have spent a day on these new issues. Similarly, I’ll be alert for any then
current events in September 2009, which you’ll want to understand.
I have attached a listing of differences between U.S. GAAP and IFRS that the next version of our textbook will contain. [XP-80 will use this textbook and will see this material
during their course.] I have keyed the topics to chapter numbers in the textbook that XP79 (and AXP and EXP used as well) used for Bus. 30800, FACMU 12th edition.
You will see that Bus 30800 did not cover all of these topics where there are differences,
so some of the instruction during this one-week course will treat the transactions and fundamentals of U.S.GAAP for the transactions before we examine the differences. Our
course will take the perspective of someone, such as you, who has learned accounting
first via U.S.GAAP and is now supplementing that education. If I were designing this
course two years from now, the course might start with a presumption that you’d studied
both sets of authoritative guidance, in parallel.
6-Oct-08
Elective Proposal for Executive Programs, Sept 2009
Roman L. Weil
International Financial Reporting Standards (IFRS) for the non-Accounting Executive
FACMU
12/e
Chapter
Differences Between U.S. GAAP and IFRS
Reporting
Topic
U.S. GAAP
IFRS
6
Revenue
recognition
Must have delivered a product or
service in return for net assets capable
of reasonably reliable measurement.
Over 200 documents provide industryspecific and transaction-specific
guidance.
One general standard and a few documents
with industry-specific guidance. For longterm contracts, use percentage-ofcompletion method if amounts are
estimable. Otherwise, use cost recovery
method. Cannot use completed contract
method.
7
Inventories and
cost of goods sold:
lower of cost or
market
Inventories: cost
flow
Measurement of market value uses a
combination of replacement cost and
net realizable values.
Measurement of market value uses net
realizable value.
Specific identification. FIFO, weighted
average, and LIFO cost flow
assumptions
Not permitted.
Specific identification. FIFO and weighted
average cost flow assumptions. LIFO not
permitted.
Permitted under certain conditions.
Recognize as an expense in the period
incurred.
Recognize research cost as an expense in
the period incurred. Capitalize
development costs and amortize them over
the expected period of benefit.
Recognize an impairment loss for the
excess of carrying value over recoverable
amount. Recoverable amount is larger of
the fair value less cost to sell and the value
in use. Can subsequently reverse the
impairment loss but not above acquisition
cost.
Recognize an impairment loss for the
excess of carrying value over recoverable
amount. Recoverable amount is larger of
the fair value less cost to sell and the value
in use. Can subsequently reverse the
impairment loss but not above acquisition
cost.
Recognize an impairment loss for the
excess of carrying value over recoverable
amount. Recoverable amount is the larger
of the fair value less cost to sell and the
value in use. Test these assets annually for
impairment losses and recoveries of
impairment losses.
7
8
8
Property, plant and
equipment:
revaluations above
acquisition cost
Research and
development cost
8
Property, plant and
equipment:
impairment loss
If carrying value exceeds undiscounted
cash flows value, then recognize an
impairment loss equal to the excess of
carrying value over fair value.
8
Intangible assets
with finite lives:
impairment loss
If undiscounted cash flows exceed
carrying value, then recognize an
impairment loss equal to the excess of
carrying value over fair value.
8
Intangible assets,
other than
goodwill, with
indefinite lives:
impairment loss
Recognize an impairment loss for the
excess of carrying value over fair
value.
6-Oct-08
Elective Proposal for Executive Programs, Sept 2009
Roman L. Weil
International Financial Reporting Standards (IFRS) for the non-Accounting Executive
8
Goodwill:
impairment loss
9
Contingent
obligations (U.S.
GAAP) and
Provisions
(IFRS)
9, 11
Step 1: Compare the carrying value
to the fair value of a reporting unit.
If the carrying value exceeds the
fair value, proceed to Step 2.
Step 2: Allocate the fair value of
the reporting unit to assets and
liabilities based on their fair values
and any excess to goodwill.
Recognize an impairment loss on
the goodwill if the carrying value
exceeds the allocated fair value.
Step 3: Test goodwill annually for
impairment loss or whenever a
goodwill impairment loss is
probable.
Recognize as liabilities if payment
is probable (probability usually
exceeds 80%). Measure at low end
of range if no one estimate is better
than any other.
Step 1: Compare the carrying value to
the recoverable amount for a cash
generating unit.
Step 2: Recognize an impairment loss
for any excess of carrying value over
recoverable amount of the cash
generating unit. First write down
goodwill and then allocate any
remaining loss to other assets based on
their relative recoverable amounts.
Step 3: Test goodwill annually for
impairment losses.
Recognize as liabilities if payment is
more likely than not (probability
exceeds 50%). Measure at the best
estimate of the amount to settle the
obligation.
Fair Value
Provides a hierarchy of
No specific measurement guidance.
measurement inputs from market
prices of identical items to other
observable inputs to
unobservable (entity-developed)
assumptions.
10
Leases
A lease is a capital lease if it
satisfies one of four conditions.
Otherwise it is an operating lease.
11
Consolidation of
joint ventures
Variable interest
entities (VIE) or
special purpose
entities (SPE):
consolidation
policy
Preferred stock
redeemable at the
option of the
preferred
shareholders
Convertible
bonds or
preferred stock
Not permitted. Firms must use the
equity method.
Primary beneficiary consolidates a
VIE.
11
12
12
Judgment required based on several
indicators to identify the entity that
enjoys the rewards and bears the risk
of leasing.
Firms have option to use proportionate
consolidation or the equity method.
Firm controlling a SPE consolidates it.
Classified between liabilities and
shareholders’ equity.
Classified as a liability.
Allocate issue price to bonds or
preferred stock and none to
conversion option.
Allocate issue price between the bonds
or preferred stock and the conversion
option.
Material above by J. Francis, K. Schipper, C.P. Stickney, and RL Weil copyright ©2008. Please do not reproduce without permission.
6-Oct-08