Long Term Liabilities under
US Generally Accepted Accounting
Principles vs. International Financing
Reporting Standards
Rebecca Fay
Julia Makarieva
Brenna Palazzo
The Fundamental Differences
US GAAP
– generally rules based
– more conservative
IFRS
– generally principles based
Bonds Payable
• Bonds based on the underlying debt
instrument
• Bonds recorded at present value of future
interest and principal payments
• Discount and premiums are amortized
throughout the useful life of the bond using
the effective-interest method
(440-10, IAS 37)
Discounts and Premiums
US GAAP
IFRS
– Discounts recorded
separately
– Discounts included directly in
carrying value of bond
– Premiums recorded
separately
– Premiums included directly in
carrying value of bonds
(440-10)
(IAS 37)
Long Term Notes Payable
US GAAP
•
• discounts and
premiums are
recorded
separately
(440-10)
•
•
IFRS
Notes recorded
at present value
of Future
Interest and
Principle
Payment
Discounts and
premiums
amortized over
term of note
using effective
interest method
Over one year,
long term
•
discounts and
premiums are
included directly in
the carrying amount
(IAS 37)
Issue Costs
US GAAP
•
• Recorded as
deferred
charges
•
(440-10)
IFRS
Direct and
incremental
costs related to
the issuance of
debt are not
expensed
Internal costs
generally
excluded from
consideration of
capitalization
•
•
Transaction Costs
Directly reduce
carrying value
(IAS 37)
Debt Modification and Extinguishment
• Debt modified when there is a non-substantial
modification of terms
• Modifications should be accounted for
prospectively
• If modification is substantial or debt is
discharged, debt is extinguished and liability
derecognized
• Difference between reacquisition price and
carrying amount should be recognized in income
(470-50, IAS 37)
Debt Modification and Extinguishment
US GAAP
– costs incurred are expensed as
incurred
– distinguishes treatment for a
significant debt modification
when the debtor is viable
– When non-viable, may be
accounted for as a troubleddebt restructuring
(470-50)
IFRS
– costs incurred for debt
modification directly reduce
the carrying value of the debt
and are amortized using
effective interest method
– troubled debt restructuringnot specifically addressed
– the treatment for a substantial
modification is the same as an
extinguishment
(IAS 37)
Troubled debt restructuring
Debtor may be relieved for part of all of his
obligations due to the financial hardships from
the transfer of assets or equity securities to the
creditor or through the modification of debt
Troubled Debt Restructuring
US GAAP
Transfer of Assets
– gain or loss recognized to the
extent the fair value of assets
transferred exceeds the amount
payable, including accrued
interest
Transfer of equity securities
– the difference between the fair
value of the equity and the
carrying amount of debt is
recognized as a gain or loss
(470-60)
IFRS
Transfer of Assets
– no gain or loss is recorded
– new effective-interest rate is
computed
Transfer of equity securities
– no gain or loss is recorded and
– new effective-interest rate is
computed
(IAS 37.72.83)
Potential Audit Problems-GAAP
Measurement of Contingencies
– If a range is given as an estimate…
• GAAP uses low end of range
• IFRS uses mid-point
– GAAP records a lower liability
• Conservatism
(450-20)
Potential Audit Problems-IFRS
Valuation of Bonds
– IFRS directly changes the carrying value of bonds for discounts and
premiums
– Discounts= understated debt
– Not full disclosure
(IAS 39, IAS 37)
Recognition of Contingencies
– IFRS requires “present obligation”
– Delays recognition of liabilities
– Not conservative
(IAS 37.86)
Recent Updates-GAAP
July 2010: FASB Exposure Draft, Disclosure of
Certain Loss Contingencies
– Provide more information to users
Project Postponed
(ASB 450, fasb.com)
Recent Updates-IFRS
• January 2010 IASB Exposure Draft, Measurement of
Liabilities in IAS 37
• February 2012: IASB Working Draft of IFRS Liabilities
– Cost of restructuring
– Specific requirements to measure liabilities
• Project postponed
(IFRS.com)
Sources
• http://www.pwc.com/en_US/us/issues/ifrsreporting/publications/assets/ifrs-and-us-gaap-similaritiesand-differences-2012.pdf
• http://ec.europa.eu/internal_market/accounting/docs/con
solidated/ias37_en.pdf
• http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_I
FRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec
%202011.pdf
• http://www.kpmg.com/Global/en/IssuesAndInsights/Articl
esPublications/IFRS-GAAP-comparisons/Documents/IFRScompared-to-US-GAAP-2012.pdf
• Academic Research Center: Long Term Liabilities. Earnst
and Young Foundation.