IFRS: Current Liabilities

Current Liabilities

• These are liabilities a company expects to settle in its normal operating cycle
• These are liabilities a company holds primarily for trading purposes
• These are liabilities a company expects to settle within 12 months of the balance sheet date
• The company doesn't have the right to defer settlement beyond 12 months after the balance sheet date

Differences in IFRS and U.S. GAAP

• Refinanced Short-Term Debt:
  • IFRS: Long-term debt if refinanced before the balance sheet date
  • U.S. GAAP: Long-term if refinancing is agreed to before the balance sheet issuance
• Accounts Payable on Demand Due to Violation of Debt Covenants:
  • IFRS: Classified as current, unless the lender issues a waiver of 12 months by the balance sheet date
  • U.S. GAAP: Classified as current, unless the lender issues a waiver obtained by the annual report issuance date
• Bank Overdrafts:
  • IFRS: Usually short term, but can be long-term in some situations
  • U.S. GAAP: Always treated as current liabilities

Provisions, Contingent Liabilities, and Contingent Assets

• IAS 37 provides guidance for reporting liabilities, assets of uncertain timing, amount, or existence, onerous contracts, restructuring costs, environmental costs, and nuclear decommissioning costs

Contingent Liabilities and Provisions

• A contingent liability isn't reported on the balance sheet
• Provision: A liability with uncertain timing or amount and is recognized on the balance sheet when there's a present obligation from past events, a probable outflow of resources, and a reliable estimate of the obligation can be made
• A constructive obligation exists when a company indicates acceptance of certain responsibilities through past actions or current statements, creating a valid expectation from other parties
• U.S. GAAP doesn't include the concept of a constructive obligation
• Contingent liabilities are defined in IAS 37 as possible obligations from past events that will be confirmed by the occurrence or nonoccurrence of a future event
• A present obligation isn't recognized if an outflow of resources isn't probable or the amount can't be measured reliably
• Under U.S. GAAP, a contingent liability is disclosed if an outflow is possible and recognized if an outflow of resources is probable
• Probable means:
  • U.S. GAAP: 70-90%
  • IFRS: "More likely than not," implying just over 50%
• IAS 37 provides guidance for measuring a provision at the best estimate of the expenditure required to settle the present obligation at the balance sheet date and the best estimate is the probability-weighted expected value
• Provisions must be discounted to present value
• Under U.S. GAAP, provisions are recognized at the low end of the range of possible amounts and allows discounting a recognized contingent liability if payment amounts and timing are fixed or reliably determinable
• A provision is reversed when the outflow of resources is no longer probable
• IFRS permits omitting disclosures if they could seriously prejudice the enterprise's position in a dispute, unlike U.S. GAAP

Onerous Contract

• Onerous contract: Contract where unavoidable costs exceed the economic benefits
• Recognition of expected future general operating losses is not allowed
• Recognize a provision for the lower of the cost of fulfillment and penalty from nonfulfillment
• If a contract becomes onerous from the entity's action, the provision isn't recognized until that action occurs

Restructuring

• Program that is planned and managed affecting business scope or manner
• This includes the sale/termination of a business line, closure of locations, management structure change, or fundamental reorganization
• Under IAS 37, a restructuring provision is recognized when:
  • There is a detailed formal plan
  • A valid expectation the plan will be carried out
  • The cost is reasonably estimable and the time period is reasonable
• U.S. GAAP doesn't allow recognition of a restructuring provision until a liability is incurred
• IFRS most likely shows loss earlier
• Contingent assets are not on the balance sheet.

Contingent Asset

• Contingent asset: A probable asset from past events, confirmed only by the occurrence or nonoccurrence of a future event
• These assets include assets sold with a variable return date, debt instruments with variable interest rates and leaseholds on land/building with variable rental rates
• Contingent Assets are not recognized under IFRS but should be disclosed if inflow of economic benefits is probable.
• IFRS recognizes the asset if income realization is virtually certain, allowing earlier recognition
• Under U.S. GAAP, the asset should be realized before it can be recognized

Employee Benefits - IAS 19

• Covers all forms of compensation and benefits except share-based compensation
• Types:
  • Short-term benefits: compensated absences and bonuses
  • Post-employment: pensions, medical benefits
  • Other long-term benefits: deferred compensation, disability
  • Termination benefits: severance pay, early retirement

Short-term Benefits

• Employers recognize an expense and liability when the employee provides services and the amount is undiscounted
• Compensated absences include sick pay and vacation pay
• For short-term compensated absences, amounts are accrued only if they accumulate and can be carried forward
• Expenses/liabilities for non-accumulating compensated balances are recognized only when the absence occurs
• For profit-sharing and bonus plans, expense and liability are accrued if there's a legal/constructive obligation from past events which can be reliably estimated

Post-Employment Benefits

• Distinguishes between:
  • Defined contribution plans: Amount is based on contributions and investment performance. Employers accrue expense/liability as service is rendered and reduce liability when contributions are made
  • Defined benefit pension plans: Amount is based on salary/length of service
• Issues include calculating net defined benefit liability/asset (present value of defined benefit obligation - fair value of plan assets, where PVDBO > FVPA = deficit, FVPA > PVDBO = surplus)
• Calculate the defined benefit cost (current service cost, past service costs, gains/losses on settlements, net interest on the net defined benefit liability/asset, and other comprehensive income)
• IAS 19 doesn't provide separate guidance for other post-employment benefits
• U.S. GAAP offers more guidance for measuring post-employment medical benefits
• Companies using IFRS may use U.S. GAAP guidance as reference

Other Long-Term Employee Benefits

• The liability should be the difference between present value of the defined benefit obligation and the fair value of plan assets, if any

Share-Based Payment - IFRS 2

• Sets out measurement principles/requirements for three types of transactions:
  • Equity-settled
  • Cash-settled
  • Choice-of-settlement
• Under IFRS 2 and U.S. GAAP are substantially similar

Equity-Settled Share-Based Payments to Non-Employees

• IFRS Measurement:
  • Fair value of goods/services if reliably determined
  • If not, fair value of equity instruments
• U.S. GAAP Measurement:
  • Fair value of equity instruments at the earlier of the commitment date or performance completion

Share-Based Payments to Employees

• Measured at the fair value of the equity instruments, considering vesting conditions and recognized as compensation expense over the vesting period
• The estimate of options expected to vest should be revised throughout the period
• Recognition of associated compensation expense is on a straight-line basis over the service period, or amortizing each installment over its vesting period for graded vesting
• U.S. GAAP allows a choice of accelerated or straight-line recognition

Modification of Stock Option Plans

• Modification is when the terms and conditions of equity instruments are changed
• If modified, recognize at least the original compensation cost at the grant date
• Types of modification:
  • Length of vesting period
  • Vesting conditions
  • Exercise price
• Result of fair value change: If the fair value increases, increase compensation cost by the same amount; if the fair value decreases, no change in compensation cost is deducted
• Under U.S. GAAP, fair value determines compensation expense, unlike IFRS, where there's no minimum compensation

Cash Settled

• Cash payment when the stock price exceeds a predetermined level
• Recognize fair value as a liability and expense using an option-pricing model and remeasure at each balance sheet date, where the change in fair value goes to net income
• Under U.S. GAAP, payments can be classified as equity
• Under IFRS, payments are classified as a liability

Choice of Settlement

• Allows the entity to choose between equity and cash settlement
• If there is an obligation to settle with cash, treat as cash-settled.
• If the obligation is settled with equity, treat as equity-settled.
• Treat as a compound financial instrument when the supplier chooses between equity settlement or cash settlement.
• The fair value splits into separate debt and equity components
• The debt component must be remeasured at fair value for every balance sheet date, with the change in fair value reflected in net income
• If the supplier chooses cash:
  • The cash payment is applied against the debt component only
  • The equity component remains in equity
• If the supplier chooses equity:
  • The debt component (liability) is transferred to equity

Income Taxes - IAS 12

• IAS 12 and U.S. GAAP take a similar approach
• It adopts an asset-and-liability approach for deferred tax assets/liabilities

Tax Laws and Rates

• Under IFRS, current and deferred taxes are measured based on enacted or substantively enacted tax laws and rates
• Under U.S. GAAP, enacted rates are used
• To minimize double taxation of corporate dividends, a lower tax rate is applied to profits distributed to shareholders

Recognition of Deferred Tax Asset

• Under IFRS, a deferred tax asset is recognized if future realization is probable, and IAS 12 provides a more stringent threshold
• Under U.S. GAAP, recognize if realization is "more likely than not."
• "Probable" is a higher threshold than "more likely than not.”

Disclosures

• IFRS requires extensive disclosures of tax expense and explanation of hypothetical expense based on 2 approaches:
  • Compare statutory tax expense in the home country and effective tax expense
  • Compare weighted-average statutory tax rate across jurisdictions and tax expense based on the effective tax rate

Financial Statement Presentation

• Under U.S. GAAP, deferred tax assets are classified as current or noncurrent based on the related asset or liability, they can be tax losses or credit carryforwards
• IAS 1 stipulates that deferred taxes may only be classified as noncurrent

Revenue Recognition - IFRS 15

• One of the most significant examples of cross-border cooperation in accounting standard-setting
• Steps:
  1. Identify the contract with a customer
  2. Identify the separate performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to performance obligations
  5. Recognize revenue when each performance obligation is satisfied
• Shift from the evaluation of the risk and rewards of ownership to the transferal of control

Bill-and-Hold Sales

• The seller segregates inventory for a customer but maintains physical possession and bills the customer as if delivery has occurred
• Relevant questions for seeing if the sale has been performed or not:
  1. Has the product been identified as belonging to the customer?
  2. Is the product ready for shipment?
  3. Can the seller use or reallocate the product?
  4. Is there a substantive business reason for the arrangement?

Customer Loyalty Programs

• Award credits should be treated as a separate component of the sales transaction
• Revenue is allocated between award credits (liability) and other components based on fair value and when credit is used, transfer from liability to revenue

Financial Instruments

• 3 standards
  • IAS 32: Financial Instruments (Presentation)
  • IAS 7: Financial Instruments (Disclosure)
  • IFRS 9: Financial Instruments

Definitions

• IAS 32: A financial instrument is a contract that creates a financial asset for one entity and a financial liability or equity instrument for another
• A financial asset covers
  • Cash
  • A contractual right to receive cash or another financial asset or to exchange financial assets/liabilities under favorable conditions
  • Equity instrument of another entity
  • A contract settled in the entity's own equity instruments, not classified as an equity instrument of the entity
• Shares: Don't include investments under consolidation (no control) or accounted for under the equity method and must have less than significant influence
• A financial liability covers
  • A contractual obligation to deliver cash/assets, or exchange financial assets/liabilities under unfavorable conditions.
  • A contract settled in the entity's equity instruments
• Equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities

Exclusion to IAS 32 and IFRS 9

• Insurance contracts
• Employer's rights in employee benefit plans
• Share-based payment programs
• Transactions in the entity's own equity instruments (treasury stock)

Liability or Equity

• IAS 32 states financial instruments must be classified as liabilities, equity, or both
• If an equity instrument contains a contractual obligation classified as a financial liability, it's classified as a liability

Compound Financial Instruments

• When an instrument contains both a liability and equity element, it is split into 2 components (debt and equity)
• Method use to measure is with-and-without method for convertible instruments
  • Fair value of instrument with conversion feature
  • Fair value of instrument without conversion feature
  • The difference between the fair value as a whole and the amount determined for the liability component is allocated to the equity component

Classification and Measurement of Financial Assets/Liabilities

• Amortized Cost: Must pass two tests:
  • Business model: collect contractual cash flows
  • Contractual cash flow: results in interest or principal payments
• Financial Assets at Fair Value Through Other Comprehensive Income: requires same 2 tests
• Financial Assets at Fair Value Through Profit or Loss: assets not allocated to the other 2 categories

Impairment

• 3 stages:
  1. General approach: estimate the probability of loss over the next 12 months (receivables) and revenue is based on the loan’s gross value.
  2. Significant increases in credit risk: estimate the probability of loss over the loan’s remaining life and the revenue is based on the loan’s gross value
  3. Credit impairment: Treated as an impairment gain or loss. Revenue is based on the loan’s net value, subtracting the loan loss allowance

Derivatives

• Options, forwards, futures, and swaps, whose value changes with rates or other variables. IFRS 9 measures derivatives at fair value
  • If classified as a hedge, the change in value goes to other comprehensive income (OCI)
  • If not classified as a hedge, the change in value goes to income (P/L)
• Option contract: Agreement to buy/sell an asset at a predetermined price before/on a date. The buyer has the right but not the obligation
• Forward contract: Private agreement to buy/sell at a set price on a date
• Futures contract: Legal agreement to buy/sell at a predetermined price on a date
• Swap contract: Financial agreement to exchange cash flows over a period

Sales of Receivables

• Question of whether the sale is truly sold or simply collateral for a loan.
• If sold, remove receivables from books
• If collateral, show receivables and liability for loan
• Pass-through arrangement entails an entity retaining to collect cash flows from a receivable but obligated to transfer those cash flows to a third party
• To consider:
  • If the buyer collects the receivables → sold and remove from books
  • If the entity is prohibited from selling/pledging, it is collateral
  • If the entity must remit any cash flows, it is collateral

Leases - IFRS 16

• Contract conveying the right for a lessee to use an asset for a period in exchange for consideration
• IFRS 16 requires lessees to account for all leases using the finance lease model
• Signing a lease triggers recognition of a right-of-use asset which depreciates and a corresponding lease liability.

Disclosure and Presentation Standards

• Applies to presentation standards of:
  • Statement of cash flows

Statement of Cash Flows

• IAS 7 requirements:
  • Must be classified as operating, investing, or financing activities
  • Operating through direct/indirect method
  • Cash flows for interest, dividends, and income taxes must be separate
  • Interest/dividends paid: can be operating or financing
  • Interest/dividends received: can be operating or investing
  • Income taxes can be operating unless related to investing/financing
  • Noncash investing/financing are excluded and disclosed
  • Cash equivalents reconciled with the balance sheet
  • Distinction between bank borrowings and bank overdrafts
• Differences with U.S. GAAP:
  • U.S. GAAP classifies interest paid, received, and dividends received as operating
  • When using the indirect method, begin the reconciliation from net income
  • When using the direct method, present a reconciliation from net income to operating cash flows
• The cash/cash equivalents line item must reconcile with the balance sheet

Events After the Reporting Period - IAS 10

• Adjusting Events: Provide evidence of conditions existing at the end of the reporting period and must be recognized through adjusting statements
• Nonadjusting Events: Conditions arising after the balance sheet date but before statements are issued, these events are not recognized on statements, though the nature is disclosed

Accounting Policies, Changes in Accounting Estimates and Errors - IAS 8

• Accounting policies: Rules and guidelines for statements
• Hierarchy for selecting accounting policies:
  1. IASB Standard or Interpretation of the transaction/event
  2. IASB Standard or Interpretation of a similar transaction/event
  3. Definitions and measurement concepts
  4. Recent pronouncements from bodies that use a similar framework
• Changes in accounting policy: Allowed only when required by an IFRS or results in more relevant statements
• Changes in estimates: Should be handled prospectively
• Correction of errors: Errors should be corrected retrospectively by restating all prior reported accounts

Related Party Disclosures - IAS 24

• Transactions must be disclosed and parties are related if one party can control or exert influence

Earnings Per Share - IAS 33

• Basic/diluted earnings per share must be reported on the income statement

Interim Financial Reporting - IAS 34

• Interim periods should be treated as discrete reporting periods
• In Spain, there is no obligation to report Quarterly Statements to CNMV
• For Public Companies there's obligation to submit:
  • First half of the year: deadline 90 days
  • Second half of the year: deadline 90 days
  • If the Company has a qualification in the auditors' report, they have to be audited
• For Private Companies only Statutory Reports at year end (deadline 90 days)

Noncurrent Assets Held for Sale and Discounted Operations - IFRS 5

• Noncurrent assets for sale are shown separately
• Netting isn't allowed and is shown at the lower of carrying value or fair value minus costs to sell and are not depreciated

Operating Segments - IFRS 8

• Business components with reviewed operating results
• Reported if it meets any of 3 tests: revenue, profit/loss, or asset
• Disclosures must include assets capital expenditures, liabilities, revenues, income, and other accounts
• Revenue of all segments must be 75% of total revenues.