IFRS: Current Liabilities

Current Liabilities

• Liabilities include those a company expects to settle in its normal operating cycle
• Liabilities include those held primarily for trading purposes
• Liabilities include those expected to be settled within 12 months of the balance sheet date
• Liabilities include those without the right to defer settlement beyond 12 months after the balance sheet date

Differences in IFRS and U.S. GAAP

• IFRS treats refinanced short-term debt as long-term if refinanced prior to the balance sheet date
• U.S. GAAP treats refinanced short-term debt as long-term if refinancing is agreed prior to the balance sheet being issued
• For accounts payable on demand due to violation of debt covenants, IFRS considers them current unless the lender issued a waiver of 12 months by the balance sheet date
• Under U.S. GAAP, accounts payable on demand due to violation of debt covenants are considered current unless a lender issued waiver is obtained by the annual report issuance date
• Bank overdrafts are usually short term under IFRS, potentially long-term certain circumstances
• Bank overdrafts are always treated as current liabilities under U.S. GAAP

Provisions, Contingent Liabilities, and Contingent Assets

• IAS 37 provides guidance for reporting liabilities and assets with uncertain timing, amount, or existence
• IAS 37 also provides guidance for onerous contracts, restructuring costs, environmental costs, and nuclear decommissioning costs
• A contingent liability is not recognized on the balance sheet
• A provision is a liability of uncertain timing or amount
• A provision 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
• A constructive obligation exists when a company indicates acceptance of certain responsibilities through past actions or current statements, creating a valid expectation for other parties
• U.S. GAAP does not include the concept of a constructive obligation
• Contingent liabilities, as defined in IAS 37, include possible obligations from past events with existence confirmed by future events
• Contingent liabilities also include present obligations not recognized because an outflow of resources is not probable or the amount cannot be reliably measured
• 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 70-90% under U.S. GAAP
• Probable means "more likely than not" (just over 50%) under IFRS
• IAS 37 establishes guidance for measuring a provision at the best estimate of expenditure required to settle the present obligation at the balance sheet date
• The best estimate for measuring a provision 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 a range of possible amounts
• U.S. GAAP allows discounting of a recognized contingent liability when the amount and timing of payments are fixed or reliably determinable
• A provision is reversed when the outflow of resources is no longer probable
• IFRS can omit disclosures that "can be expected to prejudice seriously the position of the enterprise in a dispute with other parties"
• U.S. GAAP has no such exemption

Onerous Contract

• An onerous contract when unavoidable costs of meeting the obligation exceed the economic benefits expected from it
• 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 an entity's own action, provision is not recognized until that action happens

Restructuring

• Restructuring is a program planned and controlled by management, materially changing a business's scope or manner of operation
• Restructuring includes the sale or termination of a business line, closure of business locations, changes in management structure, and fundamental reorganizations
• A restructuring provision is recognized under IAS 37 when there's a detailed formal plan, a valid expectation that the plan will be carried out, and reasonable estimation of costs and timing
• U.S. GAAP doesn't allow recognition of a restructuring provision until a liability has been incurred
• IFRS are more likely to show loss earlier

Contingent Assets

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

Employee Benefits - IAS 19

• Employee benefits cover all forms of employee compensation and benefits other than share-based compensation
• Short-term benefits include compensated absences and bonuses
• Post-employment benefits include pensions, medical benefits, and other post-employment benefits
• Other long-term benefits include deferred compensation and disability benefits
• Termination benefits include severance pay and early retirement benefits
• For short-term benefits, an employer recognizes an expense and a liability when the employee provides services; the amount recognized is undiscounted
• Compensated absences include sick pay and vacation pay
• For short-term compensated absences, an amount is accrued when services are provided only if the compensated absences accumulate over time and can be carried forward to future period
• For non-accumulating compensating balances, an expense and liability are recognized only when the absence occurs
• An expense and liability are accrued for profit-sharing or bonus plans if the company has a present legal or constructive obligation as a result of past events and the amount is reliably estimated

Post-Employment Benefits

• Defined contribution plans are based on how much the employee and employer invest in the pension and how the investments perform
• Employers accrue an expense and lability at the time the employee renders the service
• Emploers reduce the liability when contributions are made in defined contribution plans
• Defined benefit pension plans are based on salary and length of time in the pension scheme
• Calculation of the net defined benefit liability (or asset) involves present value of the defined benefit obligation minus fair value of plan assets
• Deficit occurs when the present value of the defined benefit obligation is greater than the fair value of plan assets
• Surplus occurs when the fair value of plan assets is greater than the present value of the defined benefit obligation
• Calculation of the defined benefit cost involves current service cost, past service costs and gains/losses on settlements, net interest, and other comprehensive income
• IAS 19 does not provide separate guidance for other post-employment benefits
• U.S. GAAP provides more guidance for measurement of post-employment medical benefits
• Companies using IFRS may refer to U.S. GAAP guidance to identify an appropriate method

Other Long-Term Employee Benefits

• Liability should be recognized equal to the difference between the present value of the defined benefit obligation and the fair value of plan assets

Share-Based Payment - IFRS 2

• It sets out the measurement principles and specific requirements for 3 types of share-based payment transactions: equity-settled, cash-settled, and choice-of-settlement
• IFRS 2 and U.S. GAAP are substantially similar

Equity-Settled Share-Based Payments to Nonemployees

• IFRS Measurement: fair value of the goods or services (if reliably determined) or fair value of the equity instruments (if goods/services value isn't reliably determined)
• U.S. GAAP Measurement: fair value of the equity instruments at the earlier date of a commitment for performance or when performance is completed

Share-Based Payments to Employees

• Measured at the fair value of the equity instruments, considering vesting conditions
• Total compensation cost is recognized as compensation expense over the vesting period
• The estimate of options expected to vest should be revised throughout the vesting period
• Recognition of associated compensation expense is on a straight-line basis over the service period or amortizing each installment (or tranche) 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 under which equity instruments have been granted change
• If an entity modifies a stock option's terms and conditions, the entity has to recognize, at minimum, the original amount of compensation cost as measured at the grant date
• Types of modification include length of the vesting period, vesting conditions, and exercise price
• Result of fair value change: increase in fair value increases compensation cost by the same amount
• Result of fair value change: decrease in fair value means no change in compensation cost is deducted
• Under U.S. GAAP, the fair value determines compensation expense; unlike IFRS, there's no minimum compensation

Cash-Settled

• Cash payment occurs when the stock price increases above a predetermined level
• Recognize fair value as a liability and expense using an option-pricing model
• Until the liability is settled, it must be remeasured at each balance sheet date, and the change in fair value goes to net income
• Under U.S. GAAP, certain cash-settled payments classify as equity
• Under IFRS, certain cash-settled payments Classify as a liability

Choice-of-Settlement

• Choice-of-settlement allows the entity to choose between equity settlement and cash settlement
• If the entity has a present obligation to settle in cash, treat as cash-settled
• If the obligation is settled in equity, treat as equity-settled
• Treat the transaction as a compound financial instrument when the supplier chooses between equity 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 receives settlement in cash, the cash payment is applied only against the debt component. The equity component remains in equity
• If the supplier receives settlement in 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 that recognizes deferred tax assets and liabilities for temporary differences and for operating loss and tax credit carryforwards

Tax Laws and Rates

• Under IFRS, current and deferred taxes are measured on the basis of enacted (or substantively enacted) tax laws and rates
• Under U.S. GAAP, measurement of income taxes uses enacted tax laws and rates
• To minimize the double taxation of corporate dividends, apply a lower tax rate to profits distributed to shareholders

Recognition of Deferred Tax Asset

• Under IFRS, recognize a deferred tax asset if future realization of a tax benefit is probable, 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: comparing statutory tax expense vs effective tax expense, and comparing weighted-average statutory tax rate across jurisdictions vs tax expense based on effective tax rate

Financial Statement Presentation

• Under U.S. GAAP, deferred tax assets are classified as current or noncurrent based on the classification of the related asset or liability
• Based on the expected timing of realization, they can be tax losses or credit carryforwards
• IAS 1 stipulates that deferred taxes may not be classified as a current asset/liability, but only as noncurrent

Revenue Recognition - IFRS 15

• It is a significant example of cross-border cooperation in accounting standard-setting
• Steps in the recognition of revenue include identifying the contract with a customer, identifying the separate performance obligations in the contract, and determining the transaction price
• Revenue recognition steps include allocating the transaction price to the separate performance obligations and recognizing the revenue allocated to each performance obligation
• Shift from evaluating risks and rewards of ownership to transferring control

Bill-and-Hold Sales

• The seller segregates inventory for a customer but maintains physical possession of it
• The seller bills the customer and records the sale as if the physical inventory has been delivered
• Relevant questions to see if the sale has been performed are has the product been separately identifies as belonging to customer, is the product ready for shipment to customer, can the seller use the product or reallocate it to another customer, and Is there a substantive business reason for the bill-and-hold arrangement

Customer Loyalty Programs

• Under IFRS 15, award credits should be treated as a separately identifiable component of the sales transaction in which they are granted
• Revenue should be allocated between award credits (liability) and other components of the sale. The amount allocated to the award credits is based on their fair value
• When credit is used, transfer from liability to revenue

Financial Instruments

• It includes IAS 32, IAS 7 and IFRS 9

Definitions

• IAS 32: a financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instruments of another entity
• Financial assets are cash, a contractual right to receive cash, a contractual right to exchange financial assets/liabilities under potentially favorable conditions, and an equity instrument of another entity
• Shares do not include investments that are part of consolidation or accounted for under the equity method
• shares must have less than significant influence to be considered a financial instrument
• Financial liabilities are a contractual obligation to deliver cash, a contractual obligation to exchange financial assets/liabilities under potentially unfavorable conditions, or a contract that will be settled in the entity's own equity instruments
• Equity instruments are 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 and obligations under employee benefit plans, share-based payment programs, and transactions in the entity's own equity instruments (treasury stock)

Liability or Equity

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

Compound Financial Instruments

• When a financial instrument contains a liability element and an equity element, it should be split into 2 components
• The split is reported separately as part debt and part equity via "split accounting"
• MEASURE: with-and-without method for convertible instruments
• It includes the fair value of the financial instrument with and without the 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: 2 tests must be passed for assets to qualify for inclusion: the business model objective and contractual cash flow test
• Financial Assets at Fair Value Through Other Comprehensive Income and financial assets at fair value through profit or loss are other classifications

Impairment

• General approach estimates probability of loss over the next 12 months
• Significant increases in credit risk estimates the probability of loss over the loan's remaining life
• Credit impairment is treated as an impairment gain or loss

Derivatives

• Derivatives include options, forwards, futures and swaps whose value changes in response to a change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index, credit rating or other variable
• Under IFRS 9, derivatives are measured at fair value
• When classified as a hedge, change in value is to OCI; when not classified as a hedge, change in value goes to income
• Option contract agreement between 2 parties to buy or sell an asset at a predetermined price before/on a specific date; the buyer has the right but not the obligation to exercise the option
• Forward contract is a private agreement between 2 parties to buy/sell an asset at a set price on a specific future date
• Futures contract is a legal agreement to buy/sell an asset at a predetermined price on a future date
• Swap contract is a financial agreement between 2 parties to exchange cash flows/liabilities

Sales of Receivables

• Question as to whether the sale is truly sold or simply collateral for a loan
• Remove receivables from books when sold
• Show receivables and liability for loan when collateral
• A pass-through arrangement exists when an entity retains the right to collect cash flows from a receivable but is obligated to transfer those cash flows to a third party

Leases - IFRS 16

• The contract conveys to a lessee the right to use an asset for a period of time in exchange for consideration paid to the asset's owner
• IFRS 16 requires lessees to account for virtually all leases using the finance lease model
• The financial lease model triggers balance sheet recognition of a right-of-use asset and a corresponding lease liability

Disclosure and Presentation Standards: Statement of Cash Flows

• IAS 7 requires activities to be classified as relating to operating, investing or financing activities
• Operating through direct or indirect method; no reconciliation required with direct method
• Cash flows related to interest, dividends and income taxes must be reported separately
• Interest and dividends paid can be classified as operating or financing
• Interest and dividends received can be classified as operating or investing
• Income taxes are classified as operating unless specific to investing or financing activities
• Noncash investing and financing are excluded but disclosed elsewhere within the financial statements
• Cash and cash equivalents reconciled with the balance sheet but need not agree with a single line item on the balance sheet
• There is a distinction between bank borrowings and bank overdrafts; bank overdrafts may be considered reduction of cash or financing activity.
• U.S. GAAP- Interest paid, interest received and dividends received are all classified as operating cash flows
• U.S. GAAP- Dividends paid are classified as financing cash flows
• When using the indirect method, the reconciliation from income to cash flows must begin with net income

IAS 10 - Events After the Reporting Period

• Adjusting events provide evidence of conditions that already existed at the end of the reporting period
• Adjusting events must be recognized through adjustment of the financial statements
• Nonadjusting events conditions that arise after the balance sheet date before the statements have been issued
• Nonadjusting events are not recognized on financial statements, but disclosures are required

Accounting Policies, Changes , Accounting Estimates and Errors – IAS 8

• Accounting Policies- company's rules and guidelines for preparing financial statements
• Hierarchy of authoritative pronouncements followed in selecting accounting policies to apply to a specific transaction or event

IAS 24 - Related Party Disclosures

• Transactions between related parties must be disclosed in the notes to financial statements

Earnings per Share - IAS 33

• Basic and diluted earnings per share must be reported on the face of the income statement

Interim Financial Reporting - IAS 34

• The standard defines the minimum content to be included in interim statements as required

Noncurrent Assets Held For Sale and Discounted Operations – IFRS 5

• Noncurrent assets held for sale are shown separately on balance sheet
• IAS 5 ensures netting is not allowed
• The regulation shows assets at the lower of either carrying value or the fair value minus costs to sell
• Noncurrent assets are not depreciated

Operating Segments - IFRS 8

• They are components of a business that generate revenues and expenses, whose operating results are regularly reviewed by the chief operating officer, and that has separate financial information available
• An operating segment is separately reported if it meets any of 3 quantitative tests: Revenue, Profit or loss and Asset tests
• Disclosures required for each operating segment include assets, capital expenditures, liabilities, profit or loss and their following components (external revenues, intercompany revenues, interest income and expense, depreciation and amortization, equity method income, income tax expense, and noncash expenses)
• Revenue of all segments must be at least 75% of total revenues and additional operating segments must be reported separately