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Recognition*IFRS InsightsThe general concepts and principles used for revenue recognition are similar between IFRS and GAAP. Where they differ is in the details. As indicated in the chapter, GAAP provides specific guidance related to revenue recognition for many different industries. That is not the case for IFRS.RELEVANT FACTSThe IASB defines revenue to include both revenues and gains. GAAP provides separate definitions for revenues and gains.Revenue recognition fraud is a major issue in U.S. NEC financial reporting. The same situation occurs overseas as evidenced by revenue recognition breakdowns at Dutch software company Baan NV, Japanese electronics giant NEC, and Dutch grocer NEC.In general, the IFRS revenue recognition principle is based on the probability that the economic benefits associated with the transaction will flow to the company selling the goods, rendering the service, or receiving investment income. In addition, the revenues and costs must be capable of being measured reliably. GAAP uses concepts such as realized, realizable, and earned as a basis for revenue recognition.IFRS has one basic standard on revenue recognition—IAS 18. GAAP has numerous standards related to revenue recognition (by some counts over 100).Accounting for revenue provides a most fitting contrast of the principles-based (IFRS) and rules-based (GAAP) approaches. While both sides have their advocates, the IASB and the FASB have identified a number of areas for improvement in this area.Under IFRS, revenue should be measured at fair value of the consideration received or receivable. GAAP measures revenue based on the fair value of what is given up (goods or services) or the fair value of what is received—whichever is more clearly evident.In general, the accounting at point of sale is similar between IFRS and GAAP. As indicated earlier, GAAP often provides detailed guidance, such as in the accounting for right of return and multiple-deliverable arrangements.IFRS prohibits the use of the completed-contract method of accounting for long-term construction contracts (IAS 13). Companies must use the percentage-of-completion method. If revenues and costs are difficult to estimate, then companies recognize revenue only to the extent of the cost incurred—a cost-recovery (zero-profit) approach.In long-term construction contracts, IFRS requires recognition of a loss immediately if the overall contract is going to be unprofitable. In other words, GAAP and IFRS are the same regarding this issue.*IFRS InsightsThe major IFRS requirements related to accounting and reporting for inventories are found in IAS 2 (“Inventories”), IAS 18 (“Revenue”), and IAS 41 (“Agriculture”). In most cases, IFRS and U.S. GAAP are the same. The major differences are that IFRS prohibits the use of the LIFO cost flow assumption and records market in the lower-of-cost-or-market differently.RELEVANT FACTSThe requirements for accounting for and reporting inventories are more principles-based under IFRS. That is, U.S. GAAP provides more detailed guidelines in inventory accounting.Who owns the goods—goods in transit, consigned goods, special sales agreements—as well as the costs to include in inventory are essentially accounted for the same under IFRS and U.S. GAAP.A major difference between IFRS and U.S. GAAP relates to the LIFO cost flow assumption. U.S. GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO and average cost are the only two acceptable cost flow assumptions permitted under IFRS. Both sets of standards permit specific identification where appropriate.In the lower-of-cost-or-market test for inventory valuation, IFRS defines market is net realizable value. U.S. GAAP, on the other hand, defines market as replacement cost subject to the constraints of net realizable value (the ceiling) and net realizable value less a normal markup (the floor). That is, IFRS does not use a ceiling or a floor to determine market.Under U.S. GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be reported on the income statement. IFRS accounting for lower-or-cost-or-market is discussed more fully in the About the Numbers section.As indicated, IFRS requires both biological assets and agricultural produce at the point of harvest to be reported to net realizable value. U.S. GAAP does not require companies to account for all biological assets in the same way. Furthermore, these assets generally are not reported at net realizable value. Disclosure requirements also differ between the two sets of standards.*IFRS InsightsGAAP adheres to many of the same principles of IFRS in the accounting for property, plant, and equipment. Major differences relate to use of component depreciation, impairments, and revaluations.RELEVANT FACTSThe definition of property, plant, and equipment is essentially the same under GAAP and IFRS.Under both GAAP and IFRS, changes in depreciation method and changes in useful life are treated in the current and future periods. Prior periods are not affected. GAAP recently conformed to IFRS in this area.The accounting for plant asset disposals is the same under GAAP and IFRS.The accounting for the initial costs to acquire natural resources is similar under GAAP and IFRS.Under both GAAP and IFRS, interest costs incurred during construction must be capitalized. Recently, IFRS converged to GAAP.The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. This is the same framework used in IFRS.GAAP also views depreciation as allocation of cost over an asset’s life. GAAP permits the same depreciation methods (straight-line, diminishing-balance, units-of-production) as IFRS.IFRS requires component depreciation. Under GAAP, component depreciation is permitted but is rarely used.Under IFRS, companies can use either the historical cost model or the revaluation model. GAAP does not permit revaluations of property, plant, and equipment or mineral resources.In testing for impairments of long-lived assets, GAAP uses a two-step model to test for impairments (details of the GAAP impairment test is presented in the About the Numbers discussion). As long as future undiscounted cash flows exceed the carrying amount of the asset, no impairment is recorded. The IFRS impairment test is stricter. However, unlike GAAP, reversals of impairment losses are permitted.*IFRS InsightsThere are some significant differences between IFRS and GAAP in the accounting for both intangible assets and impairments. IFRS related to intangible assets is presented in IAS 38 (“Intangible Assets”). IFRS related to impairments is found in IAS 36 (“Impairment of Assets”).RELEVANT FACTSLike GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not financial instruments. In addition, under IFRS an intangible asset is identifiable. To be identifiable, an intangible asset must either be separable from the company (can be sold or transferred) or it arises from a contractual or legal right from which economic benefits will flow to the company. Fair value is used as the measurement basis for intangible assets under IFRS, if it is more clearly evident.As in GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and GAAP. Under IFRS, however, costs in the development phase are capitalized once technological feasibility (referred to as economic viability) is achieved.IFRS permits revaluation on limited-life intangible assets. Revaluations are not permitted for goodwill and other indefinite-life intangible assets.IFRS permits some capitalization of internally generated intangible assets (e.g., brand value) if it is probable there will be a future benefit and the amount can be reliably measured. GAAP requires expensing of all costs associated with internally generated intangibles.IFRS requires an impairment test at each reporting date for long-lived assets and intangibles and records’ an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value-in-use. Value-in-use is the future cash flows to be derived from the particular assets, discounted to present value. Under GAAP, impairment loss is measured as the excess of the carrying amount over the asset’s fair value.IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of limited-life intangibles. Under GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for the asset. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.With issuance of a recent converged statement on business combinations (IFRS 3 and SFAS No. 141—Revised), IFRS and GAAP are very similar for intangibles acquired in a business combination. That is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged. In addition, under both GAAP and IFRS, companies recognize acquired in-process research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably.*IFRS InsightsIFRS and GAAP have similar definitions for liabilities. IFRS related to reporting and recognition of liabilities is found in IAS 1 (“Presentation of Financial Statements”) and IAS 37 (“Provisions, Contingent Liabilities, and Contingent Assets”).RELEVANT FACTSSimilar to U.S. practice, IFRS requires that companies present current and non-current liabilities on the face of the statement of financial position (balance sheet), with current liabilities generally presented in order of liquidity. However, many companies using IFRS present non-current liabilities before current liabilities on the statement of financial position.The basic definition of a liability under GAAP and IFRS is very similar. In a more technical way, liabilities are defined by the IASB as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liabilities may be legally enforceable via a contract or law but need not be; that is, they can arise due to normal business practices or customs.IFRS requires that companies classify liabilities as current or non-current on the face of the statement of financial position (balance sheet), except in industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions).Under IFRS, the measurement of a provision related to a contingency is based on the best estimate of the expenditure required to settle the obligation. If a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the “mid-point” of the range is used to measure the liability. In GAAP, the minimum amount in a range is used.Both IFRS and GAAP prohibit the recognition of liabilities for future losses. However, IFRS permits recognition of a restructuring liability, once a company has committed to a restructuring plan. GAAP has additional criteria (i.e., related to communicating the plan to employees) before a restructuring liability can be established.IFRS and GAAP are similar in the treatment of asset retirement obligations (AROs). However, the recognition criteria for an ARO are more stringent under GAAP: The ARO is not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated.Under IFRS, short-term obligations expected to be refinanced can be classified as non-current if the refinancing is completed by the financial statement date. GAAP uses the date the financial statements are issued.IFRS uses the term provisions to refer to estimated liabilities. Under IFRS, contingencies are not recorded but are often disclosed. The accounting for provisions under IFRS and estimated liabilities under GAAP are very similar.GAAP uses the term “contingency” in a different way than IFRS. Contingent liabilities are not recognized in the financial statements under IFRS, whereas under GAAP a contingent liability is sometimes recognized. ................
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