Transcript IFRS and Current Assets - Northern Arizona University

IFRS and Current Assets
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Comparing GAAP and IFRS Current Asset
Presentation
• US GAAP requires companies to list assets in order of
liquidity starting with Current Assets and followed by
Noncurrent Assets.
• Under IFRS order of liquidity is not specified.
– Entities can report assets and liabilities broadly without
separating current from noncurrent if they believe this is
reliable and more relevant.
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Specific Asset Treatment
• Cash – no substantive differences in the presentation
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Specific Asset Treatment continued
• Accounts Receivable under IFRS
– A/R recorded for events that create revenue but have not
been settled
– Trade receivables are generally distinguished from other
categories of receivables but this isn’t absolutely required.
– Bad debts usually recognized using the aging approach.
Companies cannot use direct write-off method.
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Sale of Receivables
• US GAAP sale of trade receivables without recourse
is generally treated as a sale if control is surrendered
with no continued involvement.
• Per SFAS No. 140 sales with recourse are treated as
sales if:
– Assets are transferred beyond the reach of the transferor
– Transferee can pledge or exchange the transferred assets
freely
– Transferor has not kept effective control such as with
required repurchase provisions
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Sale of Receivables continued
• Under IFRS factoring receivables without recourse
qualifies as a sale.
• Now factoring with recourse does not qualify as a
sale if there is no substantive risk assumed by the
“buyer” of the receivables.
– Management may interpret ‘substantive risk’ in a way
consistent with SFAS No. 140 but perhaps not.
– Another example of the use of professional judgment
under IFRS which may lead to different treatment than
with GAAP
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Inventories
• LIFO inventory costing is not allowed under IFRS
– FIFO and Weighted Average are the only allowable
methods
• Biological assets and agricultural produce are
valued at fair value less point of sale costs
• Thus inventories may be valued differently
with US GAAP than with IFRS
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Inventories
US GAAP
IFRS
• Carried at LCM.
– Market is
replacement cost
subject to floor and
ceiling constraints.
• Carried at lower of cost
or net realizable value.
NRV > Mkt > (NRV – Normal Profit Margin)
This difference can create significantly different
carrying values for inventory.
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Inventory continued
• With US GAAP if inventory is written down it may not
be written back up if market value recovers
• IFRS allows such write-ups when economic
circumstances indicate recovery of market values
– Such recoveries are reported in income
• US GAAP applies LCM rule to total inventory, each
item, or to groups of components of inventory.
• IFRS prohibits aggregation based on classification
such as finished goods, industry or geographical
segment.
• No further convergence is planned at present.
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Marketable Securities
• US GAAP categorizes marketable securities into
– Trading
– Available for sale (AFS)
– Held to maturity (HTM)
• To categorize as HTM - entity must have ‘positive
intent and ability’ to hold until maturity
– Carried at amortized cost (effective interest method)
– With IFRS if more than an insignificant amount (as
compared to total HTM securities) are sold entity cannot
use the HTM classification for two years (2 year penalty
period is not specified for nonpublic firms under US GAAP)
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Marketable Securities continued
• AFS securities are valued at fair value
• The offsetting side of the asset revaluation is
accounted for differently GAAP vs. IFRS
– GAAP the change is reflected in other comprehensive
income
– IFRS the change is recognized directly in equity through the
statement of changes in equity
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Marketable Securities continued
• Impairments of HTM securities
– With both GAAP and IFRS, impaired securities must be
written down to estimated recoverable amount (PV of
future cash flows discounted at original effective rate)
• With IFRS recoveries of impaired HTM securities are
included in income.
• Recoveries of impairments are not allowed with
GAAP.
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