IFRS vs US GAAP N
onfinancial assets – The guidance under US GAAP and IFRS as it relates to nonfinancial assets (e.g., intangibles; property, plant, and equipment, including leased assets; inventory; and investment property) contains some significant differences with potentially far-reaching implications. These differences primarily relate to differences in impairment indicators, asset unit of account, impairment measurement and subsequent recoveries of previously impaired assets. Overall, differences for long-lived assets held for use could result in earlier impairment recognition under IFRS as compared to US GAAP. IFRS vs US GAAP nonfinancial assets
In the area of inventory, IFRS prohibits the use of the last in, first out (LIFO) costing methodology, which is an allowable option under US GAAP. As a result, a company that adopts IFRS and utilizes the LIFO method under US GAAP would have to move to an allowable costing methodology, such as first in, first out (FIFO) or weighted average cost. For US-based operations, differences in costing methodologies could have a significant impact on reported operating results as well as on current income taxes payable, given the Internal Revenue Service (IRS) book/tax LIFO conformity rules.
The following discussion captures a number of the more significant GAAP differences. It is important to note that the discussion is not inclusive of all GAAP differences in this area.
Impairment of long-lived assets held for use and goodwill—general
The IFRS-based impairment model might lead to the recognition of impairments of long-lived assets held for use earlier than would be required under US GAAP.
There are also differences related to such matters as what qualifies as an impairment indicator and how recoveries in previously impaired assets get treated. Differences relating to goodwill impairment are discussed in IFRS vs US GAAP Business Combinations.
IFRS vs US GAAP nonfinancial assets IFRS vs US GAAP nonfinancial assets IFRS vs US GAAP nonfinancial assets
US GAAP requires a two-step impairment test and measurement model as follows:
Step 1—The carrying amount is first compared with the undiscounted cash flows. If the carrying amount is lower than the undiscounted cash flows, no impairment loss is recognized, although it might be necessary to review depreciation (or amortization) estimates and methods for the related asset.
Step 2—If the carrying amount is higher than the undiscounted cash flows, an impairment loss is measured as the difference between the carrying amount and fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (an exit price).
Fair value should consider the impact of the related current and deferred tax balances and should be based on the assumptions of market participants and not those of the reporting entity.
IFRS uses a one-step impairment test. The carrying amount of an asset is compared with the recoverable amount. The recoverable amount is the higher of (1) the asset’s fair value less costs of disposal or (2) the asset’s value in use.
In practice, individual assets do not usually meet the definition of a CGU. As a result, assets are rarely tested for impairment individually but are tested within a group of assets.
Fair value less costs of disposal represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date less costs of disposal.
Current and deferred tax balances, with the exception of unused tax losses, and their associated cash flows, are taken into account when calculating fair value less costs of disposal, if a market participant would also include them.
Value in use represents entity-specific or CGU-specific future pretax cash flows discounted to present value by using a pretax, market-determined rate that reflects the current assessment of the time value of money and the risks specific to the asset or CGU for which the cash flow estimates have not been adjusted.
Changes in market interest rates are not considered impairment indicators.
Changes in market interest rates can potentially trigger impairment and, hence, are impairment indicators.
If certain criteria are met, the reversal of impairments, other than those of goodwill, is permitted.
For non current, non financial assets (excluding investment properties and biological assets) carried at fair value instead of depreciated cost, losses related to the revaluation are recorded in other comprehensive income to the extent of prior upward revaluations, with any further losses being reflected in the income statement.
Impairment of long-lived assets —cash flow estimates
As noted above, impairment testing under US GAAP starts with undiscounted cash flows, whereas the starting point under IFRS is discounted cash flows. Aside from that difference, IFRS is more prescriptive with respect to how the cash flows themselves are identified for purposes of calculating value in use.
IFRS vs US GAAP nonfinancial assets IFRS vs US GAAP nonfinancial assets IFRS vs US GAAP nonfinancial assets
Future cash flow estimates used in an impairment analysis should include:
US GAAP specifies that the remaining useful life of a group of assets over which cash flows may be considered should be based on the remaining useful life of the “primary” asset of the group.
Cash flows are from the perspective of the entity itself. Expected future cash flows should represent management’s best estimate and should be based on reasonable and supportable assumptions consistent with other assumptions made in the preparation of the financial statements and other information used by the entity for comparable periods.
Cash flow estimates used to calculate value in use under IFRS should include:
Cash flow projections used to measure value in use should be based on reasonable and supportable assumptions of economic conditions that will exist over the asset’s remaining useful life. Cash flows expected to arise from future restructurings or from improving or enhancing the asset’s performance should be excluded.
Cash flows are from the perspective of the entity itself. Projections based on management’s budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified.
Estimates of cash flow projections beyond the period covered by the most recent budgets/forecasts should extrapolate the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
This growth rate shall not exceed the long-term average growth rate for the products, industries, or country in which the entity operates, or for the market in which the asset is used unless a higher rate can be justified.
Impairment of long-lived assets—asset groupings
Determination of asset groupings is a matter of judgment and could result in differences between IFRS and US GAAP.
IFRS vs US GAAP nonfinancial assets IFRS vs US GAAP nonfinancial assets IFRS vs US GAAP nonfinancial assets
For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities.
In limited circumstances, a long-lived asset (e.g., a corporate asset) might not have identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and of other asset groups. In those circumstances, the asset group for that long-lived asset should include all assets and liabilities of the entity.
A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. It can be a single asset. If an active market (as defined by IFRS 13) exists for the output produced by an asset or group of assets, that asset or group should be identified as a CGU, even if some or all of the output is used internally.
Generally, debt instruments should not be included in an asset group as they do not represent the lowest level of identifiable cash flows (i.e., debt payments are generally funded at the corporate level and are not attributable to an asset group). If debt is tied to specific assets within the asset group, or the asset group is a business or reporting unit, there may be circumstances when it is appropriate to include the cash flows associated with debt.
Liabilities are generally excluded from the carrying amount of the CGU.
However, there may be circumstances when it is not possible to determine the recoverable amount without considering a recognized liability. In such cases, the liability should be included in the CGU.
A lease liability for a finance lease is generally viewed as “debt like” and therefore is excluded from an asset group. For operating lease liabilities, an entity may elect to either (1) include the carrying amount of the operating lease liabilities in the asset group and include the associated operating lease payments in the cash flows or (2) exclude the carrying amount of the operating lease liabilities from the asset group and exclude the associated operating lease payments from the undiscounted cash flows.
While lease right-of-use assets are included in a CGU, when testing value in use, the related lease liabilities should be excluded because they are a form of financing and all financing cash flows are explicitly excluded from value in use (IAS 36 para 50(a)). While this position is clear for value in use, it is less so for fair value less cost of disposal (FVLCD) models, since IAS 36 has little specific guidance on determining FVLCD.
Generally, if the buyer of a CGU is required to assume the lease liability, the FVLCD would also include the liability.
Impairment of long-lived assets held for sale—general
US GAAP and IFRS criteria are similar in determining when long-lived assets qualify for held-for-sale classification. Under both US GAAP and IFRS, long-lived assets held for sale should be measured at the lower of their carrying amount or fair value less cost to sell. However, differences could exist in what is included in the disposal group between US GAAP and IFRS.
US GAAP requires a disposal group to include items associated with accumulated other comprehensive income. This includes any cumulative translation adjustment, which is considered part of the carrying amount of the disposal group [ASC 830-30-45-13].
Under IFRS 5, a disposal group generally should not include amounts that have been recognized in other comprehensive income and accumulated in equity for the purpose of calculating impairment. Other comprehensive balances that recycle should only be recognized in the income statement when the disposal group is sold.
Assignment of goodwill
Goodwill is assigned to a reporting unit, which is defined as an operating segment or one level below an operating segment (component).
Goodwill is allocated to a cash-generating unit (CGU) or group of CGUs that represents the lowest level within the entity at which the goodwill is monitored for internal management purposes and cannot be larger than an operating segment (before aggregation) as defined in IFRS 8, Operating Segments.
Method of determining impairment — goodwill
A company has the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Before the adoption of ASU 2017-04, Simplifying the Test for Goodwill Impairment, the company performs a recoverability test under the two-step approach first at the reporting unit level (the carrying amount of the reporting unit is compared with the reporting unit’s fair value).
If the carrying amount of the reporting unit exceeds its fair value, the company performs impairment testing.
After the adoption of ASU 2017-04, the company performs an impairment test under the one-step approach at the reporting unit level by comparing the reporting unit’s carrying amount with its fair value.
(ASU 2017-04 is effective for annual and interim impairment tests performed in periods beginning after (1) 15 December 2019 for PBEs that meet the definition of an SEC filer, (2) 15 December 2020 for PBEs that are not SEC filers, and (3) 15 December 2021 for all other entities. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after 1 January 2017. The ASU will be applied prospectively.)
Qualitative assessment is not permitted. The one-step approach requires that an impairment test be done at the CGU level by comparing the CGU’s carrying amount, including goodwill, with its recoverable amount.
Impairment loss calculation – goodwill
Before the adoption of ASU 2017-04, an impairment loss is the amount by which the carrying amount of goodwill exceeds the implied fair value of the goodwill within its reporting unit.
After the adoption of ASU 2017-04, an impairment loss is the amount by which the reporting unit’s carrying amount exceeds the reporting unit’s fair value. The impairment loss will be limited to the amount of goodwill allocated to that reporting unit.
The impairment loss on the CGU (the amount by which the CGU’s carrying amount, including goodwill, exceeds its recoverable amount) is allocated first to reduce goodwill to zero, then, subject to certain limitations, the carrying amount of other assets in the CGU are reduced pro rata, based on the carrying amount of each asset.
Reversal of impairment losses – All assets
The reversal of impairments is prohibited for all assets to be held and used.
This is prohibited for goodwill. PPE must be reviewed annually for reversal indicators. If appropriate, loss may be reversed up to the newly estimated recoverable amount, not to exceed the initial carrying amount adjusted for depreciation.
Other long-lived assets (see above)
Disposal of non-financial assets
ASC 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, provides a model for the derecognition of nonfinancial assets that do not meet the definition of a business and is effective at the same time an entity adopts the new revenue guidance in ASC 606. IFRS does not contain similar guidance and often follows the form of the disposal. As such, differences could exist in certain circumstances.
ASC 610-20 applies to transfers of all nonfinancial assets and in substance nonfinancial assets to parties that are not customers. The guidance does not change the derecognition model for financial assets under the scope of ASC 860, Transfers and Servicing, or businesses under the scope of ASC 810, Consolidation.
If a transaction is within the scope of ASC 610-20, in order for an entity to derecognize nonfinancial assets and recognize a gain or loss, the entity must lose control of the assets while also satisfying the criteria for transfer of control to another party under the new revenue recognition guidance.
If these criteria are not met, an entity would continue to recognize the asset and record a liability for the consideration received. Situations may arise when a loss of control has occurred, but the transaction does not meet the transfer of control criteria in the revenue standard. For example, if the seller retains a call option to repurchase the assets, the transfer of control test will likely not be satisfied. In these situations, alternate guidance will need to be followed.
Under ASC 610-20, when an entity transfers its controlling financial interest in a nonfinancial asset (or in substance nonfinancial asset) but retains a noncontrolling ownership interest, the entity would measure such interest (including interests in joint ventures) at fair value, similar to the current guidance on the sale of businesses. This would result in full gain or loss recognition upon the sale of the nonfinancial or in substance nonfinancial asset.
IFRS does not include the concept of in substance nonfinancial assets in its guidance. Accounting for a disposal under IFRS will usually depend on the nature of what is disposed. If a subsidiary is disposed of, an entity would generally follow the deconsolidation guidance in IFRS 10, Consolidated Financial Statements. If other assets are disposed of and not in the scope of the revenue standard, an entity would follow the related guidance (e.g., IAS 16 for PPE).
IAS 28, Investments in Associates and Joint Ventures, requires entities to recognize a partial gain or loss on contribution of nonfinancial assets to equity method investees and joint ventures for an interest in that associate unless the transaction lacks commercial substance.
The ability to revalue assets (to fair value) under IFRS might create significant differences in the carrying value of assets as compared with US GAAP.
US GAAP generally utilizes historical cost and prohibits revaluations except for certain categories of financial instruments, which are carried at fair value.
Historical cost is the primary basis of accounting. However, IFRS permits the revaluation to fair value of some intangible assets; property, plant, and equipment; and investment property and inventories in certain industries (e.g., commodity broker/dealer).
IFRS also requires that biological assets (except bearer plants) be reported at fair value.
Internally developed intangibles
US GAAP prohibits, with limited exceptions, the capitalization of development costs. Development costs are capitalized under IFRS if certain criteria are met.
Further differences might exist in such areas as software development costs, where US GAAP provides specific detailed guidance depending on whether the software is for internal use or for sale. Other industries also have specialized capitalization guidance under US GAAP (e.g., film and television production). The principles surrounding capitalization under IFRS, by comparison, are the same, whether the internally generated intangible is being developed for internal use or for sale.
In general, both research costs and development costs are expensed as incurred, making the recognition of internally generated intangible assets rare.
However, separate, specific rules apply in certain areas. For example, there is distinct guidance governing the treatment of costs associated with the development of software for sale to third parties. Separate guidance governs the treatment of costs associated with the development of software for internal use, including fees paid in a cloud computing arrangement.
The guidance for the two types of software varies in a number of significant ways. There are, for example, different thresholds for when capitalization commences, and there are also different parameters for what types of costs are permitted to be capitalized.
ASU 2018-15 was issued to provide specific US guidance on when implementation costs incurred in a cloud computing service contract should be capitalized under US GAAP. This guidance is effective for calendar year end public business entities on January 1, 2020. It can be early adopted.
Costs associated with the creation of intangible assets are classified into research phase costs and development phase costs. Costs in the research phase are always expensed. Costs in the development phase are capitalized, if all of the following six criteria are demonstrated:
Expenditures on internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognized as intangible assets.
Development costs initially recognized as expenses cannot be capitalized in a subsequent period.
IFRS does not contain any specific guidance relating to cloud computing arrangements. Assessing these arrangements will require judgment.
Acquired research and development assets
Under US GAAP, capitalization depends on both the type of acquisition (asset acquisition or business combination) as well as whether the asset has an alternative future use.
Under IFRS, acquired research and development assets are capitalized if is probable that they will have future economic benefits.
Research and development intangible assets acquired in an asset acquisition are capitalized only if they have an alternative future use. For an asset to have alternative future use, it must be reasonably expected (greater than a 50% chance) that an entity will achieve economic benefit from such alternative use and further development is not needed at the acquisition date to use the asset.
The price paid reflects expectations about the probability that the future economic benefits of the asset will flow to the entity. The probability recognition criterion is always assumed to be met for separately acquired intangible assets.
Impairment of indefinite-lived intangible assets
Impairment testing and measurement of indefinite-lived intangible assets are different under US GAAP and IFRS.
1. Indefinite-lived intangible assets—assessment level
Under US GAAP, the assessment is performed at the asset level. Under IFRS, the assessment may be performed at a higher level (i.e., the CGU level). The varying assessment levels can result in different conclusions as to whether an impairment exists.
Separately recorded indefinite-lived intangible assets, whether acquired or internally developed, shall be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from one another.
Indefinite-lived intangible assets may be combined only with other indefinite-lived intangible assets; they may not be tested in combination with goodwill or with a finite-lived asset.
US GAAP provides a number of indicators that an entity should consider to determine if indefinite lived intangible assets should be combined for impairment testing purposes.
As most indefinite-lived intangible assets (e.g., brand name) do not generate cash flows independently of other assets, it might not be possible to calculate the value in use for such an asset on a standalone basis.
Therefore, it is necessary to determine the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets, (known as a CGU), in order to perform the test.
2. Indefinite-lived intangible assets—impairment testing
Under US GAAP, an entity can choose to first assess qualitative factors in determining if further impairment testing is necessary. This option does not exist under IFRS.
ASC 350, Intangibles-Goodwill and Other, requires an indefinite-lived intangible asset to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
IAS 36, Impairment of Assets, requires an entity to test an indefinite-lived intangible asset for impairment annually. It also requires an impairment test in between annual tests whenever there is an indication of impairment.
An entity may first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required.
An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite lived intangible assets. An entity can bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test and then choose to perform the qualitative assessment in any subsequent period.
IAS 36 allows an entity to carry forward the most recent detailed calculation of an asset’s recoverable amount when performing its current period impairment test, provided the following criteria are met:
Intangible assets – revaluation
|Revaluation is not allowed.||Revaluation to fair value of intangible assets other than goodwill is allowed.|
Indefinite-lived intangible assets—impairment measurement
Even when there is an impairment under both frameworks, the amount of the impairment charge may differ.
Impairments of indefinite-lived intangible assets are measured by comparing fair value to carrying amount.
Indefinite-lived intangible asset impairments are calculated by comparing the recoverable amount to the carrying amount (see above for determination of level of assessment). The recoverable amount is the higher of fair value less costs of disposal or value in use. The value in use calculation uses the present value of future cash flows.
Software costs to be sold, leased, or marketed—impairment
Impairment measurement model and timing of recognition of impairment are different under US GAAP and IFRS.
When assessing potential impairment, at least at each balance sheet date, the unamortized capitalized costs for each product must be compared with the net realizable value of the software product.
The amount by which the unamortized capitalized costs of a software product exceed the net realizable value of that asset shall be written off. The net realizable value is the estimated future gross revenue from that product reduced by the estimated future costs of completing and disposing of that product.
The net realizable value calculation doesnot utilize discounted cash flows.
Under IFRS, intangible assets not yet available for use are tested annually for impairment because they are not being amortized.
Once such assets are brought into use, amortization commences and the assets are tested for impairment when there is an impairment indicator.
The impairment is calculated by comparing the recoverable amount (the higher of either (1) fair value less costs of disposal or (2) value in use) to the carrying amount. The value in use calculation uses the present value of future cash flows.
Under IFRS, advertising costs may need to be expensed sooner. IFRS vs US GAAP nonfinancial assets
The costs of other than direct response advertising should be either expensed as incurred or deferred and then expensed the first time the advertising takes place. This is an accounting policy decision and should be applied consistently to similar types of advertising activities.
Certain direct response advertising costs are eligible for capitalization if, among other requirements, probable future economic benefits exist. Direct response advertising costs that have been capitalized are then amortized over the period of future benefits (subject to impairment considerations).
Aside from direct response advertising-related costs, sales materials such as brochures and catalogs may be accounted for as prepaid supplies until they no longer are owned or expected to be used, in which case their cost would be a cost of advertising.
Costs of advertising are expensed as incurred. The guidance does not provide for deferrals until the first time the advertising takes place, nor is there an exception related to the capitalization of direct response advertising costs or programs.
Prepayment for advertising may be recorded as an asset only when payment for the goods or services is made in advance of the entity’s having the right to access the goods or receive the services.
The cost of materials, such as sales brochures and catalogues, is recognized as an expense when the entity has the right to access those goods.
Property, plant, and equipment—Revaluation
|Revaluation is not permitted.||Revaluation is a permitted accounting policy election for an entire class of assets, requiring revaluation to fair value on a regular basis.|
Property, plant, and equipment—Depreciation
Under IFRS, differences in asset componentization guidance might result in the need to track and account for property, plant, and equipment at a more disaggregated level.
US GAAP generally does not require the component approach for depreciation.
While it would generally be expected that the appropriateness of significant assumptions within the financial statements would be reassessed each reporting period, there is no explicit requirement for an annual review of residual values.
In accordance with ASC 350-30-35-9, an entity should evaluate the remaining useful life of an intangible asset each reporting period to determine whether events or circumstances may indicate that a revision to the useful life (presumably shorter) is warranted to reflect the remaining expected use of the asset.
Unlike the guidance that exists for long-lived intangible assets, there is no explicit requirement to evaluate the useful lives of long-lived tangible assets each reporting period. However, we believe the useful lives of long-lived tangible assets should be reassessed whenever events or circumstances indicate that a revision to the useful life (presumably shorter) is warranted.
IFRS requires that separate significant components of property, plant, and equipment with different economic lives be recorded and depreciated separately.
The guidance requires entities to review residual values and useful lives, at a minimum, at each balance sheet date.
Property, plant, and equipment—overhaul costs
US GAAP may result in earlier expense recognition when portions of a larger asset group are replaced. IFRS vs US GAAP nonfinancial assets
US GAAP permits alternative accounting methods for recognizing the costs of a major overhaul. Costs representing a replacement of an identified component can be (1) expensed as incurred, (2) accounted for as a separate component asset, or (3) capitalized and amortized over the period benefited by the overhaul.
IFRS requires capitalization of the costs of a major overhaul representing a replacement of an identified component.
Consistent with the componentization model, the guidance requires that the carrying amount of parts or components that are replaced be derecognized.
Property, plant, and equipment – AROs
Initial measurement might vary because US GAAP specifies a fair value measure and IFRS does not. IFRS results in greater variability, as obligations in subsequent periods get adjusted and accreted based on current market-based discount rates. IFRS vs US GAAP nonfinancial assets
Asset retirement obligations (AROs) are recorded at fair value and are based upon the legal obligation that arises as a result of the acquisition, construction, or development of a long-lived asset.
The use of a credit-adjusted, risk-free rate is required for discounting purposes when an expected present-value technique is used for estimating the fair value of the liability. A fair value measurement should include a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows.
The guidance also requires an entity to measure changes in the liability for an ARO due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period.
The interest rate used for measuring that change would be the credit-adjusted, risk-free rate that existed when the liability, or portion thereof, was initially measured.
In addition, changes to the undiscounted cash flows are recognized as an increase or a decrease in both the liability for an ARO and the related asset retirement cost. Upward revisions are discounted by using the current credit-adjusted, risk-free rate.
Downward revisions are discounted by using the credit-adjusted, risk-free rate that existed when the original liability was recognized. If an entity cannot identify recognized. If an entity cannot identify the prior period to which the downward revision relates, it may use a weighted-average, credit-adjusted, risk-free rate to discount the downward revision to estimated future cash flows.
IFRS requires that management’s best estimate of the costs of dismantling and removing the item or restoring the site on which it is located be recorded when an obligation exists. The estimate is to be based on a present obligation (legal or constructive) that arises as a result of the acquisition, construction, or development of a fixed asset.
If it is not clear whether a present obligation exists, the entity may evaluate the evidence under a more-likely-than-not threshold. This threshold is evaluated in relation to the likelihood of settling the obligation.
The guidance uses a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. IFRS does not explicitly state whether an entity’s own credit risk should be taken into account in determining the amount of the provision.
Changes in the measurement of an existing decommissioning, restoration, or similar liability that result from changes in the estimated timing or amount of the cash outflows or other resources, or a change in the discount rate, adjust the carrying value of the related asset under the cost model.
Adjustments may result in an increase of the carrying amount of an asset beyond its recoverable amount. An impairment loss would result in such circumstances. Adjustments may not reduce the carrying amount of an asset to a carrying amount of an asset to a negative value.
Once the carrying value reaches zero, further reductions are recorded in profit and loss. The periodic unwinding of the discount is recognized in profit or loss as a finance cost as it occurs.
Property, plant, and equipment—borrowing costs
Borrowing costs under IFRS are broader and can include more components than interest costs under US GAAP. IFRS vs US GAAP nonfinancial assets
US GAAP allows for more judgment in the determination of the capitalization rate, which could lead to differences in the amount of costs capitalized.
IFRS does not permit the capitalization of borrowing costs in relation to equity-method investments, whereas US GAAP may allow capitalization in certain circumstances.
Capitalization of interest costs is required while a qualifying asset is being prepared for its intended use.
The guidance does not require that all borrowings be included in the determination of a weighted-average capitalization rate. Instead, the requirement is to capitalize a reasonable measure of cost for financing the asset’s acquisition in terms of the interest cost incurred that otherwise could have been avoided.
Eligible borrowing costs do not include exchange rate differences from foreign currency borrowings. Also, generally, interest earned on invested borrowed funds cannot offset interest costs incurred during the period.
An investment accounted for by using the equity method meets the criteria for a qualifying asset while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee’s activities include the use of funds to acquire qualifying assets for its operations.
Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are required to be capitalized as part of the cost of that asset.
The guidance acknowledges that determining the amount of borrowing costs directly attributable to an otherwise qualifying asset might require professional judgment. Having said that, the guidance first requires the consideration of any specific borrowings and then requires consideration of all general borrowings outstanding during the period.
In broad terms, a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Investments accounted for under the equity method would not meet the criteria for a qualifying asset.
Eligible borrowing costs include exchange rate differences from foreign currency borrowings.
Lease of land and building
|A lease for land and buildings that transfers ownership to the lessee or contains a bargain purchase option would be classified as a capital lease by the lessee, regardless of the relative value of the land.||The land and building elements of a lease are considered separately for purposes of evaluation of all indicators, unless the amount that would initially be recognized for the land element is immaterial, in which case they would be treated as a single unit for the purposes of lease classification.|
There is no 25% test to determine whether the land and a building should be considered separately for purposes of evaluating certain indicators.
Recognition of gain or loss on a sale leaseback
|If the seller does not relinquish more than a minor part of the right to use the asset, gain or loss is generally deferred and amortized over the lease term. If the seller relinquishes more than a minor part of the use of the asset, then part or all of a gain may be recognized depending on the amount relinquished.|
(Note: Does not apply if real estate is involved as the specialized rules are very restrictive with respect to the seller’s continuing involvement and they may not allow for recognition of the sale.)
|Gain or loss deferred and amortized over the lease term.|
Distributions of non-monetary assets to owners
Spin-off transactions under IFRS can result in gain recognition as non-monetary assets are distributed at fair value. Under US GAAP, pro-rata distributions of a business are distributed at their recorded amount, and no gains are recognized. IFRS vs US GAAP nonfinancial assets
Accounting for the pro-rata distribution of assets that constitute a business to owners of an enterprise (a spin-off) should be based on the recorded amount (after reduction, if appropriate, for an indicated impairment of value) of the non-monetary assets distributed. Upon distribution, those amounts are reflected as a reduction of owner’s equity.
Unless part of a common control transaction, accounting for the distribution of non-monetary assets to owners of an entity should be based on the fair value of the non-monetary assets to be distributed. A dividend payable is measured at the fair value of the non-monetary assets to be distributed.
Upon settlement of a dividend payable, the distributing entity will recognize any differences between the carrying amount of the assets to be distributed and the carrying amount of the dividend payable in profit or loss.
The recognition of the distribution at fair value by the entity distributing non-monetary assets does not affect the accounting by the spinee after the distribution.
Companies that utilize the LIFO costing methodology under US GAAP might experience significantly different operating results as well as cash flows under IFRS.
Furthermore, regardless of the inventory costing model utilized, under IFRS companies might experience greater earnings volatility in relation to recoveries in values previously written down.
A variety of inventory costing methodologies such as FIFO, and/or weighted-average cost are permitted. LIFO is not allowed.
For private companies using LIFO for US income tax purposes, the book/tax conformity rules also require the use of LIFO for book accounting/reporting purposes.
Reversals of write-downs are prohibited
A number of costing methodologies such as FIFO or weighted-average costing are permitted. The use of LIFO, however, is precluded.
Reversals of inventory write-downs (limited to the amount of the original write-down) are required for subsequent recoveries.
In the past there was a difference between US GAAP and IFRS in that US GAAP referred to the lower of cost or market whereas IFRS referred to the lower of cost and net realizable value. Since 2018, all entities under both US GAAP and IFRS measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price less the costs of completion and sale. IFRS vs US GAAP nonfinancial assets
Reversal of inventory write-downs
|Write downs of inventory to the lower of cost or replacement cost will create a new cost basis that cannot be reversed.||Previously recognized impairment losses are reversed up to the amount of the original impairment loss.|
Biological assets—fair value versus historical cost
Companies whose operations include management of the transformation of living animals or plants into items for sale, agricultural produce, or additional biological assets have the potential for fundamental changes to their basis of accounting (because IFRS requires fair value-based measurement).
Biological assets can be measured at historical cost or fair value less costs to sell, as a policy election. If historical cost is elected, these assets are tested for impairment in the same manner as other long-lived assets. If fair value is elected, all changes in fair value in subsequent periods are recognized in the income statement in the period in which they arise
Under IAS 41, biological assets are measured at fair value less costs to sell for initial recognition and at each subsequent reporting date, except when the measurement of fair value is unreliable. All changes in fair value are recognized in the income statement in the period in which they arise.
Bearer plants are accounted for in the same way in IAS 16, Property, Plant and Equipment. Whereas, the produce growing on bearer plants is within the scope of IAS 41 and measured at fair value. Once harvested, produce is in the scope of IAS 2, Inventories.
Alternative methods or options of accounting for investment property under IFRS could result in significantly different asset carrying values (fair value) and earnings.
There is no specific definition of investment property.
The historical-cost model is used for most real estate companies and operating companies holding investment-type property.
Investor entities—such as many investment companies, insurance companies’ separate accounts, bank-sponsored real estate trusts, and employee benefit plans that invest in real estate—carry their investments at fair value.
Investment property is separately defined as property (land and/or buildings) held in order to earn rentals and/or for capital appreciation. The definition does not include owner-occupied property, property held for sale in the ordinary course of business, or property being constructed or developed for such sale.
Properties under construction or development for future use as investment properties are within the scope of investment properties.
Investment property is initially measured at cost (transaction costs are included). Thereafter, it may be accounted for on a historical-cost basis or on a fair value basis as an accounting policy choice3.
When fair value is applied, the gain or loss arising from a change in the fair value is recognized in the income statement. The carrying amount is not depreciated.
See also: The IFRS Foundation