IFRS vs US GAAP Nonfinancial liabilities

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IFRS vs US GAAP Nonfinancial liabilities – The guidance in relation to nonfinancial liabilities (e.g., provisions, contingencies, and government grants) includes some fundamental differences with potentially significant implications.

For instance, a difference exists in the interpretation of the term “probable.” IFRS defines probable as “more likely than not,” but US GAAP defines probable as “likely to occur.” Because both frameworks reference probable within the liability recognition criteria, this difference could lead companies to record provisions earlier under IFRS than they otherwise would have under US GAAP. The use of the midpoint of a range when several outcomes are equally likely (rather than the low-point estimate, as used in US GAAP) might also lead to higher expense recognition under IFRS.

IFRS does not have the concept of an ongoing termination plan, whereas severance is recognized under US GAAP once probable and reasonably estimable. This could lead companies to record restructuring provisions in periods later than they would under US GAAP.

As it relates to reimbursement rights, IFRS has a higher threshold for the recognition of reimbursements of recognized losses by requiring that they be virtually certain of realization, whereas the threshold is lower under US GAAP.

Standards Reference

US GAAP1

IFRS2

ASC 410-30 Asset retirements and environmental obligations – Environmental obligations

ASC 420 Exit or disposal cost obligations

ASC 450 Contingencies

ASC 460-10 Guarantees – Overall

ASC 958-605 Not-for-Profit Entities – Revenue recognition

IAS 19 Employee benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 37 Provision, Contingent Liabilities and Contingent assets

IFRIC 21 Levies

Note

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.

Recognition of provisions

Differences in the definition of “probable” may result in earlier recognition of liabilities under IFRS. The IFRS “present obligation” criteria might result in delayed recognition of liabilities when compared with US GAAP.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.

An accrual for a loss contingency is required if two criteria are met: (1) if it is probable that a liability has been incurred and (2) the amount of loss can be reasonably estimated.

A contingent liability is defined as a possible obligation from a past event whose outcome will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control.

A contingent liability is not recognized. A contingent liability becomes a provision and is recorded when three criteria are met: (1) a present obligation from a past event exists, (2) it is probable that an outflow of resources will be required to settle the obligation, and (3) a reliable estimate can be made.

Implicit in the first condition above is that it is probable that one or more future events will occur confirming the fact of the loss.

The guidance uses the term “probable” to describe a situation in which the outcome is likely to occur. While a numeric standard for probable does not exist, practice generally considers an event that has a 75% or greater likelihood of occurrence to be probable.

The term “probable” is used for describing a situation in which the outcome is more likely than not to occur. Generally, the phrase “more likely than not” denotes any chance greater than 50%.

Measurement of provisions

In certain circumstances, the measurement objective of provisions varies under the two frameworks. IFRS results in a higher liability being recorded when there is a range of possible outcomes with equal probability.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

A single standard does not exist to determine the measurement of obligations. Instead, entities must refer to guidance established for specific obligations (e.g., environmental or restructuring) to determine the appropriate measurement methodology.

Pronouncements related to provisions do not necessarily have settlement price or even fair value as an objective in the measurement of liabilities, and the guidance often describes an accumulation of the entity’s cost estimates.

When no amount within a range is a better estimate than any other amount, the low end of the range is accrued.

The amount recognized should be the best estimate of the expenditure required (the amount an entity would rationally pay to settle or transfer to a third party the obligation at the balance sheet date).

Where there is a continuous range of possible outcomes and each point in that range is as likely as any other, the midpoint of the range is used.

Discounting of provisions

Provisions will be discounted more frequently under IFRS. At the same time, greater charges will be reflected as operating (versus financing) under US GAAP.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

For losses that meet the accrual criteria of ASC 450, an entity will generally record them at the amount that will be paid to settle the contingency, without considering the time that may pass before the liability is paid. Discounting these liabilities is acceptable when the aggregate amount of the liability and the timing of cash payments for the liability are fixed or determinable.

The discount rate used should produce an amount at which the liability could be settled in an arm’s length transaction with a third party. Practice has gravitated toward using the risk-free rate of monetary assets that have comparable maturities. Entities with these liabilities that are eligible for discounting are not, however, required to discount those liabilities; the decision to discount is an accounting policy choice.

The classification in the statement of operations of the accretion of the liability to its settlement amount is an accounting policy decision that should be consistently applied and disclosed.

When discounting is applied, the discount rate applied to a liability should not change from period to period if the liability is not recorded at fair value.

There are certain instances outside of ASC 450 (e.g., in the accounting for asset retirement obligations) where discounting is required.

IFRS requires that the amount of a provision be the present value of the expenditure expected to be required to settle the obligation. The anticipated cash flows are discounted using a pre-tax discount rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability (for which the cash flow estimates have not been adjusted) if the effect is material.

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. The carrying amount of a provision increases in each period to reflect the passage of time with said increase recognized as a borrowing cost.

IFRS vs US GAAP Nonfinancial liabilities

Restructuring provisions (excluding business combinations)

IFRS does not have the concept of an ongoing termination plan, whereas a severance liability is recognized under US GAAP once it is probable and reasonably estimable. This could lead companies to record restructuring provisions in periods later than they would under US GAAP.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

Guidance exists for different types of termination benefits (e.g., special termination benefits, contractual termination benefits, severance benefits, and one-time benefit arrangements).

If there is a pre-existing arrangement such that the employer and employees have a mutual understanding of the benefits the employee will receive if involuntarily terminated, the cost of the benefits are accrued when payment is probable and reasonably estimable. In this instance, no announcement to the workforce (nor initiation of the plan) is required prior to expense recognition.

IFRS requires that a single approach be used to account for all types of termination benefits. Termination benefits are recognized at the earlier of (1) when an entity can no longer withdraw an offer of termination benefits, or (2) when it would recognize restructuring costs in accordance with IAS 37 (i.e., upon communication to those affected employees laid out in a detailed formal restructuring plan).

Onerous contracts

Onerous contract provisions may be recognized earlier and in different amounts under IFRS.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

Provisions are not recognized for unfavorable contracts unless the entity has ceased using the rights under the contract (i.e., the cease-use date).

One of the most common examples of an unfavorable contract has to do with leased property that is no longer in use. With respect to such leased property, estimated sublease rentals are to be considered in a measurement of the provision to the extent such rentals could reasonably be obtained for the property, even if it is not management’s intent to sublease or if the lease terms prohibit subleasing. Incremental expense in either instance is recognized as incurred.

Recording a liability is appropriate only when a lessee permanently ceases use of functionally independent assets (i.e., assets that could be fully utilized by another party).

US GAAP generally does not allow the recognition of losses on executory contracts prior to such costs being incurred.

Provisions are recognized when a contract becomes onerous regardless of whether the entity has ceased using the rights under the contract.

When an entity commits to a plan to exit a lease property, sublease rentals are considered in the measurement of an onerous lease provision only if management has the right to sublease and such sublease income is probable.

IFRS requires recognition of an onerous loss for executory contracts if the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

Accounting for government grants

IFRS permits the recognition of government grants once there is reasonable assurance that requisite conditions will be met, rather than waiting for the conditions to be fulfilled, as is usually the case under US GAAP. As a result, government grants may be recognized earlier under IFRS.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

Government grants to business entities are scoped out of the US GAAP contribution accounting model. However, business entities may analogize to the US GAAP contribution accounting model or other appropriate US GAAP based on the facts and circumstances of the grant. Otherwise, business entities may use other accounting literature, such as IAS 20.

If a business entity elects to use the US GAAP contribution accounting model for a grant that contains conditions, recognition of the grant is delayed until such conditions have been fulfilled.

Government grants are recognized once there is reasonable assurance that both (1) the conditions for their receipt will be met and (2) the grant will be received. Income-based grants are deferred in the balance sheet and released to the income statement to match the related expenditure that they are intended to compensate. Asset based grants are deferred and matched with the depreciation on the asset for which the grant arises.

Grants that involve recognized assets are presented in the balance sheet either as deferred income or by deducting the grant in arriving at the asset’s carrying amount, in which case the grant is recognized as a reduction of depreciation.

Reimbursement and contingent assets

Guidance varies with respect to when these amounts should be recognized. As such, recognition timing differences could rise.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

Recovery of recognized losses—An asset relating to the recovery of a recognized loss shall be recognized when realization of the claim for recovery is deemed probable.

Recoveries representing gain contingencies—Gain contingencies should not be recognized prior to their realization. In certain situations a gain contingency may be considered realized or realizable prior to the receipt of cash.

Contingent consideration Contingent consideration Contingent consideration Contingent consideration Contingent consideration

Reimbursements—Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognized for the reimbursement shall be treated as a separate asset and shall not exceed the amount of the provision.

The virtually certain threshold may, in certain situations, be achieved in advance of the receipt of cash.

Contingent assets—Contingent assets are not recognized in financial statements because this may result in the recognition of income that may never be realized. If the inflow of economic benefits is probable, the entity should disclose a description of the contingent asset. However, when the realization of income is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate.

Levies

IFRS includes specific guidance related to the treatment of levies. US GAAP does not include specific guidance. This could result in differences between the timing and measurement of contingencies related to levies.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

Specific guidance does not exist within US GAAP. Levies and their related fines and penalties follow the guidance in ASC 450 (see Recognition of provisions above) unless other guidance established for the specific obligation exists (e.g., environmental).

Levies are defined as a transfer of resources imposed by a government on entities in accordance with laws and/or regulations, other than those within the scope of other standards (such as IAS 12); and fines or other penalties imposed for breaches of laws and/or regulations.

The obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern principle, does not create an obligation to pay a levy that will arise from operating in the future. A liability to pay a levy is recognized when the obligating event occurs, at a point in time or progressively over time, and an obligation to pay a levy triggered by a minimum threshold is recognized when the threshold is reached.

Expenses or liabilities paid by a principal stockholder

US GAAP may result in more expenses or liabilities being recorded than IFRS when another party pays it on the entity’s behalf.

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

US GAAP

IFRS

If a principal stockholder settles an obligation on behalf of the entity, it should be reflected as an expense in the company’s financial statements with a corresponding credit to contributed (paid-in) capital, unless the stockholder’s action is caused by a relationship or obligation completely unrelated to their position as a stockholder or such action clearly does not benefit the company.

IFRS does not include the concept that the expense should be reflected on the company’s financial statements if it was not paid by the company, except if it is within the scope of IFRS 2.

See also: The IFRS Foundation

General model of measurement of insurance contracts

IFRS vs US GAAP Nonfinancial liabilities

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities IFRS vs US GAAP Nonfinancial liabilities

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