CHAPTER 4

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Chapter Outline
I. The International Accounting Standards Board (IASB) had 30 International Accounting
Standards (IAS) and 8 International Financial Reporting Standards (IFRS) in force in Ma
!008.
A. In !00!" the IASB and #.S. Financial Accounting Standards Board (FASB) agreed to
$or% together to reduce differences &et$een IFRS and #.S. 'AA(.
II. There are se)eral tpes of differences &et$een IFRS and #.S. 'AA(.
A. *efinition differences. *ifferences in definitions can occur e)en though concepts are
si+ilar. *efinition differences can lead to differences in recognition and,or
+easure+ent.
B. Recognition differences. *ifferences in recognition criteria and,or guidance related to
(a) $hether an ite+ is recogni-ed" (&) ho$ it is recogni-ed" and,or (c) $hen it is
recogni-ed (ti+ing difference).
.. Measure+ent differences. *ifferences in approach for deter+ining the a+ount
recogni-ed resulting fro+ either (a) a difference in the +ethod re/uired" or (&) a
difference in the detailed guidance for appling a si+ilar +ethod.
*. Alternati)es. 0ne set of standards allo$s a choice &et$een t$o or +ore alternati)e
+ethods1 the other set of standards re/uires one specific +ethod to &e used.
2. 3ac% of re/uire+ents or guidance. IFRS do not co)er an issue addressed & #.S.
'AA(" and )ice )ersa.
F. (resentation differences. *ifferences in the presentation of ite+s in the financial
state+ents.
'. *isclosure differences. *ifferences in infor+ation presented in the notes to financial
state+ents related to (a) $hether a disclosure is re/uired and,or (&) the +anner in
$hich a disclosure is re/uired to &e +ade.
III. A )ariet of differences e4ist &et$een IFRS and #.S. 'AA( $ith respect to the recognition
and +easure+ent of assets.
A. In)entor 5 IFRS re/uire in)entor to &e reported on the &alance sheet at the lo$er of
cost or net reali-a&le )alue1 #.S. 'AA( re/uires the lo$er of cost or replace+ent cost"
$ith net reali-a&le )alue as a ceiling and net reali-a&le )alue less a nor+al profit
+argin as the floor. #.S. 'AA( allo$s the use of 3IF01 IFRS do not.
B. (ropert" plant and e/uip+ent 5 su&se/uent to ac/uisition" IFRS allo$ fi4ed assets to
&e reported on the &alance sheet using a cost +odel (historical cost less accu+ulated
depreciation and i+pair+ent losses) or a re)aluation +odel (fair )alue at the &alance
sheet date less accu+ulated depreciation and i+pair+ent losses)1 #.S. 'AA( re/uires
the use of the cost +odel.
.. *e)elop+ent costs 5 $hen certain criteria are +et" IFRS re/uire de)elop+ent costs to
&e capitali-ed as an asset and then a+orti-ed o)er their useful life1 #.S. 'AA(
re/uires de)elop+ent costs to &e e4pensed as incurred. An e4ception e4ists in #.S.
'AA( for soft$are de)elop+ent costs.
*. I+pair+ent of assets 5 an asset is i+paired under IFRS $hen its carring a+ount
e4ceeds its reco)era&le a+ount" $hich is the greater of net selling price and )alue in
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use. 6alue in use is calculated as the present )alue of future cash flo$s e4pected fro+
continued use of the asset and fro+ its disposal. An asset is i+paired under #.S.
'AA( $hen its carring a+ount e4ceeds the undiscounted future cash flo$s e4pected
fro+ the asset7s continued use and disposal.
8. Measure+ent of i+pair+ent loss 5 the i+pair+ent loss under IFRS is the
difference &et$een carring a+ount and reco)era&le a+ount1 under #.S. 'AA("
the i+pair+ent loss is the a+ount & $hich carring a+ount e4ceeds fair )alue.
Reco)era&le a+ount and fair )alue are li%el to &e different.
!. Re)ersal of i+pair+ent loss 5 if su&se/uent to recogni-ing an i+pair+ent loss" the
reco)era&le a+ount of an asset is deter+ined to e4ceed its ne$ carring a+ount"
IFRS re/uire the original i+pair+ent loss to &e re)ersed1 #.S. 'AA( does not
allo$ the re)ersal of a pre)iousl recogni-ed i+pair+ent loss.
2. Borro$ing costs 5 the &ench+ar% treat+ent in IFRS is to e4pense all &orro$ing costs
$hen incurred" the allo$ed alternati)e is to capitali-e &orro$ing costs to the e4tent
the are attri&uta&le to the ac/uisition" construction" or production of a /ualifing asset.
The &ench+ar% treat+ent is not allo$ed under #.S. 'AA(1 interest +ust &e
capitali-ed as part of a /ualifing asset $hen certain criteria are +et.
F. 3eases 5 &oth IFRS and #.S. 'AA( distinguish &et$een operating and finance
(capitali-ed) leases. #.S. 'AA( pro)ides 9&right line: tests to deter+ine $hen a lease
+ust &e capitali-ed1 IFRS do not.
I6. A nu+&er of IASB standards deal pri+aril $ith disclosure and presentation issues" and in
so+e cases re/uire+ents differ fro+ #.S. 'AA(.
A. IAS 1 re/uires presentation of a state+ent of cash flo$s. IAS 7 allo$s interest to &e
classified as operating" in)esting" or financing" $hereas it al$as is classified as
operating under #.S. 'AA(.
B. IAS 8 generall re/uires changes in accounting policies to &e handled retrospecti)el1
unli%e under #.S. 'AA(" the cu+ulati)e effect of a change is not included in inco+e.
.. IAS 14 re/uires disclosures for &oth &usiness seg+ents and geographical seg+ents"
$ith one &eing identified as the pri+ar reporting for+at. The so;called +anage+ent
approach that re/uires the disclosure of operating seg+ents used in #.S. 'AA( is not
follo$ed.
*. IAS 34 re/uires interi+ periods to &e treated as discrete accounting periods" $hereas
#.S. 'AA( treats interi+ periods as an integral part of the full ear.
2. IFRS 5 pro)ides a +ore li&eral definition of $hat /ualifies as a discontinued operation
than does #.S. 'AA(.
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Answers to Questions
8. The tpes of differences that e4ist &et$een IFRS and #.S. 'AA( can &e classified as<
*efinition differences
Recognition differences
Measure+ent differences
*ifferences in allo$ed alternati)es
*ifferences in (lac% of) guidance
(resentation differences
*isclosure differences
!. In appling the lo$er of cost and +ar%et rule for in)entories" IAS 2 defines +ar%et as net
reali-a&le )alue (=R6) and #.S. 'AA( defines +ar%et as replace+ent cost ($ith =R6 as a
ceiling and =R6 less nor+al profit +argin as a floor).
3. The t$o +odels allo$ed & IAS 8> are the cost +odel and the re)aluation +odel. #nder the
re)aluation +odel" propert" plant" and e/uip+ent is reported on the &alance sheet at a
re)alued a+ount" +easured as fair )alue at the date of re+easure+ent" less accu+ulated
depreciation and an accu+ulated i+pair+ent losses.
?. #nder IAS 3>" e4penditures gi)ing rise to a potential intangi&le are classified as either
research or de)elop+ent e4penditures. Research e4penditures are e4pensed as incurred.
*e)elop+ent e4penditures are recogni-ed as an intangi&le asset $hen si4 criteria are +et.
#nder #.S. 'AA(" research and de)elop+ent costs are e4pensed as incurred. The onl
e4ception is for soft$are de)elop+ent costs" $hich are recogni-ed as an asset $hen certain
criteria ha)e &een +et.
@. #nder IAS 36" an i+pair+ent loss arises $hen an asset7s reco)era&le a+ount is less than
its carring )alue" $here reco)era&le a+ount is the greater of net selling price and )alue in
use. 6alue in use is deter+ined as the e4pected future cash flo$s fro+ use of the asset
discounted to present )alue. The a+ount of the loss is the difference &et$een carring
)alue and reco)era&le a+ount.
#nder #.S. 'AA(" an i+pair+ent loss arises $hen the e4pected future cash flo$s
(undiscounted) fro+ the use of the asset are less than its carring )alue. If i+pair+ent
e4ists" the a+ount of the loss is e/ual to the difference &et$een carring )alue and fair
)alue" $hich can &e deter+ined in different $as.
>. 'ood$ill +ust &e tested for i+pair+ent annuall. 'ood$ill that can &e allocated to a
specific cash;generating unit is tested for i+pair+ent using a &otto+;up test. In this test" the
carring )alue of the cash;generating unit" including good$ill" is co+pared $ith the
reco)era&le a+ount of the cash;generating unit. If the reco)era&le a+ount of a cash;
generating unit is less its carring )alue" good$ill is dee+ed to &e i+paired and is $ritten
do$n.

A. IAS !3 (re)ised in !00A) re/uires &orro$ing costs to &e capitali-ed to the e4tent that the
are attri&uta&le to the ac/uisition" construction" or production of a /ualifing asset1 other
&orro$ing costs are e4pensed i++ediatel. (rior to the !00A re)ision" IAS !3 allo$ed fir+s
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to choose &et$een the current treat+ent or a treat+ent in $hich all &orro$ing costs are
e4pensed i++ediatel.
8. IAS 17 descri&es fi)e situations that $ould nor+all lead to a lease &eing capitali-ed" &ut
does not descri&e these as &eing a&solute tests. The criteria i+plied in four of the situations
are si+ilar to the specific criteria in #.S. 'AA(" &ut the IAS 17 criteria pro)ide less 9&right
line: guidance. IAS 17 indicates that a lease $ould nor+all &e capitali-ed $hen the lease
ter+ is for the +aBor part of the leased asset7s life 5 #.S. 'AA( specificall defines 9+aBor
part: as A@C. IAS 17 also indicates that a lease $ould nor+all &e capitali-ed $hen the
present )alue of +ini+u+ lease pa+ents is e/ual to su&stantiall all the fair )alue of the
leased asset 5 #.S. 'AA( specificall defines 9su&stantiall all: as D0C. *eter+ining
$hether a lease should &e capitali-ed is an e4a+ple of the principles;&ased approach
follo$ed in IFRS )ersus the rules;&ased approach of #.S. 'AA(.
D. A difference in accounting for a sale;and;lease&ac% gain e4ists &et$een IFRS and #.S.
'AA( $hen the lease in the transaction is classified as an operating lease 5 the gain is
recogni-ed i++ediatel under IAS 8A" &ut +ust &e a+orti-ed o)er the life of the lease under
#.S. 'AA(. If the lease is classified as a financing lease" &oth IFRS and #.S. 'AA( re/uire
the gain on sale;and;lease&ac% to &e a+orti-ed o)er the life of the lease.
80. The criteria for the disclosure and recognition of a contingent lia&ilit (loss) are )er si+ilar
in &oth IAS 37 and #.S. 'AA(. The +ain difference is that IAS 37 defines 9pro&a&le: in the
conte4t of recogni-ing a contingent lia&ilit as 9+ore li%el than not.: #.S. 'AA( does not
pro)ide a definition for 9pro&a&le.: IAS 37 allo$s recognition of a contingent asset (gain)
$hen the gain is 9)irtuall certain": i+pling that it can &e recogni-ed prior to actual
reali-ation. #.S. 'AA( does not allo$ recognition of contingent gains. The gain +ust &e
reali-ed &efore it can &e recogni-ed.
88. IAS 19 re/uires past ser)ice cost related (a) to retirees and )ested acti)e e+ploees to &e
e4pensed i++ediatel and (&) to non;)ested e+ploees to &e recogni-ed on a straight;line
&asis o)er the re+aining )esting period. In contrast" #.S. 'AA( re/uires the past ser)ice
cost related (a) to retirees &e a+orti-ed o)er their re+aining e4pected life and (&) to acti)e
e+ploees &e a+orti-ed o)er their re+aining ser)ice period.
8!. =either the IASB nor the FASB is satisfied $ith its guidance regarding re)enue recognition.
=either Board &elie)es it has ade/uate literature that is &oth coherent and co+prehensi)e.
The IASB has a single re)enue recognition standard that is not co+prehensi)e" and #.S.
'AA( contains o)er !00 pieces of authoritati)e literature de)eloped on a piece+eal &asis"
$hich is not coherent.
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Solutions to Eer!ises an" Pro#le$s
%& 'onroe Co$pan( ) In*entor(
IFRS +&S& GAAP
Eistorical cost !0"00
0
Eistorical cost !0"000
2sti+ated selling price 8A"000 Replace+ent cost 8?"00
0
.osts to co+plete and sell !"000 =et reali-a&le )alue 8@"00
0
=et reali-a&le )alue 8@"000 =or+al profit +argin !0C
In)entor loss @"000 =R6 ; profit +argin 88">0
0
Mar%et 8?"000
In)entor loss >"00
0
a. (8) IFRS< Fear 8 In)entor loss G@"000
Fear ! .ost of goods sold G8>"800
(!) #.S. 'AA(< Fear 8 In)entor loss G>"000
Fear ! .ost of goods sold G8@"800
&. Fear 8< IFRS result in G8"000 larger inco+e &efore ta4" assets" and stoc%holders7 e/uit.
Fear !< IFRS result in G8"000 s+aller inco+e &efore ta41 assets and stoc%holders7 e/uit
are the sa+e at the end of Fear ! under &oth IFRS and #.S. 'AA(.

,& Lin!oln Co$pan( ) Resear!h an" De*elop$ent Costs
a. IFRS -ear % -ear ,
Research e4pense G> +illion
*eferred de)elop+ent costs (asset) G? +illion
A+orti-ation e4pense 5 deferred de)elop+ent costs G800"000
+&S& GAAP
Research and de)elop+ent e4pense G80 +illion ;;
&. IFRS result in G? +illion larger inco+e &efore ta4 in Fear 8 and G800"000 s+aller inco+e
&efore ta4 in Fears !;> co+pared to #.S. 'AA(.
Ignoring inco+e ta4es" total assets and total stoc%holders7 e/uit are larger under IFRS &
the follo$ing a+ounts<
Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
G?"000"000 G3"!00"000 G!"?00"000 G8">00"000 G800"000 G0
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.& /e00erson Co$pan( ) Propert(1 Plant an" E2uip$ent 3$easure$ent su#se2uent to
a!2uisition4
.ost" 8,!,F8 G80"000"000
#seful life @ ears
Annual depreciation G!"000"000
Boo% )alue" 8!,38,F! G>"000"000
IFRS Allo$ed Alternati)e
Fair )alue" 8,!,F3 G8!"000"000
Re+aining useful life 3 ears
Annual depreciation G?"000"000
a. *epreciation e4pense IFRS #.S. 'AA(
Fears 8 and ! G!"000"000 G!"000"000
Fears 3" ?" and @ G?"000"000 G!"000"000
Inco+e &efore ta4 is the sa+e under IFRS and #.S. 'AA( in Fears 8 and !. Inco+e
&efore ta4 is G!"000"000 s+aller under IFRS in Fears 3" ?" and @.
&. 2nd of Fear
2/uip+ent (&oo% )alue) 8 ! 3 ? @
IFRS
Beginning G80 +n G8 +n G> +n G8 +n G? +n
Re)aluation > +n
*epreciation e4pense (! +n) (! +n) (? +n) (? +n) (? +n)
2nding G8 +n G> +n G8 +n G? +n G0
+&S& GAAP
Beginning G80 +n G8 +n G> +n G? +n G! +n
*epreciation e4pense (! +n) (! +n) (! +n) (! +n) (! +n)
2nding G8 +n G> +n G? +n G! +n G0
2nd of Fear
Stoc%holders7 e/uit 8 ! 3 ? @
IFRS
Beginning G0 (G! +n) (G? +n) (G! +n) (G> +n)
Re)aluation G> +n
*epreciation e4pense(G! +n) (G! +n) (G? +n) (G? +n) (G? +n)
2nding (G! +n) (G? +n) (G! +n) (G> +n) (G80 +n)
+&S& GAAP
Beginning G0 (G! +n) (G? +n) (G> +n) (G8 +n)
*epreciation e4pense(G! +n) (G! +n) (G! +n) (G! +n) (G! +n)
2nding (G! +n) (G? +n) (G> +n) (G8 +n) (G80 +n)
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4& 'a"ison Co$pan( ) Propert(1 Plant an" E2uip$ent 3i$pair$ent4
IFRS +&S& GAAP
.arring a+ount 80"000"000 .arring a+ount 80"000"000
=et selling price A"@00"000 Future cash flo$s 80"000"000
*iscounted future cash flo$s 8"000"000 =o i+pair+ent 0
6alue in use (larger a+ount) 8"000"000
I+pair+ent loss !"000"000
a. (8) IFRS<
Fear 8 *epreciation e4pense !"000"000
I+pair+ent loss !"000"000
Fears ! ; > *epreciation e4pense 8">00"000 (8"000"000,@ ears)
(!) #.S. 'AA(<
Fears 8;> *epreciation e4pense !"000"000
&. Income before tax
IFRS Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
*epreciation e4pense
(!"000"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000)
I+pair+ent loss
(!"000"000) 0 0 0 0 0
I+pact on inco+e
(?"000"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000)
+&S& GAAP Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
*epreciation e4pense
(!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000)
I+pact on inco+e
(!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000)
*iff. (IFRS;#.S. 'AA()
(!"000"000) ?00"000 ?00"000 ?00"000 ?00"000 ?00"000
Total Assets
IFRS Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
.arring )alue (at 8,8)
8!"000"000 8"000"000 >"?00"000 ?"800"000 3"!00"000 8">00"000
*epreciation e4pense
(!"000"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000)
I+pair+ent loss
(!"000"000) 0 0 0 0 0
.arring )alue (at 8!,38)
8"000"000 >"?00"000 ?"800"000 3"!00"000 8">00"000 0
+&S& GAAP Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
.arring )alue (at 8,8)
8!"000"000 80"000"000 8"000"000 >"000"000 ?"000"000 !"000"000
*epreciation e4pense
(!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000)
.arring )alue (at 8!,38)
80"000"000 8"000"000 >"000"000 ?"000"000 !"000"000 0
*iff. (IFRS;#.S.'AA()
(!"000"000) (8">00"000) (8"!00"000) (800"000) (?00"000) 0
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Total Stockholders Equity (ignoring income taxes)
IFRS Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
Beginning &alance
0 (?"000"000) (@">00"000) (A"!00"000) (8"800"000) (80"?00"000)
*epreciation e4pense
(!"000"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000) (8">00"000)
I+pair+ent loss
(!"000"000) 0 0 0 0 0
2nding &alance
(?"000"000) (@">00"000) (A"!00"000) (8"800"000) (80"?00"000) (8!"000"000)
+&S& GAAP Fear 8 Fear ! Fear 3 Fear ? Fear @ Fear >
Beginning &alance
0 (!"000"000) (?"000"000) (>"000"000) (8"000"000) (80"000"000)
*epreciation e4pense
(!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000) (!"000"000)
2nding &alance
(!"000"000) (?"000"000) (>"000"000) (8"000"000) (80"000"000) (8!"000"000)
*iff. (IFRS;#.S.'AA() (!"000"000) (8">00"000) (8"!00"000) (800"000) (?00"000) 0
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5& Iptat International ) Re*aluation o0 Fie" Assets
a. AdBust+ent (a) relates to the depreciation of the re)aluation a+ount on fi4ed assets.
AdBust+ent (a) results in an addition to net inco+e &ecause the additional depreciation
ta%en on the re)aluation a+ount does not e4ist under #.S. 'AA(. The addition to net
inco+e pertains to the current ear onl. The addition to net inco+e in the current ear
plus the addition to net inco+e in pre)ious ears is the cu+ulati)e effect on retained
earnings" $hich is the shareholders7 e/uit account affected & adBust+ent (a). The
addition to shareholders7 e/uit is greater than the addition to net inco+e &ecause of this
cu+ulati)e effect.
&. AdBust+ent (&) relates to the re)aluation surplus (increase in shareholders7 e/uit) that is
recorded $hen fi4ed assets are re)alued. This increase does not e4ist under #.S.
'AA( and shareholders7 e/uit +ust &e reduced accordingl. In this case" the
shareholders7 e/uit account affected is Re)aluation Surplus.
6& 7ani Petro!he$i!al Co$pan( ) De0erre" "e*elop$ent !osts an" Gain on sale an"
lease#a!8
#nder IFRS" Han4i apparentl has capitali-ed so+e de)elop+ent costs as an asset (IAS
38)" $hich $ould not &e accepta&le under #.S. 'AA(. AdBust+ent (a) adds &ac% the current
ear7s a+orti-ation e4pense on the deferred de)elop+ent costs that $as deducted in
deter+ining IFRS net inco+e. This adBust+ent results in a larger a+ount of #.S. 'AA( net
inco+e. The addition to inco+e flo$s through to retained earnings increasing shareholders7
e/uit. The addition to net inco+e pertains to the current ear onl. The addition to net
inco+e in the current ear plus the addition to net inco+e in pre)ious ears is the
cu+ulati)e effect on retained earnings. The addition to shareholders7 e/uit is greater than
the addition to net inco+e &ecause of this cu+ulati)e effect.
If the lease in a sale;lease&ac% transaction is classified as an operating lease" IAS 17
re/uires the gain on such a transaction to &e reported in inco+e i++ediatel" $hereas #.S.
'AA( re/uires the gain to &e a+orti-ed o)er the life of the lease. AdBust+ent (&) su&tracts
the gain on sale,lease&ac% in the current ear that $as recogni-ed in full under IFRS. The
a+ount of adBust+ent (&) is the difference &et$een the entire gain recogni-ed under IFRS
and the portion of the gain that $ould &e recogni-ed under #.S. 'AA( (including
a+orti-ation of gains that +ight ha)e &een generated in earlier ears). The sa+e a+ount
should &e su&tracted fro+ retained earnings reducing shareholders7 e/uit. Fro+ the fact
that adBust+ent (&) reduced shareholders7 e/uit & a larger a+ount than it reduces net
inco+e" $e can infer that Han4i had one or +ore sale,lease&ac% gains in pre)ious ears.
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9& :u!h Corporation ) Deter$ination o0 I$pair$ent Loss an" Su#se2uent Re*ersal
.ost G800"000
#seful life 80 ears
Residual )alue G0
Annual depreciation charge G80"000
Fear 8 Fear ! Fear 3
.arring )alue (at 8,8) G800"000 GD0"000 G80"000
*epreciation e4pense (80"000) (80"000) (80"000)
.arring )alue (at 8!,38) GD0"000 G80"000 GA0"000
Test for i+pair+ent at *ece+&er 38" Fear 3<
.arring )alue GA0"000
=et selling price (GA0"000 ; GA"000) G>3"000
6alue in use G@@"000
Reco)era&le a+ount (greater of the t$o) >3"000
I+pair+ent loss G A"000
The i+pair+ent loss of GA"000 $ould &e recogni-ed in inco+e on *ece+&er 38" Fear 3 $ith
an offsetting reduction in the asset7s carring )alue. As a result" the asset $ill &e reported at
on the *ece+&er 38" Fear 3 &alance sheet at a carring )alue of G>3"000. This a+ount $ill
&e depreciated o)er the re+aining useful life of A ears on a straight;line &asis.
Fear 8 Fear ! Fear 3 Fear ? Fear @
.arring )alue (at 8,8) G800"000 GD0"000 G80"000 G>3"000 G@?"000
*epreciation e4pense (80"000) (80"000) (80"000) (D"000) (D"000)
I+pair+ent loss (A"000)
.arring )alue (at 8!,38) GD0"000 G80"000 G>3"000 G@?"000 G?@"000
Re)ie$ for re)ersal of i+pair+ent loss at *ece+&er 38" Fear @<
.arring )alue G?@"000
=et selling price (G@0"000 ; GA"000) G?3"000
6alue in use G@3"000
Reco)era&le a+ount (greater of the t$o) @3"000
I+pair+ent loss G 0
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Doupnik and erera, International Accounting, 2!e
"-#0
IAS 36 re/uires an i+pair+ent loss to &e re)ersed if the reco)era&le a+ount of an asset is
deter+ined to e4ceed its ne$ carring a+ount" &ut onl if there are changes in the
esti+ates used to deter+ine the original i+pair+ent loss or there is a change in the &asis
for deter+ining the reco)era&le a+ount (fro+ )alue in use to net selling price or )ice )ersa).
Because reco)era&le a+ount has changed fro+ net selling price at the end of Fear 3 to
)alue in use at the end of Fear @" and the reco)era&le a+ount is greater than the carring
)alue at the end of Fear @" the i+pair+ent loss recogni-ed in Fear 3 should &e re)ersed.
Eo$e)er" the carring )alue of the asset after re)ersal of the i+pair+ent loss should not
e4ceed $hat it $ould ha)e &een if no i+pair+ent loss had &een recogni-ed. The carring
)alue of Machine I at *ece+&er 38" Fear @ $ould ha)e &een G@0"000 if no i+pair+ent loss
had &een recogni-ed in Fear 3 (G800"000 original cost less G80"000 annual depreciation for
fi)e ears). Thus" an increase in the carring )alue of the asset of G@"000 should &e
recogni-ed at *ece+&er 38" Fear @ $ith a re)ersal of i+pair+ent loss in an e/ual a+ount.
The asset7s carring )alue on the *ece+&er 38" Fear @ &alance sheet $ill &e G@0"000
(G?@"000 J G@"000). This a+ount $ill &e depreciated o)er the re+aining useful life of @
ears on a straight;line &asis.
Su++ar of a+ounts to &e reported on the &alance sheet and inco+e state+ent in Fears 8
5 @<
Fear 8 Fear ! Fear 3 Fear ? Fear @
.arring )alue (at 8,8) G800"000 GD0"000 G80"000 G>3"000 G@?"000
Inco+e State+ent
*epreciation e4pense (80"000) (80"000) (80"000) (D"000) (D"000)
I+pair+ent loss (A"000)
Re)ersal of i+pair+ent loss @"000
.arring )alue (at 8!,38) GD0"000 G80"000 G>3"000 G@?"000 G@0"000
Inco+e state+ent effect (80"000) (80"000) (8A"000) (D"000) (?"000)
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Doupnik and erera, International Accounting, 2!e
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;& Hol<er Co$pan( ) Capitali<ation o0 #orrowin= !osts an" 'easure$ent o0 asset
su#se2uent to a!2uisition usin= two alternati*e $o"els
IAS 1 Cost 'o"el
.arr asset on the &alance sheet at cost less accu+ulated depreciation and an
accu+ulated i+pair+ent losses.
.apitali-e &orro$ing costs &orro$ing costs attri&uta&le to the construction of /ualifing
assets.
Annual interest (GD00"000 4 80C) GD0"000
Interest to &e capitali-ed in Fear 8 (G@00"000K 4 80C) @0"000
Interest e4pense in Fear 8 G?0"000
K 24penditures of G8"000"000 $ere +ade e)enl throughout the ear" so the a)erage
accu+ulated e4penditures during the ear are G@00"000 (G8"000"000 , !).
.ost of &uilding<
.onstruction costs G8"000"000
.apitali-ed interest @0"000
Total initial cost of &uilding G8"0@0"000
Annual depreciation (&eginning in Fear !) (G8"0@0"000 , ?0 ears) G!>"!@0
Fear 8 Fear ! Fear 3 Fear ? Fear @
Inco+e State+ent
*epreciation e4pense G0 G!>"!@0 G!>"!@0 G!>"!@0 G!>"!@0
Balance Sheet
Building (at 8,8) G0 G8"0@0"000 G8"0!3"A@0 GDDA"@00 GDA8"!@0
*epreciation (!>"!@0) (!>"!@0) (!>"!@0) (!>"!@0)
Building (at 8!,38) G8"0@0"000 G8"0!3"A@0 GDDA"@00 GDA8"!@0 GD?@"000
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Doupnik and erera, International Accounting, 2!e
"-#2
IAS 1 Re*aluation 'o"el
.arr asset on the &alance sheet at re)alued a+ount e/ual to fair )alue less an
su&se/uent accu+ulated depreciation and an accu+ulated i+pair+ent losses.
.apitali-e &orro$ing costs attri&uta&le to the construction of /ualifing assets.
Annual interest (GD00"000 4 80C) GD0"000
Interest to &e capitali-ed in Fear 8 (G@00"000 4 80C) @0"000
Interest e4pense in Fear 8 G?0"000
.ost of &uilding<
.onstruction costs G8"000"000
.apitali-ed interest @0"000
Total initial cost of &uilding G8"0@0"000
Annual depreciation (&eginning in Fear !) (G8"0@0"000 , ?0 ears) G!>"!@0
Fear 8 Fear ! Fear 3 Fear ? Fear @
Inco+e State+ent
*epreciation e4pense G0 G!>"!@0 G!>"!@0 G!@"@!>
!
G!@"@!>
Su&total G0 G!>"!@0 G!>"!@0 G!@"@!> G!@"@!>
3oss on re)aluation !A"@00
Re)ersal of re)aluation loss (!A"@00)
Total e4pense (inco+e) G0 G!>"!@0 G?3"A@0 G!@"@!> G(8"DA?)
Balance Sheet
Building (at 8,8) G0 G8"0@0"000 G8"0!3"A@0 GDA0"000 GD??"?A?
*epreciation (!>"!@0) (!>"!@0) (!@"@!>) (!@"@!>)
Building (at 8!,38) G8"0@0"000 G8"0!3"A@0 GDDA"@00 GD??"?A? GD88"D?8
3oss on re)aluation (!A"@00)
8
Re)ersal of re)aluation loss !A"@00
3
Re)aluation surplus 3"@@!
3
Building (at 8!,38) G8"0@0"000 G8"0!3"A@0 GDA0"000 GD??"?A? GD@0"000
8
At *ece+&er 38"Fear 3" the fair )alue of the &uilding is deter+ined to &e GDA0"000. The
carring )alue of the &uilding is decreased & G!A"@00" $ith a loss on re)aluation recogni-ed
in Fear 3 net inco+e.
!
*epreciation in Fear ? is G!@"@!> (GDA0"000 , 38 re+aining ears).
3
At *ece+&er 38"Fear @" the fair )alue of the &uilding is deter+ined to &e GD@0"000. The
carring )alue of the &uilding is increased & G38"0@!. A re)ersal of re)aluation loss of
G!A"@00 is recogni-ed in inco+e and G3"@@! (G38"0@! 5 !A"@00) is recorded as re)aluation
surplus in shareholders7 e/uit.

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Doupnik and erera, International Accounting, 2!e
"-#$
>& Quanta!! Co$pan( ) Re!on!iliation to +&S& GAAP
-ear 5
=et inco+e under IFRS G800"000
AdBust+ents<
Re)ersal of depreciation on re)aluation of fi4ed assets 3"@00
Re)ersal of a+orti-ation of deferred de)elop+ent costs 8>"000
Re)ersal of gain on sale and lease&ac% (8@0"000)
A+orti-ation of gain on sale and lease&ac% A"@00
=et inco+e (loss) under #.S. 'AA( G (!3"000 )
De!e$#er .%1 -ear 5
Stoc%holders7 e/uit under IFRS G@00"000
AdBust+ents<
Re)ersal of re)aluation of fi4ed assets (3@"000)
Re)ersal of accu+ulated depreciation on re)aluation of fi4ed assets A"000
Re)ersal of deferred de)elop+ent costs (80"000)
Re)ersal of accu+ulated a+orti-ation on deferred de)elop+ent costs 3!"000
Re)ersal of gain on sale and lease&ac% (8@0"000)
Accu+ulated a+orti-ation of gain on sale and lease&ac% A"@00
Stoc%holders7 e/uit under #.S. 'AA( G !88"@00
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Doupnik and erera, International Accounting, 2!e
"-#"
%?&
Acceptable under
IFRS U.S. GAAP Both Neither
A company takes out a loan to finance the
construction of a building that will be used by
the company. The interest on the loan is
capitalized as part of the cost of the building.
X
Inventory is reported on the balance sheet
using the last-in, first-out (I!"# cost flow
assumption.
X
The gain on a sale and leaseback transaction
classified as an operating lease is deferred and
amortized over the lease term.
X
A company writes a fi$ed asset down to its
recoverable amount and recognizes an
impairment loss in %ear &. In a subse'uent
year, the recoverable amount is determined to
e$ceed the asset(s carrying value, and the
previously recognized impairment loss is
reversed.
X
)ast service costs related to retired employees
that arise when a company makes an
improvement to its pension plan are amortized
over the remaining e$pected lives of the
retirees.
X
A company enters into an eight-year lease on
e'uipment that is e$pected to have a useful life
of ten years. The lease is accounted for as an
operating lease.
X
&
*ividends paid are classified as an operating
cash outflow in the statement of cash flows.
X
In preparing interim financial statements,
interim periods are treated as discrete reporting
periods rather than as an integral part of the
full year.
X
+esearch and development costs are
capitalized when certain criteria are met.
X
,
8
This $ould &e accepta&le under IAS 8A if 80C of the life of the lease is not )ie$ed as the
9+aBor part: of the lease.
!
=either IFRS nor #.S. 'AA( allo$s capitali-ation of research costs.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009
Doupnik and erera, International Accounting, 2!e
"-#%
88. The ans$ers to this e4ercise $ill depend upon the co+pan and the three line ite+s
selected & the students to e4plain. If the nu+&er of students in class is s+all" each
co+pan can &e assigned to a tea+ of students" $ith responses to the re/uire+ents of the
e4ercise presented in class.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009
Doupnik and erera, International Accounting, 2!e
"-#&
CASE 4@% /ar"ine 'atheson Group 3part ,4
Choi!e a$on= Alternati*es
Four areas in $hich IFRS allo$ a choice a+ong alternati)es and Lardine7s selection a+ong the
choices<
9Tangi&le fi4ed assets: are stated at )aluation" as are 9In)est+ent properties: as allo$ed &
IAS 16 and IAS 40" respecti)el.
The cost of 9Stoc%s and $or% in progress: is deter+ined & the first;in" first;out +ethod as
allo$ed & IAS 2.
9Borro$ing costs: related to +aBor de)elop+ent proBects are capitali-ed until the asset is
su&stantiall co+pleted. All other &orro$ing costs are e4pensed as incurred. IAS 23 allo$s
this treat+ent for &orro$ing costs.
9Actuarial gains and losses: on defined &enefit pension plans are recogni-ed in full in the
ear in $hich the occur" outside profit and loss" as is allo$ed & IAS 19 (a+ended !00?).
(=ote< this topic is co)ered in the Appendi4 to the chapter.)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009
Doupnik and erera, International Accounting, 2!e
"-#'
CASE 4@, :essrawl Corporation
Re!on!iliation 0ro$ +&S& GAAP to IFRS

,??;
In!o$e un"er +&S& GAAP A%1???1???
A"Bust$entsC
Re)ersal of $ritedo$n of in)entor to replace+ent cost 80"000
Additional depreciation on re)aluation of e/uip+ent (!@"000)
I+pair+ent loss on intangi&le asset (&rand) (@"000)
Recognition of deferred de)elop+ent costs 80"000
Re)ersal of a+orti-ation of deferred gain on sale and lease&ac% (30"000)
*ifference in a+orti-ation of prior ser)ice cost (88"000)
In!o$e un"er IFRS A%1?%>1???
,??;
Sto!8hol"ersD e2uit( un"er +&S& GAAP A;1???1???
A"Bust$entsC
Re)ersal of $ritedo$n of in)entor to replace+ent cost 80"000
0riginal re)aluation surplus on e/uip+ent >00"000
Accu+ulated depreciation on re)aluation of e/uip+ent (!@"000)
I+pair+ent loss on intangi&le assets (&rand) (@"000)
Recognition of deferred de)elop+ent costs 80"000
Recognition of gain on sale and lease&ac% in !00> 8@0"000
Accu+ulated a+orti-ation of deferred gain on sale and lease&ac% (!00>;
!008) (D0"000)
*ifference in cu+ulati)e a+orti-ation of prior ser)ice cost (@!"000)
Sto!8hol"ersD e2uit( un"er IFRS A;166;1???
Eplanation o0 A"Bust$ents
Inventory. #nder #.S. 'AA(" the co+pan reports in)entor on the &alance sheet at the lo$er
of cost or +ar%et" $here +ar%et is defined as replace+ent cost (G880"000)" $ith net reali-a&le
)alue (G8D0"000) as a ceiling and net reali-a&le )alue less a nor+al profit (G8@!"00) as a floor.
In this case" in)entor $as $ritten do$n to replace+ent cost and reported on the *ece+&er 38"
!008 &alance sheet at G880"000. A GA0"000 loss $as included in !008 inco+e.
In accordance $ith IAS 2" the co+pan $ould report in)entor on the &alance sheet at the lo$er
of cost (G!@0"000) and net reali-a&le )alue (G8D0"000). In)entor $ould ha)e &een reported on
the *ece+&er 38" !008 &alance sheet at net reali-a&le )alue of G8D0"000 and a loss on
$ritedo$n of in)entor of G>0"000 $ould ha)e &een reflected in net inco+e.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009
Doupnik and erera, International Accounting, 2!e
"-#(
IFRS inco+e $ould &e G80"000 larger than #.S. 'AA( net inco+e. IFRS retained earnings
$ould &e larger & the sa+e a+ount.
Equi!ent. #nder #.S. 'AA(" the co+pan reports depreciation e4pense of G800"000
M(G!"A@0"000 5 G!@0"000) , !@ earsN in !00A and in !008.
#nder IAS 167s re)aluation +odel" depreciation e4pense on e/uip+ent in !00A $as G800"000"
resulting in a &oo% )alue at the end of !00A of G!">@0"000. The e/uip+ent then $ould &e
re)alued up$ard at the &eginning of !008 to its fair )alue of G3"!@0"000.
The appropriate Bournal entr to recogni-e the re)aluation $ould &e<
*r. 2/uip+ent G>00"000
.r. Re)aluation Surplus (a stoc%holders7 e/uit account) G>00"000
In !008" depreciation e4pense $ould &e G8!@"000 M(G3"!@0"000 ; G!@0"000),!? earsN.
The additional depreciation under IFRS causes IFRS;&ased inco+e in !008 to &e G!@"000
s+aller than #.S. 'AA( inco+e. IFRS;&ased stoc%holders7 e/uit is G@A@"000 larger than #.S.
'AA( stoc%holders7 e/uit. This is e/ual to the a+ount of the re)aluation surplus (G>00"000)
less the additional depreciation in !008 under IFRS (G!@"000)" $hich reduced retained earnings.
Int"n#i$%e Assets. #nder #.S. 'AA(" an asset is i+paired $hen its carring a+ount e4ceeds the
undiscounted future cash flo$s e4pected to arise fro+ continued use of the asset. The &rand
ac/uired in !00@ has a carring a+ount of G?0"000 and future e4pected cash flo$s are G?!"000"
so it is not i+paired under #.S. 'AA(.
#nder IAS 3>" an asset is i+paired $hen its carring a+ount e4ceeds its reco)era&le a+ount"
$hich is the greater of net selling price and )alue in use. The &rand7s reco)era&le a+ount is
G3@"0001 the greater of net selling price of G3@"000 and )alue in use (present )alue of future
cash flo$s) of G3?"000. As a result" an i+pair+ent loss of G@"000 $ould &e recogni-ed under
IFRS.
IFRS inco+e and retained earnings $ould &e G@"000 less than #.S. 'AA( inco+e and retained
earnings.
Rese"rc& "nd 'eve%o!ent (osts. #nder #.S. 'AA(" research and de)elop+ent e4pense in
the a+ount of G!00"000 $ould &e recogni-ed in deter+ining !008 inco+e.
#nder IAS 38" G8!0"000 (>0C 4 G!00"000) of research and de)elop+ent costs $ould &e
e4pensed in !008" and G80"000 (?0C 4 G!00"000) of de)elop+ent costs $ould &e capitali-ed as
an intangi&le asset (deferred de)elop+ent costs).
IFRS;&ased inco+e in !008 $ould &e G80"000 larger than #.S. 'AA( inco+e. Because the
ne$ product has not et &een &rought to +ar%et" there is no a+orti-ation of the deferred
de)elop+ent costs under IFRS in !008.
S"%e "nd )e"se$"c*. #nder #.S. 'AA(" the gain on the sale and lease&ac% (operating lease) is
recogni-ed in inco+e o)er the life of the lease. Oith a lease ter+ of fi)e ears" G30"000 of the
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009
Doupnik and erera, International Accounting, 2!e
"-#9
gain $ould &e recogni-ed in !008. G30"000 also $ould ha)e &een recogni-ed in !00> and
!00A" resulting in a cu+ulati)e a+ount of retained earnings at ear;end !008 of GD0"000.
#nder IAS 13" the entire gain on the sale and lease&ac% of G8@0"000 $ould ha)e &een
recogni-ed in inco+e in !00>. This resulted in an increase in retained earnings of G8@0"000 in
that ear. =o gain $ould &e recogni-ed in !008. IFRS inco+e in !008 $ould &e G30"000
s+aller than #.S. 'AA( inco+e" &ut stoc%holders7 e/uit at *ece+&er 38" !008 under IFRS
$ould &e G>0"000 larger than under #.S. 'AA(.

+ension +%"n. #nder #.S. 'AA(" the prior ser)ice cost is a+orti-ed o)er the re+aining ser)ice
life of the e+ploees. 24pense recogni-ed in !008 is G?"000 MG>0"000 , 8@ earsN. The
cu+ulati)e e4pense (and reduction in retained earnings) recogni-ed since the plan $as
changed in !00A is G8"000 MG?"000 4 ! earsN.
#nder IAS 19" the prior ser)ice cost attri&uta&le to the )ested e+ploees $ould ha)e &een
e4pensed in !00A 5 G30"000 M@0C 4 G>0"000N. The prior ser)ice cost attri&uta&le to non;)ested
e+ploees $ould &e e4pensed o)er the t$o re+aining ears until )esting. 24pense recogni-ed
in !008 $ould &e G8@"000 MG30"000 , ! earsN. The cu+ulati)e e4pense (and reduction tin
retained earnings) recogni-ed since the plan $as changed is G>0"000 MG30"000 J (G8@"000 4 !
ears).
IFRS inco+e in !008 $ould &e G88"000 (G8@"000 ; G?"000) less than #.S. 'AA( inco+e" and
stoc%holders7 e/uit at ear;end !008 under IFRS $ould &e G@!"000 (G>0"000 ; G8"000) less
than under #.S. 'AA(.
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