Chapter 4

INTERNATIONALSCHOOL
HaNoiNational University
http://is.vnu.edu.vn/
INTERNATIONAL ACCOUNTING
Ha Noi, 2019
Topic Three
International Financial
Reporting Standards
(IFRS): Part I
Copyright © 2012 The McGraw-Hill Companies,

All Rights Reserved
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INTERNATIONAL FINANCIAL REPORTING
STANDARDS
August 2010, 41 International Accounting Standards (IAS) and 9
International Financial Reporting Standards (IFRS) had been
issued by IASB.
In 2017, 41 IAS and 17 IFRS
Ref:
1. https://www.ifrs.org/issued-standards/list-of-standards/
2.
https://en.wikipedia.org/wiki/List_of_International_Financial_Rep
orting_Standards
INTERNATIONALSCHOOL
International Financial Reporting Standards - Part I
Chapter Topics
• Differences between IFRS and US GAAP.
• Inventories. – IAS 2
• Property, Plant & Equipment. – IAS 16
• Investment Property. – IAS 40
• Impairment of Assets. – IAS 36
• Intangible Assets. – IAS 38
• Goodwill.
• Borrowing Costs. – IAS 23
• Leases. – IAS 17
• Disclosure and Presentation Standards. INTERNATIONALSCHOOL
International Financial Reporting Standards - Part I
Learning Objectives
1. Discuss the differences between IFRS and U.S. GAAP.
2. Describe IFRS requirements for recognition and
measurement of inventories; property, plant and equipment;
intangibles and leased assets.
3. Explain the major differences between IFRS and U.S. GAAP
on the recognition and measurement of assets.
4. Describe the IFRS requirements in a variety of disclosure and
presentation standards.
5. Explain the major differences between IFRS and U.S. GAAP
on certain disclosure and presentation issues.
6. Analyze the impact that the differences between IFRS and
U.S. GAAP can have on financial statements.
INTERNATIONALSCHOOL
Types of Differences Between IFRS and U.S. GAAP
• Definitions.
• Recognition.
• Measurement.
• Alternatives.
• Lack of requirements or guidance.
• Presentation.
• Disclosure.
Learning Objective 1 INTERNATIONALSCHOOL

Types of Differences Between IFRS and U.S. GAAP
IFRS more flexible in many cases:
• Choice of alternatives.
• Less guidance leads to more judgment in applying IFRS.

IAS 2, Inventories
• Initial cost.
• Cost formulas to allocate cost of inventories to
expense.
• Subsequent balance sheet measurement.

IAS 2, Inventories
• Costs included:
– Cost of purchase (purchase price and direct
acquisition costs).
– Conversion costs (labor and overhead).
– Other costs (design, interest if takes time to bring to
saleable condition).
• Costs excluded:
– Abnormal waste.
– Storage unless necessary for production process.
– Purely administrative overhead.
– Selling costs.

IAS 2, Inventories
Cost formulas:
• No LIFO!
• Must use same cost formula for similar inventory items.
Must report on balance sheet at lower of

cost or net realizable value:
• Unlike U.S. GAAP which uses lower of cost or market.
• NRV = estimated selling price less costs of completion
and other costs to make sale.
Learning Objectives 2 and 3 INTERNATIONALSCHOOL

IAS 2, Inventories. Example
INTERNATIONALSCHOOL
IAS 2, Inventories
• Historic cost is constant over the life of the inventory.

• U.S. GAAP: market = replacement cost:
– Ceiling = NRV
– Floor = NRV –normal profit margin
– Any write-down establishes new cost for subsequent
periods
• IFRS and U.S. GAAP both yield same expense over
entire life.

IAS 16, Property, Plant & Equipment
1. Recognition of initial costs—when yield probable future

benefits which can be measured.
2. Recognition of subsequent costs—i.e. replacements—
follow initial recognition rules and then remove cost and a/d
of the replaced part.
• Example (Page 119) Replacement of part of an Assets

3. Measurement at initial recognition—purchase price plus

costs to put into service. (Costs as duties, taxes, etc)
4. Measurement after initial recognition —can use cost or---
unlike U.S. GAAP, can use revaluation model.
5. Depreciation—review estimated lives, residual value and
method annually—any changes are “prospective”---also, unlike
U.S. GAAP—separate any significant components.
(Example page 126)
6. Derecognition--retirements and disposals—no more future
benefit.

Example: Component Depreciation
On January 1, Year 1, an entity acquires a new piece of

machinery with an estimated useful life of 10 years for
$120,000. The company has determined that the straight-
line method. The component as following:
1. Calculate Depreciation Year 1 follow IFRS?

2. Calculate Depreciation Year 1 follow U.S. GAAP
INTERNATIONALSCHOOL
6. Revaluation Model:
• U.S. GAAP do not allow to revaluation
• IAS 16 requires that all assets of the same class be revalued
at the same time

IAS 40, Investment Property
• Land or buildings held for rental, capital appreciation or

both.
• Same general principles as IAS 16 re: choice of cost or

revaluation:
– EXCEPT gains or losses from changes in Fair value (FV)
recognized in current income and not revaluation surplus
• Even using cost model—disclose FV in notes.
• U.S. generally requires use of cost model for investment

property.

IAS 36, Impairment of Assets
• Must test annually for impairment to P,P & E; intangible

assets; goodwill; investments in subsidiaries ;
associates and joint ventures.
• Does not apply to inventory, construction in progress,

deferred tax assets, employee benefit assets or financial
assets (eg accounts and notes receivable).
• Some differences with U.S. GAAP.
• Impairment indicators—external events (eg economic,

legal, technological) or internal events (eg damage,
obsolescence).

• Impairment means carrying amount > recoverable

amount:
– Recoverable amount = greater of net selling price and value in
use
– Net selling price = price in active market less disposal costs
– Value in use = PV of future net cash flows (cover maximum of 5
years unless longer period is justified)—based on approved
budgets and using appropriate discount rate
• U.S. GAAP– carrying amount > undiscounted future

cash flows (net selling price not considered).
• Impairment more likely under IFRS since discounted

cash flows used.
Measurement of Impairment Loss
Reverse if recoverable amount > new carrying amount---if

changes in estimates used to determine original
impairment loss or change in how recoverable amount is
determined.
• Can only reverse up to original carrying amount.
• Recognize reversal in income immediately.
• U.S. GAAP—no reversal!

Impairment Loss
Example: Determination and Measurement of
INTERNATIONALSCHOOL
IAS 38, Intangible Assets
Applies to:
• (i) Purchased intangibles.
• (ii) Intangibles acquired in business combination.
• (iii) Internally-generated intangibles.
• (iv) Goodwill covered separately under IFRS 3—
Business Combinations.

Definition:
• Identifiable, nonmonetary asset .
• No physical substance.
• Held for production of goods or services, rental to others,
or for administrative purposes.
• Must be controlled by enterprise as result of past events
from which future economic benefits are expected to be
realized.
• Must expense immediately if definition not met unless It
is obtained in business combination and then it is
included in goodwill.

(i) Purchased intangibles:

• Similar to U.S. GAAP treatment.
• Initially measured at cost and life is either finite or

infinite .
• Finite—amortize over useful life—usually assume

zero residual value unless 3rd party agreement to
purchase or active market exists.

(ii) Intangibles acquired in business combination:

• Like U.S. GAAP—patents, trademarks and customer lists
should be separate from goodwill and recognized as long as
fair value is measurable (even if not previously recognized by
target).
• Must have finite or infinite life.
• Special situation re: target’s development costs incurred prior
to its being acquired---if meet certain criteria—capitalize—
otherwise include in goodwill.
• Recent changes in U.S. GAAP converged treatment of in-
process development costs with IFRS.

(iii) Internally generated intangibles:

• Major difference with U.S. GAAP
IFRS: some development costs may be capitalized whereas U.S.
GAAP expenses all research and virtually all development
• If can’t separate R & D—must treat all as research and

expense immediately.
• May not capitalize internally-generated goodwill.

• Examples of Internally Generated Intangible Assets:
Items that might qualify for capitalization as internally generated

intangible assets under IAS 38 include:
• Computer software costs
• Patents, copyrights
• Motion picture films
• Mortgage servicing rights
• Fishing licenses
• Franchises
• Customer or supplier relationships
• Customer loyalty
• Market share
• Marketing rights
INTERNATIONALSCHOOL

Must demonstrate the following criteria for
development cost capitalization:
• Technical feasibility so asset can be available for use or sale.
• Intention to complete asset for use or sale.
• Ability to use or sell the asset.
• How probable future economic benefits will be generated (eg—
market or internal use).
• Available adequate technical, financial and other resources to
complete the asset for use or sale.
• Ability to reliably measure expenditures pegged to
development.

Must demonstrate the following criteria for

development cost capitalization:
• Technical feasibility so asset can be available for use or sale.
• Intention to complete asset for use or sale.
• Ability to use or sell the asset.
• How probable future economic benefits will be generated
(eg—market or internal use).
• Available adequate technical, financial and other resources to
complete the asset for use or sale.
• Ability to reliably measure expenditures pegged to
development.

Goodwill under IFRS 3, Business
Combinations
• Recognize only in business combinations, is measured
as the difference between (a) and (b)
(a) The consideration transferred by the acquiring firm plus
any amount recognized as noncontrolling interest;.
(b) The fair value of net assets acquired
When (a) exceeds (b), goodwill is recognized as an asset.

When (a) is less than (b), a “bargain purchase” – negative
goodwill is possible—must recognize in income.
• Not amortized as life is indefinite.

Goodwill under IFRS 3, Business
Combinations
Impairment of goodwill:
• As an indefinite-lived intangible asset, goodwill is not
amortized. Instead, goodwill must be tested at least annually
for impairment.
• Impairment is tested at the level of the cash-generating unit
(CGU)—the smallest identifiable group of assets that
generates cash inflows—use bottom-up and top-down test to
allocate overall goodwill to each CGU.
• Compare carrying value of CGU, including goodwill, with
recoverable amount (higher of value in use and fair value less
costs to sell).
• U.S. GAAP is tested at level of the reporting unit which can be
different and typically larger than CGU.
• U.S. GAAP only requires only a bottom-up test.
IAS 23 . Borrowing Costs
• Revised in 2007 to be similar to U.S. GAAP, provided

two methods of accounting for borrowing costs:
1 . Benchmark treatment: Expense all borrowing costs
in the period incurred.
2. Allowed alternative treatment: Capitalize borrowing
costs to the extent they are:
• attributable to the acquisition, construction, or production
of a qualifying asset;
• other borrowing costs are expensed in the period
incurred.

IAS 23 . Borrowing Costs
• Borrowing costs are interest and other costs incurred in

connection with borrowing—broader in scope than U.S.
GAAP definition of interest cost.
• IAS 23 includes foreign currency exchange gain/loss if
regarded as adjustment to interest cost.
• Qualifying asset takes substantial time to get ready for
intended use or sale.
• Under IAS 23 (and not U.S. GAAP) specifically includes
inventories that requires require a substantial period to
bring them to a marketable condition.

IAS 23. Borrowing Costs
• Capitalize interest that could have been avoided in

absence of expenditure on the qualifying asset.
• Multiply weighted average accumulated expenditures by

appropriate interest rate (similar to U.S. GAAP)---can
use actual interest rate if can associate specific
borrowing as being less than total expenditures.
• Unlike U.S. GAAP—allowed to net interest income on

invested borrowed funds against interest cost.
• Example: Capitalization of Borrowing Costs (page 143)

IAS 17, Leases
• Distinguishes between finance (capitalized) leases and

operating leases.
• Also provides rules for sale-leaseback transactions.
• Conceptually similar to U.S. GAAP but less specific

guidance (one of the best examples of “principles-based”
vs. “rules-based” provisions of IFRS and GAAP,
respectively).
• IAS 17 says lease is finance when substantially all the

risks and rewards of ownership have been transferred to
lessee.

IAS 17. Leases
Examples of situations normally leading to

capitalization, individually or in combination
normally would lead to a lease being classified as a
finance leas (for U.S. GAAP—any one of the first four
criteria will trigger capitalization):
• Lease transfers ownership to lessees by end of lease term.
• Lessee has option to purchase at less than Fair market value.
• Lease term is for major part of the asset’s economic life (U.S.
GAAP says 75%).
• Present value of future minimum lease payments at lease
inception is equal to substantially all of the fair value of the
leased asset (U.S. GAAP says 90%).
• Leased assets specialized so only usable by lessee without
major modifications (not present in U.S. GAAP).
INTERNATIONALSCHOOL
Learning Objectives 2 and 3
IAS 17, Leases
IAS 17 provides three additional indicators of

situations that individually or in combination could
lead to a lease being classified as a finance lease:
• Lessee bears loss on lease cancellation.
• Lessee absorbs gain or loss from fluctuation in market
value of residual asset value.
• Lessee may extend lease for additional period at
substantially below market rent.
Example: Classification of Leases (Page 144)

IAS 17, Leases
Sale-Leaseback—Finance Lease:
• Must defer any gain on sale and recognize it in income
over the lease term.
• U.S. GAAP rules generally similar.
• If fair value less than carrying value IAS 17 recognizes
loss only if loss due to impairment, whereas US GAAP
requires immediate recognition of loss regardless of
source.
Sale-Leaseback—Operating Lease:
• IAS 17 recognizes gain immediately in income.
• U.S. GAAP amortizes gain over lease term.
IAS 17, Leases
Disclosures:
• Lessees must disclose future minimum payments related to
finance leases and operating leases separately as follows:
– Amount to be paid in Year 1
– Amount to be paid in Years 2-5 as a single amount
– Amounts to be paid in Year 6 and beyond as single amount
– Present value of future minimum payments under finance leases
• U.S. GAAP—more detailed info—disclose payments for each

of Years 1-5 separately by year and then lump remaining
years as single amount.

Disclosure and Presentation Standards
IAS 7, Statement of Cash Flows:
• Classified as operating, investing or financing.

• Operating cash flows may use direct or indirect method
(indirect method: can reconcile to operating income or
any measure of income).
• Interest, dividends and income taxes must be reported
separately.

IAS 7, Statement of Cash Flows:
• Interest and dividends paid may be classified operating

or financing.
• Interest and dividends received may be classified
operating or investing.
• Income taxes are operating unless specifically identified
with investing or financing activities.
• Can only disclose noncash investing and financing
activities outside of this statement.

IAS 7, Statement of Cash Flows (continued):

• Must disclose and reconcile components of cash and
cash equivalents with amounts reported on balance
sheet (need not agree with a single line item on the
balance sheet).
• Bank overdrafts can reduce cash/cash equivalents if an
integral part of cash management—otherwise classified
as financing activity.

IFRS/U.S. GAAP differences in statement of cash

flows:
• Interest paid and received and dividends received all
operating cash flows
• Dividends paid are financing cash flows
• Indirect method—reconciliation must begin with net income
• Direct method—must reconcile operating cash flows to net
income
• Cash/cash equivalents line must reconcile with same line on
balance sheet.

IAS 10, Events After Reporting Period:

• Known under U.S. GAAP as “subsequent events”.
• Covers events between balance sheet date and authorized
date of issuance of financial statements (U.S. GAAP—through
date of issuance).
• Adjusting events—existed at balance sheet date, such as
estimated legal settlement—finalized before authorized date
of issuance—must adjust as of balance sheet date!
• Non-adjusting events—events arose after balance sheet date
but before issuance authorized—disclose nature of event and
estimate of financial effect or that estimate can’t be made.

IAS 8, Accounting Policies, Changes in

Accounting Estimates, and Errors:
• Hierarchy of authoritative pronouncements:
– IASB Standard or Interpretation specific to to the
event or transaction
– IASB Standard or Interpretation dealing with similar
and related issues
– Definitions, recognition criteria and measurement
concepts in the IASB Framework
– Most recent pronouncements of other standards
setting bodies that use similar framework (like FASB)


• Changes in accounting policy:
– Only if required by IFRS
– Results in more relevant and reliable information
– Apply retrospectively if practical—adjust carrying
value of affected assets and liabilities and beginning
retained earnings—do not report cumulative effect of
change in net income!


• Changes in estimates are handled prospectively
• Correction of errors—if material—handle retrospectively
and change all affected comparative periods and
beginning retained earnings
• If can’t determine period-specific effects—just change
earliest period and restate opening balances where
practical (U.S. GAAP has no such option—all material
errors must be corrected through restatement)


Accounting Estimates, and Errors (continued):
Related Party Disclosures:
• Similar to U.S. GAAP
• Must disclose transactions in notes if one party has
ability to significantly influence or control another party

IAS 33, Earnings per Share:

• Basic and diluted EPS must be on face of income
statement
• U.S. GAAP has more detailed guidance re: diluted EPS,
but appears consistent with IAS 33

IAS 34, Interim Financial Reporting:

• Treat interim periods fundamentally as discrete reporting
periods vs. U.S. GAAP which treats interim periods as
integral part of full year
• No guidance as to who should prepare, how often and
how soon after end of the period
• Describes minimum content and accounting principles
applied

Noncurrent Assets Held for Sale and Discontinued

Operations:
• Report separately on balance sheet at lower of carrying
value or fair value less costs to sell—similar to U.S.
GAAP.
• Not depreciable.
• Discontinued operations:
– After-tax profit or loss and after-tax gain on disposal of assets
shown as single amount on face of income statement.
– Disclose details in notes or on the face of the income statement.
– Similar to U.S. GAAP except for U.S. GAAP need to show pre
and post tax profit or loss on the income statement.
– Definition of what constitutes discontinued operation narrower
under IFRS.
IFRS 8, Operating Segments (issued in 2006—

replaced IAS 14):
• Part of short-term convergence project with FASB.
• Extensive disclosures required.
• Must meet any of three quantitative tests—revenue, profit or
loss, asset.
• Disclosures similar to U.S. GAAP except the latter doesn’t
require disclosure of liabilities.
• If revenue reporting by operating segments less than 75% of
total revenues, then report additional segments otherwise not
required under the three quantitative tests, until 75% reached.

SUMMARY AND REVIEW
• Summary: Page 155

• Review questions:
1. What are the types of differences that exist between
IFRS and U.S. GAAP?
2. Find out 6 differences between IFRS and U.S GAAP?
INTERNATIONALSCHOOL
• Page 158
EXERCISES AND PROBLEMS
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Copyright © 2012 The McGraw-Hill Companies,

Types of Differences Between IFRS and U.S. GAAP

Learning Objective 1 INTERNATIONALSCHOOL

Types of Differences Between IFRS and U.S. GAAP

IFRS more flexible in many cases:

Learning Objective 1 INTERNATIONALSCHOOL

Learning Objective 2 INTERNATIONALSCHOOL

Learning Objective 2 INTERNATIONALSCHOOL

Must report on balance sheet at lower of

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

IAS 2, Inventories. Example

• Historic cost is constant over the life of the inventory.

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

1. Recognition of initial costs—when yield probable future

• Example (Page 119) Replacement of part of an Assets

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

3. Measurement at initial recognition—purchase price plus

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

Example: Component Depreciation

On January 1, Year 1, an entity acquires a new piece of

1. Calculate Depreciation Year 1 follow IFRS?

Learning Objective 2 INTERNATIONALSCHOOL

• Land or buildings held for rental, capital appreciation or

• Same general principles as IAS 16 re: choice of cost or

• Even using cost model—disclose FV in notes.

• U.S. generally requires use of cost model for investment

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

IAS 36, Impairment of Assets

• Must test annually for impairment to P,P & E; intangible

• Does not apply to inventory, construction in progress,

• Some differences with U.S. GAAP.

• Impairment indicators—external events (eg economic,

Learning Objective 2 INTERNATIONALSCHOOL

• Impairment means carrying amount > recoverable

• U.S. GAAP– carrying amount > undiscounted future

• Impairment more likely under IFRS since discounted

IAS 36, Impairment of Assets

Measurement of Impairment Loss

Reverse if recoverable amount > new carrying amount---if

• Can only reverse up to original carrying amount.

• Recognize reversal in income immediately.

• U.S. GAAP—no reversal!

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

Learning Objective 2 INTERNATIONALSCHOOL

Learning Objective 2 INTERNATIONALSCHOOL

(i) Purchased intangibles:

• Initially measured at cost and life is either finite or

• Finite—amortize over useful life—usually assume

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

(ii) Intangibles acquired in business combination:

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

(iii) Internally generated intangibles:

• If can’t separate R & D—must treat all as research and

• May not capitalize internally-generated goodwill.

Learning Objectives 2 and 3 INTERNATIONALSCHOOL

IAS 38, Intangible Assets

• Examples of Internally Generated Intangible Assets:

Items that might qualify for capitalization as internally generated

IAS 38, Intangible Assets

Learning Objective 2 INTERNATIONALSCHOOL

Must demonstrate the following criteria for

Learning Objective 2 INTERNATIONALSCHOOL

When (a) exceeds (b), goodwill is recognized as an asset.