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Long Term Liabilities

Examining US GAAP vs. IFRS

Brett Donner, Nick Ioriatti, Mike Nowaczyk, Mike OHara and James Peters

Definition: Long- Term Liabilities

Probable future sacrifices arising from present obligations that are not payable within a year or the operating cycle of the company.

Whichever is longer

FASB Codification 5.20.22

Examples of Long Term Liabilities

Bonds Payable
Long- Term Notes Payable Mortgages Payable Pension Liabilities Deferred Income Taxes

Product Warranties
Other Contingencies

Selling Price of Bonds


Discount-Stated Interest Rate less than Market Interest

Rate
Premium- Stated Interest Rate is greater than Market

Interest Rate
Face Value-Stated Interest Rate equals Market Interest

Rate

Bonds: Troubled Debt

Impairments of Long- Term Debt:


Probable that the amounts due will not be collected Journal Entry:

(DR) Bad Debt Expense XXX (CR) Allowance for Doubtful Accounting

XXX

Troubled Debt Continued

Restructuring:

Creditor grants concession to the debtor Two Types:


1.

Settling the debt at less than the carrying value

2.

Continuation of the debt with modified terms

GAAP Bond Disclosure

Premium and discount on the bond is reported separately


Terms of bond agreement are stated in financial statements per SEC Regulations

Bonds are Classified along with loans and notes as Long Term Debt

FASB Codification: 5-.02-24

Disclosure Example

Kieso, pg. 181

IFRS vs. GAAP Differences


Bonds:
IFRS: Premiums or discounts on debt directly reduce

carrying value of debt upon initial recognition, requires that issue costs reduce carrying value of debt
US GAAP: these amounts are recorded separately

costs are deferred

Discounts and Premiums Example

December 31, 2012 US Steel issued $1 million in bonds at 5% annual interest, at a discount of $100,000
Cash $900,000 Bonds Payable $900,000

IFRS

US GAAP

Cash

$900,000

Discounts on Bonds Payable Bonds Payable

$100,000
$1,000,000

Effective Interest Method

Compute interest expense

Multiply carrying value at the beginning of the period by effective interest rate

Compute interest paid

Multiply face value by stated interest rate

Determine Discount or premium amortization

Compose interest expense with interest cash to be paid

Effective Interest Amortization Example

IFRS vs. GAAP Differences


Minority Interests
IFRS states its reported in balance sheet with equity GAAP states its reported with non-current liabilities, not with

equity

IFRS Example of Disclosure

GAAP Example

IFRS vs. GAAP Differences

IFRS allows upwards revisions to the CV of an investment in a loan after a write down
US GAAP does not permit this

IAS 40: Recognition

IFRS vs. GAAP Similarities

Bonds are recorded at present value of future interest and principal payments
Discounts and premiums are amortized over the life of the bond using the effective interest method

Potential Audit Problems


Potential audit problems in regards to long term

liabilities include:
Obtaining information proving that all long-term liabilities are included in the financial statements and are accurately stated. Proving all relevant information in regards to an entitys long term liabilities is properly disclosed within the financial statements. Proving all long term liabilities disclosed by the entity are legitimate obligations.

Off Balance Sheet Financing


Attempt to borrow money in way to prevent the

recording of obligations.
Keeps debt off the Balance sheet.

Allows for previous loan commitments to be met, while

incurring more debt.


In response to the amount of entities using Off Balance

Sheet Financing the FASB has increased disclosure (note) requirements.

Our Opinion

GAAP is the better option


GAAP does not permit upward revisions of an investment in a loan

IFRS does not address troubled debt restructuring as adequately as GAAP


Under GAAP convertible debt must be classified a liability

Sources
"IFRS GAAP | International Financial Reporting Standards | Accounting, Accountant | Barry Epstein, Ph.D., CPA, Author, Expert." IFRS GAAP | International Financial Reporting Standards | Accounting, Accountant | Barry Epstein, Ph.D., CPA, Author, Expert. N.p., n.d. Web. 20 Feb. 2013. Securities and Exchange Commission. "A Comparison of US GAAP and IFRS." SEC.gov. Securities and Exchange Commission Staff Paper, 16 Nov. 2011. Web. 20 Feb. 2013. <http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-workplan-paper-111611-gaap.pdf>. "Summary of Statement No. 78." FASB: Financial Accounting Standards Board. N.p., n.d. Web. 20 Feb. 2013. <http://www.fasb.org/summary/stsum78.shtml>. Kieso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate Accounting. Hoboken, NJ: Wiley, 2012. Print.

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