INTERNATIONALSCHOL

HaNoiNationalUniversity
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INTERNATIONAL ACCOUNTING

Hanoi, 2019
 Topic three

International Financial
Reporting Standards:
Part II

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 International Financial Reporting
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Standards—Part II

Chapter Topics
• Current Liabilities
• Provisions, Contingent Liabilities, and Contingent Assets –
IAS 37
• Revenue Recognition IFRS 15
• Financial instruments IFRS 9, IAS 32, IFRS 7
• Leases - IFRS 16
• Employee Benefits- IAS 19
• Share-Based Payment – IFRS 2
• Income Taxes IAS 12

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 International Financial Reporting
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Standards—Part II

Learning Objectives
1. Describe and apply the requirements of IFRS related to
the financial reporting of current liabilities, provisions,
employee benefits, share-based payment, income
taxes, revenue, and financial instruments.

2. Explain and analyze the effect of major differences

between IFRS and U.S. GAAP related to the reporting
of current liabilities, provisions, employee benefits,
share-based payment, income taxes, revenue, and
financial instruments.

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1. Current Liabilities

IAS 1, Presentation of Financial Statements:

• Requires liabilities to be classified as current or
noncurrent
• Current liabilities:
– Expects to settle in its normal business cycle
– Holds primarily for the purpose of trading
– Expects to settle within 12 months of the balance
sheet date
– Does not have the right to defer until 12 months after the
balance sheet date

Learning Objective 1 INTERNATIONALSCHOL

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1. Current liabilities

Classification and accounting for current liabilities under IFRS is

similar to US GAAP, but there are still differences relate to:
• Refinanced short-term debt– Under IFRSs, only long-term if
completed prior to balance sheet date. Whereas, U.S. GAAP
allows long-term if an agreement has been reached prior to balance
sheet date, even if not completed by then.
• Accounts payable on demand due to violation of debt covenants—
must be current unless lender issues waiver of at least 12 months by
balance sheet date. The waiver must be obtained, under U.S. GAAP,
by annual report issuance date.
• Bank overdrafts—netted against cash if the overdrafts form an integral
part of cash management—otherwise current liabilities. Under U.S.
GAAP, bank overdrafts are always classified as current liabilities.
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HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 2. IAS 37 Provisions, Contingent Liabilities,
and Contingent Assets

Provisions and contingent liabilities

• A provision is a liability of uncertain timing or amount.
• A liability is a current obligation to transfer an economic resource as a
result of past event.
• A provision should be recognised when ALL 3 recognition criteria are
satisfied:
– An entity has a present obligation (legal or constructive) as a result of
a past event.
– It is probable that an outflow of economic resources will be required to
settle the obligation.
– A reliable estimate can be made of the amount of the obligation.

Learning Objective 1 INTERNATIONALSCHOL

HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 2. IAS 37 Provisions, Contingent Liabilities,
and Contingent Assets

Provisions and contingent liabilities

•An obligation can be legal or constructive:
–A legal obligation derives from a contract or legislation.
–A constructive obligation derives from the actions of an entity
where:
•An established pattern of past practice, published policies or a
specific statement has indicated to other parties that the entity
will accept certain responsibilities
•The entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities

Learning Objective 1 INTERNATIONALSCHOL

HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 2. IAS 37 Provisions, Contingent Liabilities,
and Contingent Assets
A contingent liability is:
• A possible obligation that arises from past events whose existence will
be confirmed only by the occurrence of one or more future events not
wholly within the control of the entity; or
• A present obligation that arises from past events but which is not
recognised because:
– It is not probable that an outflow of economic benefits will be required
to settle the obligation; or
– The amount of the obligation cannot be measured with significant
reliability.
• Contingent liabilities are not liabilities and are not recognized in the FSs.
They are disclosed in the notes, unless the possibility of resource outflow
is remote.

Learning Objective 2 INTERNATIONALSCHOL

HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 2. IAS 37, Provisions, Contingent Liabilities,
and Contingent Assets
Contingent Assets
• A contingent assets is a probable asset arising from past events whose
existence will be confirmed by occurrence or non-occurrence of future
event.
• Don’t recognize—disclose when probable inflow of economic benefits.
• Recognize as asset when virtually certain.
• Earlier recognition of contingent asset and related gain than U.S. GAAP,
which generally requires realization before recognition.

Learning Objective 1, 2 INTERNATIONALSCHOL

 Contingent asset & liability

Probability Economic resource inflow Economic resource

(asset) outflow
(Liability)
Virtually
certain

Probable

Possible

Remote
 2. IAS 37 Provisions, Contingent Liabilities,
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and Contingent Assets

Onerous Contract
• An onerous contract is a contract where the unavoidable costs of
completing the contract exceed the benefits expected to be received
under it
• Where an onerous contract exists, the entity should provide for the net
loss which is the lower of cost of fulfillment or penalty from non-
fulfillment.
• If onerous from entity's own action--no recognition until that action
happens.

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HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 2. IAS 37 Provisions, Contingent Liabilities,
and Contingent Assets
Onerous Contract
Example: You have a contract to buy 300 metres of silk from China Co
each month for $9 per metre. From each metre of silk you make one shirt.
You also incur labour and other direct variable costs of $8 per shirt.
Usually you can sell each shirt for $22 but in late July 20X8 the market
price falls to $14. You are considering ceasing production since you think
the market may not improve. If you decide to cancel the silk purchase
contract without one months' notice you must pay a cancellation penalty of
$1,200.
(1) Is there a present obligation at the year end of 31 July 20X8?
(2) What will appear in respect of the contract in your financial
statements for the year ended 31 July 20X8?

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 2. IAS 37 Provisions, Contingent Liabilities,
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and Contingent Assets

Restructuring
• A program planned and controlled by management that materially
changes either scope of business or manner in which business is
conducted.

• Such as sale or termination of line of business, closure of location,

change in management structure, material reorganization which
changes nature and focus of operations.

• IAS 37 allows to provide restructuring when an entity has a detailed

formal plan and it has raised a valid expectation by affected
parties. U.S. GAAP doesn’t allow restructuring provision until liability
incurred, so may occur later than under IFRS.

Learning Objective 1, 2 INTERNATIONALSCHOL

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3. IFRS 15 Revenue from
contracts with customers
• IFRS 15 and its American equivalant (ASC 606) represent
one of significant examples of accounting convergence.
They are closely aligned and come into force from 2018
fiscal years.

• U.S. GAAP has over 200 different authoritative pronouncements,

so difficult to compare IAS 18 and U.S. GAAP .

Learning Objective 1, 2 INTERNATIONALSCHOL

 3. IFRS 15 Revenue from
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contracts with customers
5 Steps model in the recognition of revenue:
1. Identify the contract with a customer:
A contract is within the scope of IFRS 15 only when:
- Written, verbal or implied contract: For example: food order in a restaurant
- Contract must be approved => signed
- Commercial substance: some gain or loss.
- Payment term and each party right can be identified
- Probable that the entity will collect the consideration
2. Identify the separate performance obligations in the contract.
A performance obligation is a promise in a contract with a customer to
transfer a good or service to the customer.
The entity must evaluate all of promised goods and services to determine
whether they are separte POs?

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 3. IFRS 15 Revenue from
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contracts with customers
5 Steps model in the recognition of revenue:
3. Determine the transaction price
Transaction price. The amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties.
Note:
1. Discount to present value if material
2. If consideration include variable or contingent consideration, the
transaction price should be determined using expected value.
4. Allocate the transaction price to each separate PO.
Transaction price should be allocated to all separate POs in proportion to
the standard-alone selling price of the goods or service underlying each
PO.
5. Recognize the revenue allocated to each performance obligation
when the entity satisfies each POs.
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 3. IFRS 15 Revenue from
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contracts with customers
Example:
Eg. Hanoi Telecomm has a financial year end 31 Mar. On 1 Jan, they
secured a contract with a multinational bank to supply smart phone to many
employees of the bank and give them one year of unlimited access to the
network. The contract price per unit is $432 per unit. This is payable in full 30
days after the contract commences. At the end of the contract, the phone will
not be returned. The company normally charges a monthly fee of $20 per
month per unit for unlimited access to the network and $240 for a smart
phone.

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3. IFRS 15 Revenue from
contracts with customers
Variable consideration example: Sale of goods with a right
of return
Lighten is an US company which manufacture lighting fixtures enters into a
contract with a Mexican company that will distribute Lighten’s products
locally. In Jan, year 1, Lighten ships $2,000,000 of lighting fixtures to the
Mexican distributor at gross profit margin of 40%. The distributor has the right
to return products to Lighten over the subsequent 3 months if they cannot be
sold.
Suppose that initially, Lighten’s accountants estimate that 10% of the goods
sold will be returned.
After that, until 31 Mar, the Mexican distributor returned 8% of fixtures and
Lighten has returned the money back to the distributor.
Required: Prepare journal entries for this transaction.
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 3. IFRS 15 Revenue from
contracts with customers
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Variable consideration example: Sale of goods with a right

of return
January, Year 1
Dr Cash 2,000,000
Cr Sales revenues 1,800,000
Cr Refund liability 200,000
Dr COGS (2,000,000*60%*90%) 1,080,000
Dr Right to Inventory returns (asset) 120,000
Cr Inventory 1,200,000
Mar, Year 1
Dr Refund liability 160,000
Cr Cash 160,000
Dr Inventory (1,200,000*8%) 96,000
Cr Right to inventory returns (asset) 96,000
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 3. IFRS 15 Revenue from
contracts with customers
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Variable consideration example: Sale of goods with a right

of return
Mar, Year 1
Dr Refund liability 40,000
Cr Revenue 40,000
Dr COGS 24,000
Cr Right to inventory returns (asset) 24,000

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3. IFRS 15 Revenue from
contracts with customers
Bill-and-hold sales
Under a bill-and-hold arrangement goods are sold but remain in the
possession of the seller for a specified period.
An entity will need to determine at what point the customer obtains
control of the product by answering following questions:
- Has the product been separately identified as belonging to the
customers?
- Is the product ready for delivery?
- Can the seller use the product or reallocate it to another
customer?
- Is there a substantive business reason for the bill-and-hold
agreement?
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4. Financial Instruments

Three Standards
• IAS 32, Financial Instruments: Presentation.
• IFRS 7, Financial Instruments: Disclosure.
• IFRS 9, Financial Instruments
Definitions
• IAS 32 says a financial instrument is any contract that
gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity.
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4. Financial Instruments

Definitions (continued)
• Financial asset. Any asset that is:
– Cash
– An equity instrument of another entity. A contract that will or may
be settled in the entity’s own equity instruments and is not
classified as an equity instrument of the entity
– Contractual right to:
• Receive cash or other financial asset
• Exchange financial assets or financial liabilities under
potentially favorable conditions
For example: cash, receivables, loans to others, etc.
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HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 4. Financial Instruments

Definitions (continued)
• Financial liability. Any liability that is:
– A contractual obligation to:
• Deliver cash or another financial asset
• Exchange financial assets or financial liabilities under
potentially unfavorable conditions
– A contract that will or may be settled in the entity’s own equity
instruments.
For example: payables, loans from other entities, bonds, etc
• Equity instrument—any contract that evidences a residual
interest in the assets of an entity after deducting all its
liabilities.
Learning Objective 1 INTERNATIONALSCHOL
HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 4. Financial Instruments

Financial liability or equity

• IAS 32 requires financial instruments to be classified
as financial liabilities or equity or both based on the
substance of the contractual agreement.
• Redeemable preferred shares
• Example: On 29 Oct, Griglia issues $1,000,000 of 5%
preferred shares at par value. These preferred shares are
redeemed at par value after 3 years from issue date.
• IFRS:
Dr Cash: $1,000,000
Cr Redeemable preferred shares liability: $1,000,000
Learning Objective 1 INTERNATIONALSCHOL
HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 4. Financial Instruments

Financial liability or equity

• Compound financial instruments
• A compound financial instrument contains both a liability
element and an equity element. It should be split into two
components that are reported separately – split accounting.
• Eg. Sharma issued $2million of 4% convertible bonds at par
value. The bonds have a 5 year life with interest payable
annually. Each bond has a face value of $1,000 and is
convertible at any time up to maturity into 250 shares of
common stock. At the date of issue, the interest rate for
similar debt without a conversion feature is 6%.

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HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 4. Financial Instruments

Financial liability or equity

• Compound financial instruments
Yr Cash flows $ 6% Present value $
1 80,000 0.9434 75,472
2 80,000 0.89 71,200
3 80,000 0.8396 67,168
4 80,000 0.7921 63,368
5 2,080,000 0.7473 1,554,384
Liability element 1,831,592
Equity element 2,000,000 – 1,831,592 168,408

• Dr Cash: $2,000,000
• Cr Liability: 1,831,592
• Cr equity: 168,408
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4. Financial Instruments

Classification and measurement of Financial Assets

and Liabilities
• Initial—fair value (normally = amount paid or received).
• Subsequently measured according to the rules of category
into which they are classified.

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 4. Financial Instruments
Financial asset

FVTPL Amortised Cost FVTOCI

- Initial measurement:
Fair value of the - Initial measurement: fair - Initial measurement: fair
consideration given value of the consideration value of the consideration
given or received + given or received +
- Transaction cost goes transaction cost transaction cost
directly to PL

-Subsequence Subsequence measurement: Subsequence

measurement: All changes - Amortised cost adjustment measurement:
in FV will go to PL using effective interest rate. - Changes in FV will go to
- Gains and losses are OCI.
recognized in PL as a result of - Dividend income for
Learning Objective 1 the amortisation process and equity INTERNATIONALSCHOL
instrument will go
when the asset is to PL.
derecognized.
 4. Financial Instruments

Financial liabilities

FVTPL Amortised cost

- Initial recognition: - Initial recognition:

Proceed received Proceed received
- Transaction cost less trading cost
goes directly to PL

- Subsequent
- Subsequent measurement: Amortised
measurement: All cost adjustment using
changes in FV will go
Learning Objective 1 effective interest rate
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directly to PL
HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 4. Financial Instruments
Example: financial liabilities measured at amortized
cost
• On 1 Jan, year 1 Keane issued $1,000,000 of 5% bonds at face value.
The bonds pay interest annually and mature on 31 Dec Year 2. The
company incurred bank and legal fees of $70,000 in conjunction with
issuing the bonds. The bonds are measured at amortized cost. Effective
interest rate is 8.9781%.
• Required: Prepare journal entries related to the bonds

Year Beginning balance Interest expense Interest paid Closing balance

(8.9781%)
1 930,000 83,496 50,000 963,496
2 963,496 86,504 50,000 1,000,000

• 1 Jan Year 1:
Dr Cash: 1,000,000
Cr Bond payables: 1,000,000
Dr Bond payables: 70,000
Cr Cash: 70,000 INTERNATIONALSCHOL
 4. Financial Instruments
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Example: financial liabilities measured at amortized
cost
• 31 Dec Year 1:
• Interest expense:
Dr Interest expense (930,000*8.9781%) $83,496
Cr Bonds payable: $83,496
• Interest paid:
Dr Bonds payable (1,000,000 * 5%) 50,000
Cr Cash 50,000
• 31 Dec Year 2:
• Interest expense:
Dr Interest expense (963,496*8.9781%) $86,504
Cr Bonds payable: $86,504
• Interest paid:
Dr Bonds payable (1,000,000 * 5%) 50,000
Cr Cash 50,000
• Principle paid:
Dr Bonds payable: 1,000,000
Cr Cash: 1,000,000
Learning Objective 1 INTERNATIONALSCHOL
 4. Financial Instruments
Example: Financial assets at FVOCI
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Porfirio purchases marketable equity securities for $20,000 on 15 Oct, Year

1. At the time of purchase, Porfirio makes an election for accounting the
investment using FVOCI. On Dec 31, the end of Porfirio’s fiscal year, the
securities have risen in value to $22,000. Porfirio sells the securities on 1
Feb year 2 for $23,000.
Required: how will the company account for this investment?
- 15 Oct Year 1:
Dr equity investment – FVTOCI: 20,000
Cr Cash: 20,000
- 31 Dec Year 1:
Dr equity investment – FVTOCI: 2,000
Cr OCI: 2,000
- 1 Feb Year 2:
Dr Cash: 23,000
Cr Equity investment – FVTOCI: 22,000 INTERNATIONALSCHOL

Cr OCI: 1,000
 5. Leases
Lease contracts are previously ruled by IAS 17. From 2019, IFRS 16 takes
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effect and surpass IAS 17.

Under IAS 17
Both lessor and lessee need to classify the lease as either
finance or operating.
A finance lease is a lease that transfers substantially all the
risks and rewards incidental to ownership of an asset. Legal
title may or may not eventually be transferred.
An operating lease is a lease other than a finance lease.
Leasor Leasee
Operating - Recognize the leased asset in the - Do not show the leased asset
lease BS. and liability in the BS
- Recognize lease income as an - Recognize lease payments as an
income in PL over the lease term expense in PL
Finance - Remove the leased asset from BS - Recognize an asset and a lease
lease and recognized a lease receivable, liability in the BS.
instead. - Recognize the depreciation
- Recognize finance income in the expense & finance expense in
PL the PL INTERNATIONALSCHOL
 5. Leases
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Example: Speedy signs a 3 year lease contract for 10 new delivery vans on
1 Jan Year 1. The market value of a new vans is $30,000 and its useful life is
8 years. According to lease contract, Speedy has to pay annual lease
payments of $60,000 at the end of each year of the lease. Assume that
Speedy’s borrowing rate is 8%.
Required: Accounting for the above transactions under IAS 17 and IFRS 16

Answer: Under IAS 17

Leasor Leasee
1 Jan year 1: no entries No entries
31 Dec Year 1: 31 Dec Yr 1:
Dr Cash: 60,000 Dr rent expenses: 60,000
Cr Rent revenue: 60,000 Cr Cash: 60,000
Dr Depn expense (300,000/8) 37,500
Cr Acc. Depn 37,500
Year 2, 3: the same as year 1 Year 2,3: the same as year 1

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HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 5. Leases
IFRS 16
IFRS 16 introduces a single lessee accounting model and requires a lessee
to recognize a right-of-use asset and a lease liability for all leases except for:
- Short-term leases of 12 months or less.
- Low value leases: Underlying assets has a low value when new.
Meanwhile IFRS 16 maintain dual model for lessor accounting (financial vs.
operating) lease.
Example: Speedy signs a 3 year lease contract for 10 new delivery vans on
1 Jan Year 1. The market value of a new vans is $30,000 and its useful life is
8 years. According to lease contract, Speedy has to pay annual lease
payments of $60,000 at the end of each year of the lease. Assume that
Speedy’s borrowing rate is 8%.
Required: Accounting for the above transactions under IAS 17 and IFRS 16

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 5. Leases
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Under IFRS 16: Leasor accounting is the same as under IAS 17.
Leasee accounting:
1 Jan Year 1: present value of lease payment
Year Payment Discount factors 8% Present value
1 60,000 0.9259 55,554
2 60,000 0.8573 51,438
3 60,000 0.7938 47,628
Total 154,620

Dr Right of use asset: 154,620

Cr Lease liability: 154,620
31 Dec Year 1:
- Depreciation of right of use asset: 154,620/3 =51,540
Dr Depn expense: 51,540
Cr Acc. Depn: 51,540
- Unwinding of lease liability: 154,620*8% = 12,370
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Dr Interest expense: 12,370
Cr Lease liability: 12,370
 5. Leases
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Under IFRS 16: Leasor accounting is the same as under IAS 17.
Leasee accounting:
1 Jan Year 1: present value of lease payment
31 Dec Year 1:
Lease payment:
Dr Lease liability: 60,000
Cr Cash: 60,000
=> Lease liability at 31 Dec Y1: 154,620+12,370 – 60,000 = 106,990

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6. IAS 19, Employee Benefits
• Covers all forms of employee compensation and benefits
other than share-based compensation (e.g. stock options).
Share-based payment is covered in IFRS 2.
• Four types of employee benefit:
– Short-term (compensated absences and bonuses): employee benefits
expected to be settled wholly within 12 months after reporting date.
– Post-employment ( pensions, medical benefits, etc.): employee
benefits (other than termination benefits) payable after the completion
of employment.
– Other long-term benefits (deferred compensation and disability). all
employee benefits other than short-term employee benefits, post-
employment benefits and termination benefits.
– Termination benefits (severance and early retirement). employee
benefits provided in exchange for the termination of an employee’s
employment
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 6. IAS 19, Employee Benefits
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Short-term benefits
• General rules: an employer recognizes expense and
liability at time services provided—undiscounted.

• Accrue compensated absences (sick/vacation pay) only if

accumulate over time and can be carried forward to future
periods— otherwise expense as incurred.

• Profit sharing and bonus plans—accrue only if the company

has a present legal or constructive obligation from past
events and the amount can be reliably estimated.

Learning Objective 1 INTERNATIONALSCHOL

HTP: /[Link]-HTP: /[Link]-HTP: /[Link]-HTP:/[Link] 6. IAS 19, Employee Benefits
Post-employment benefits
• Distinguishes between defined benefit and defined
contribution plans.
• Defined contribution plans:
− post-employment benefit plans under which an entity pays fixed
contributions into a separate entity (a fund) and will have no legal or
constructive obligation to pay further contributions.
− accrue an expense and a liability when services rendered for
amount required to be contributed and reduce liability when
contributions are made.
• Defined benefit plans:
− post-employment benefit plans other than defined contribution
plans
− Accounting for both defined benefit pension plans and other
defined post-employment benefit plans is basically the same
Learningand is similar
Objective 1, 2 to accounting under U.S. GAAP INTERNATIONALSCHOL
 6. IAS 19, Employee Benefits
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Defined post-employment benefit plans—Income statement

recognition and measurement
• Net pension expense (revenue) recognized in net income comprised of
up to 6 components:
+ Current service cost
+ interest cost
– expected return on plan assets
+/- actuarial gains and losses (recognized in current period)
+ past service cost (recognized in current period)
+/- curtailment of settlement gains or losses.

Learning Objective 1 INTERNATIONALSCHOL

 6. IAS 19, Employee Benefits
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Post-employment benefits—Income statement

recognition and measurement
• Actuarial gains/losses—corridor approach used to smooth
impact—recognize currently if > 10% of greater of present value
of previous year end defined benefit obligation or fair value of
previous year end plan assets.
• Current actuarial g/l is recognizable amount divided by average
remaining working lives of covered employees.
• Actuarial g/l re: inactive or retired employees expensed immediately.
• Similar corridor approach under U.S. GAAP except amortize
expense of inactive/retired employees over life expectancy

Learning Objective 1 INTERNATIONALSCHOL

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6. IAS 19, Employee Benefits

Post-employment benefits—Income statement

recognition and measurement
• Also permitted– any systematic method of amortization
resulting in faster recognition of actuarial g/l (even
immediate) if applied to both g/l consistently each period.
• If recognize immediately—either in net income or
separate component of shareholders’ equity (U.S. GAAP
must report only in net income).

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IAS 19, Employee Benefits

Post-employment benefits—Income statement

recognition and measurement
• Past service cost—from improvement to benefits from defined
benefit plan. PSC to retired employees and vested employees
expensed immediately .
• PSC to non-vested employees amortized straight-line over
remaining vesting period.
• U.S. GAAP says past service cost (called prior service cost)
for retired employees amortized over remaining life
expectancy while active employees amortized over remaining
service period.

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 IAS 19, Employee Benefits
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Post-employment benefits—Income statement

recognition and measurement
• Curtailments and settlements—when material reduction in covered
employees (e.g. from closure or restructuring) or when future
service by current employees will no longer qualify for pension
benefits or only qualify for reduced pension benefits.

• Gains/losses recognized in income when entity is demonstrably

committed and curtailment or settlement is announced.

• U.S. GAAP is different—losses generally recognized earlier than

gains and curtailment gain not recognized until related employees
terminate or the plan has been adopted.

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IAS 19, Employee Benefits

Post-employment benefits—Balance sheet

recognition and limitation re: defined benefit
pension plan
• Can either be net liability or asset.
+ Present value of defined benefit obligation (PVDBO)
– fair value of plan assets
+/- unrecognized actuarial gains and losses
– unrecognized past service cost.

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IAS 19, Employee Benefits

Post-employment benefits—Balance sheet

recognition and limitation re: defined benefit
pension plan
• If result is negative (i.e. net asset) report the lesser of:
• PVDBO +/- unrecognized actuarial gains/losses –
unrecognized past service costs – fair value of plan
assets or
• Sum of unrecognized actuarial losses and past
service cost and the present value of available plan
refunds and available future reductions in employer
contributions.
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IAS 19, Employee Benefits

• PVDBO assumptions re: turnover, life expectancy and

future salary levels.
• Discount rate refers to end of period yield on high-
quality corporate bonds.
• U.S. GAAP recognizes difference between PVDBO and
fair value of plan assets (i.e. “funded status”)—no
adjustment for unrecognized actuarial g/l and psc—also
no limitation on recognized amount of pension asset.

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IAS 19, Employee Benefits
Other post-employment benefits
• No separate guidance provided for medical and life insurance
benefits.
• U.S. GAAP provides much more guidance with regard to
assumptions and measurement for post-employment medical
benefits.
• IFRS allows reference to U.S. GAAP guidance for post-
employment measurement for other post-employment
benefit plans than pension plans.

Other long-term employee benefits

• IFRS says liability should be recognized for difference between
present value of defined benefit obligation and fair value of any
plan assets.

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IAS 19, Employee Benefits
Termination benefits
• Recognize as expense and liability when demonstrable commitment to
either terminating the employee or group of employees or providing
termination benefits as a result of an offer to encourage voluntary
termination
• An offer made to encourage voluntary termination: based on number of
affected employees expected to accept the offer, discounted to present
value if benefits to be paid more than 12 months after balance sheet date
(U.S. GAAP based on actual number who accept and no discounting
required).

• U.S. GAAP—3 types of termination benefits—different timing

recognition criteria for each:
– Special termination benefits: recognize when accepted.
– Contractual obligations: recognize when employees’ entitlement is
probable.
– Termination benefits under restructuring recognized: recognize when
management approves plan.
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 7. IFRS 2, Share-based Payment
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• IASB and FASB worked closely on standards.

• A number of minor differences, but both standards

substantially similar

• IFRS 2 sets out measurement principles and specific

guidance for three types of transactions:
– Equity-settled—entity receives goods or services in exchange for
equity instruments (e.g. stock options).
– Cash-settled—entity receives goods or services by incurring
liability to supplier based on price or value of shares or other
equity instruments (e.g. share appreciation rights).
– Choice of settlement of above two options.

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7. IFRS 2, Share-based Payment

(i) Equity-settled
Typically, a debit is made to either an asset (goods acquired) or expense
(service received), and a credit is made to paid-in capital.

• Share-based payments to Non-employees

− IFRS 2: Share-based payments to non-employees are measured at FV
of goods or services received. If fair value of goods or services can’t be
determined—use fair value of the equity instrument. Measurement date
is the date the entity obtains the goods or services.
− U.S. GAAP: when fair value of equity instrument is used, measurement
date is the earlier of either performance commitment date or
performance completed date.

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(i) Equity-settled
• Share-based payments to Employees

• use fair value of instrument since fair value of services not

reliably measurable.

• FV of stock options must be determined at grant date. The

company need to estimate number of options expected to vest
multiplied by fair value to determine compensation expense
over vesting period (offset is paid-in capital).
– If single vesting date (cliff vesting)—straight-line over service
period.
– If installments (graded vesting)—amortize each installment
(tranche) over their vesting period.
– U.S. GAAP re: graded vesting—choice of accelerated or straight-line
recognition.
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IFRS 2, Share-based Payment
(i) Equity-settled
• Modification of stock option plans that make changes to FV
of stock options—eg: length of vesting period or exercise
price—IFRS 2 requires to recognize, at minimum, original
compensation cost at grant date.
– If fair value reduced---no change in compensation deduction.
– If fair value increased—increase compensation by the like
amount.

• U.S. GAAP—if modifications—fair value at modification date

determines compensation expense---no minimum
compensation as under IFRS.

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IFRS 2, Share-based Payment

(ii) Cash-settled
• Eg: Stock appreciation rights in which employees are entitled to receive
a cash payment when the entity’s stock price increases above a
predetermined level
• Should recognize a liability and an expense. Liability is measured at fair
value of appreciation rights using an option pricing model.

• Until liability is settled, ti must be remeasured at each balance sheet date.

• U.S. GAAP—certain cash-settled payments classified as equity, whereas

liability under IFRS.

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IFRS 2, Share-based Payment

(iii) Choice-of-settlement
• If entity can choose: Treat as cash-settled only if the company has present
obligation to settle in cash—otherwise, treat as equity-settled.
• If supplier can choose—entity has issued a compound financial
instrument with debt and equity components. FV of it should be split into
debt and equity components:
– Debt component must be remeasured at FV at each
balance sheet date (recognize changes in income).
– Equity component remains in equity and if supplier chooses debt
settlement in equity—transfer debt to equity.

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8. IAS 12, Income Taxes

• IAS 12 takes similar approach with U.S. GAAP.

• Both have deferred tax assets and liabilities related to timing

differences and operating loss and tax credit carryovers.

• March 2009 IASB exposure draft “Income Tax” intended to

eliminate differences with U.S. GAAP.

• Final standard replacing IAS 12 still not published as of

Spring 2011.

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8. IAS 12, Income Taxes

Tax Laws and Rates

• Current and deferred taxes based on tax laws and tax rates
enacted or substantively enacted (when future steps
can’t change outcome) by balance sheet date.

• U.S. GAAP must use actually enacted tax laws and tax rates.

• To minimize double taxation some countries apply lower rate

to distributed profits vs. retained profits.

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IAS 12, Income Taxes

Recognition of Deferred Tax Asset

• If future realization probable (undefined) vs. U.S. GAAP
where realization takes place if more likely than not --- IAS
12 is more stringent if probability interpreted to mean greater
than “more likely than not”.

Disclosures
• IAS 12 requires extensive disclosures, including current
and deferred components of tax expense and relationship
between hypothetical expense based on statutory vs.
effective tax rates using 2 approaches (statutory rate in
home country or weighted average statutory rate between
jurisdictions).
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IAS 12, Income Taxes

IFRS vs. U.S. GAAP

• IFRS can cause temporary differences not existing under U.S.
GAAP (e.g. revaluation model for PPE under IAS 16).

• Other differences between IFRS and US GAAP can create different

temporary differences. Eg. Different definition of impairment.

Financial Statement Presentation

• Under U.S. GAAP—deferred tax assets and liabilities are classified
as current or non-current based on classification of underlying
asset or liability.
• IAS 1, Presentation of Financial Statements”—only
noncurrent.

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Homeworks

Exercises: 1-4, 9, 13, 17, 18, 19, 27, 31, 32, 35, 38, 39 in textbook

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