Changing Accounting Standards

Rule

Topic

Description

Impact

IFRS 15 / ASC 606

Revenue recognition

1) i.d. contract w/ customer, 2) i.d. perf obligations in contract, 3) determine transaction price, 4) allocate price to obligations, 5) recognise revenue when/as obligation is satisfied

E.g., phone contracts:

• Pre: Recognise revenue on sale of phone only up to amt of cash received
• Post: Allocate transaction price (i.e., full contract price) to phone and network services on basis of relative standalone prices of each (record one-time phone revenue even if “free”, services revenue across contract period)

E.g., Spotify – discounted trial revenue now recognised

IFRS 9

Provisions

Recognise expected losses on receivables and loans

• Before IFRS 9, recognise only incurred losses
• Now more flex in aging analysis, % of credit sales allowed
• Closely mirrors US GAAP

IFRS 16

Leases

Leases w/ term >12 months must be brought onto balance sheet

• Effectively ends off-balance sheet leases
• Assets (PPE) and liabilities increase, EBITDA increase, Net Income effect minimal

Topic

IFRS

US GAAP

Inventory NRVs & writedowns

• Inventories usually written down to NRV item-by-item, new assessment each period

• If NRV goes up, write-down is reversed (BUT ltd to amt of original write-down) so that new carrying amt is lower of cost and revised NRV

• No item-by-item restriction
• Reversal of a write-down for an increase in market value NOT allowed

LIFO vs. FIFO

• LIFO is not allowed

• LIFO allowed, but must disclose the value of inventory at FIFO or current costs for the purpose of tax/ accounting report

Capitalise this asset?

• Development – Yes (Research – No)
• Allowed to capitalise entire cost for self-constructed assets

• Development – No (Research –  No)
• Req’d to capitalise entire cost (incl interest on debt) for self-constructed assets

Provision if...

• “Probable” is “more often than not”, >50%        

• “Probable” is “likely”, >70%        

Lease is a finance lease if it meets any of these criteria...

• Lease transfers ownership rights to lessee
• Bargain price, option to purchase < fair value
• Lease term is for the major part of asset’s useful life
• At lease inception, PV of future payments is substantially all of the asset’s fair value
• Leased assets are of a specialised nature that only lessee can use them w/o major modifications

• Lease transfers ownership rights to lessee
• Bargain price, option to purchase < fair value
• Lease term > 75% of asset’s useful life
• PV of future payments > 90% of asset’s fair value

In/outflow

IFRS

US GAAP

In practice...

Interest, dividends rcv’d

CFO or CFI

CFO

Little difference b/c IFRSers put them in CFO

Interest paid

CFO or CFF

CFO

Difference b/c IFRSers tend to put it in CFF

Dividends paid

CFO or CFF

CFF

Little difference b/c IFRSers put it in CFF