INTERNATIONAL ACCOUNTING

INTERNATIONAL FINANCIAL
REPORTING STANDARDS
Disusun oleh : Meiliani Luckieta, SE., Ak., CA.,
ACPA., MM., BKP
 INTRODUCTION

IFRS is .. ( explain as per your opinion)

International Financial Reporting Standards (IFRS) have been adopted as generally accepted accounting
principles (GAAP) for listed companies in many countries around the world and are accepted for cross-listing
purposes by most major stock exchanges, including those in the United States. Increasingly, accountants are
being called on to prepare and audit, and users are finding it necessary to read and analyze, IFRS-based
financial statements.
With the US Securities and Exchange Commission reaffirming its support for a global set of accounting
standards, it is likely that IFRS will be integrated into the US financial reporting system in the near future.
This chapter describes and demonstrates the requirements of selected IASB standards, particularly those relating
to the recognition and measurement of asset, through numerical examples. IFRS that deal exclusively with
disclosure and presentation issues also are briefly summarized.
 TYPES OF DIFFERENCES BETWEEN IFRS AND U.S.
GAAP
Numerous differences exist between IFRS and U.S. GAAP. The types of differences that exist
can be classified as follows :
1. Definition differences. Differences in definitions exist even though concepts are similar.
Definition differences can lead to recognition or measurement differences.
2. Recognition differences. Differences in recognition criteria and/or guidance are related to
(1) whether an item is recognized or not. (2) how it is recognized (e.g., as a liability or as
equity), and/or (3) when it is recognized (timing differences).
3. Measurement differences. Differences in the amount recognized resulting from either (1) a
difference in the method required or (2) a difference in the detiailed guidance for applying
a similar method.
4. Alternatives. One set of standards allows a choice between two or more alternative
methods; the other set of standards requires one specific method to be used.
 TYPES OF DIFFERENCES BETWEEN IFRS AND U.S.
GAAP
5. Lack of requirements or guidance. IFRS may not cover an issue addressed by US GAAP and
vice versa.
6. Presentation differences. Differences exist in the presentation of items in the financial
statements.
7. Disclosure differences. Differences in information presented in the notes to financial
statements are related to (1) whether a disclosure is required and (2) the manner in which
disclosures are required to be made.
In many cases, IFRS are more flexible than U.S. GAAP. For example, several IASB standards
allow firms to choose between two alternative treatments in accounting for a particular items.
Also, IFRS generally have less bright-line guidance than U.S. GAAP; therefore, more judgment
is required in applying IFRS. IFRS are said to constitute a principles-based accounting system
(broad principles with limited detailed rules), whereas U.S. GAAP is a rules-based system.
However for some accounting issues, IFRS are more detailed than U.S. GAAP.
 INVENTORIES
IAS 2, Inventories, is an example of an International Accounting Standard that provides more extensive
guidance than U.S. GAAP, especially with regard to inventories of service providers and disclosures
related to Inventories. IAS 2 provides guidance on determining the initial cost of inventories, the cost
formulas to be used in allocating the cost of inventories to expense, and the subsequent measurement of
inventories on the balance sheet.
The cost of inventories includes costs of purchase, cost of conversion, and other costs :
1. Cost of purchase include purchase price; import duties and other taxes; and transportation, handling,
and other costs directly attributable to acquiring materials, services and finished products.
2. Cost of conversion include direct labor and a systematic allocation of variable and fixed production
overhead. Fixed overhead should be applied based on a normal level of production.
3. Other costs are included in the cost of inventories to the extent they are incurred to bring the
inventories to their present location and condition. This can include the cost of designing products for
specific customers. Under certain conditions, interest costs are allowed to be included in the cost of
inventories for those items that require a substantial period of time to bring them to a saleable
conditions.
 INVENTORIES
Costs that are expressly excluded from the cost of inventories are :
1. Abnormal amounts of wasted materials, labor, or other production costs.
2. Storage costs, unless they are necessary in the production process before a further stage of production.
3. Administrative overhead that does not contribute to bringing inventories to their present location and
condition.
4. Selling costs.
IAS 2 does not allow as much choice with regard to cost formulas as does U.S. GAAP. FIFO and weighted-
average cost are acceptable treatments, but LIFO is not. The standard cost method and retail method also
are acceptable provided that they are approximate cost as defined in IAS 2.
For inventories with a different nature or use, different cost formulas may be justified. U.S. GAAP does not
require use of a uniform inventory valuation method for inventory having a similar nature. It is common
for U.S. companies to use different methods in different jurisdictions for tax reasons-for example, LIFO in
the U.S. and FIFO or average cost elsewhere.
 LOWER OF COST OR NET REALIZABLE VALUE
IAS 2 requires inventory to be reported on the balance sheet at the lower of cost or net realizable value. Net realizable
value is defined as estimated selling price in the ordinary course of business less the estimated costs of completion and
the estimated costs necessary to make the sale. This rule typically is applied on an item-by-item basis. However, the
standard indicates that it may be appropriate to group similar items of inventory relating to the same product line. Write-
downs to net realizable value must be reversed when the selling price increases.
U.S. GAAP require inventory to be reported at the lower of cost or market, where market is defined as replacement cost with a ceiling
(net realizable value) and a floor (net realizable value less normal profit margin).
Example : Application of Lower of Cost or Net Realizable Value Rule
Assume that Distributor Company Inc. has the following inventory item on hand at December 31, Year 1 :
Historical Cost $1,000
Replacement Cost $ 800
Estimated Selling price $ 880
Estimated Cost to complete and sell $ 50
Net realizable value $ 830
Normal profit margin - 15% $ 124.50
Net Realizable value less normal profit margin $ 705.50
 LOWER OF COST OR NET REALIZABLE VALUE
Net realizable value is $830, which is lower than historical cost. In accordance with IFRS, inventory
must be written down by $170 ($1,000 - $830). The journal entry at December 31, Year 1 is :
Inventory Loss $170
Inventory $170
To record the write-down on inventory due to decline in net realizable value.
Under U.S. GAAP, market is replacement cost of $800 (falls between $705.50 and $830), which is lower
than historical cost. Inventory must be written down by $200 ($1,000-$800).
Assume that at the end of the first quarter in Year 2 , replacement cost has increased to $900, the
estimated selling price has increased to $980, and the estimated cost to complete and sell remains at $50.
The item now has a net realizable value of $930. This is $100 greater than carrying amount (and $70 less
than historical cost). Under IFRS, $100 of the write-down that was made at December 31, Year 1, is
reversed through the following journal entry :
Inventory $100
Recovery of inventory loss (increase in income) $100
To record a recovery of inventory loss taken in the previous period
 LOWER OF COST OR NET REALIZABLE VALUE
Under US GAAP, the new carrying amount for the item is $800, which is less than the current
replacement cost of $900. However, no adjustment is made.
In effect, under IFRS, the historical cost of $1,000 is used in applying the lower of cost or net
realizable value rule over the entire period the inventory is held. In contrast, under U.S. GAAP,
the inventory write-down at the end of Year 1 establishes a new cost used in subsequent periods
in applying the lower of cost of market rule.
Over the period of time that inventory is held by a firm, the two sets of standards result in the
same amount of expenses (cost of goods sold plus any net inventory loss). However, the amount
of expense recognized in any given accounting period can differ between the two rules as can
the amount at which inventory is measured on the balance sheet.
 PROPERTY, PLANT, AND EQUIPMENT
IAS 16, Property, Plant and Equipment, provides guidance for the following aspects of
accounting for fixed assets :
1. Recognition of initial costs of property, plant and equipment.
2. Recognition of subsequent costs.
3. Measurement at initial recognition
4. Measurement after initial recognition
5. Depreciation
6. Derecognition (retirements and disposals)
Impairment of assets, including property, plant and equipment, is covered by IAS 36,
Impairment of Assets.
 RECOGNITION OF INITIAL AND SUBSEQUENT COSTS

Relying on the definition of an asset provided in the IASB’s Framework for the Preparation and Presentation of Financial Standards,
both initial costs and subsequent cost related to property, plant, and equipment should be recognized as an asset when (1) it is probable
that future economic benefits will flow to the enterprise and (2) the cost can be measured reliably. Replacement of part of an asset should
be capitalized if (1) and (2) are met, and the carrying amount of the replaced part should be derecognized (removed from the accounts).
Example : Replacement of Part of an Asset
Road Warriors Inc. acquired a truck with a useful life of 20 years at a cost of $150,000. At the end of the sixth year, the power train
requires replacement. The remainder of the truck is perfectly roadworthy and is expected to last another 14 years. The cost of the new
power train is $35,000.
The new power train will provide economic benefit to Road Warriors ( it will allow the company to continue to use the truck), and the
cost is measurable. The $35,000 cost of the new power train meets the asset recognition criteria and should be added to the cost of the
truck. The original cost of the truck of $150,000 was not broken down by component, so the cost attributable to the original power train
must be estimated. Assuming annual price increases for power trains of 5 percent, Road Warriors estimates that the cost of the original
power train was $26,117 ($35,000/1.05) – IAS 16, paragraph 6. The appropriate journal entries to account for replacement would be :
Truck $35,000
Cash $35,000
Expense $26,117
Truck $26,117
 MEASUREMENT AT INITIAL RECOGNITION
PPE should be initially measured at cost, which includes (1) purchase price, including import duties and taxes; (2) all
costs directly attributable in bringing the asset to the location and condition necessary for it to perform as intended; and
(3) an estimate of the costs of dismantling and removing the asset and restoring the site on which it is located .
Example : Dismantling and Removal Costs
Caylor Corporation constructed a powder coating facility at cost of $3,000,000: $1,000,000 for the building and
$2,000,000 for machinery and equipment. Local law requires the company to dismantle and remove the plant assets at
the end of their useful life. Caylor estimates that the net cost, after deducting salvage value, for removal of the equipment
is $100,000, and the net cost for dismantling and removing the building will be $400,000. The useful life of the facility is
20 years, and the company uses a discount rate of 10 percent in determining present values.
The initial cost of the machinery and equipment and the building must include the estimated dismantling and removal
costs discounted to present value. The present value factor for a discount rate of 10 percent for 20 periods is 0.14864
(1/1.10²º). The calculations are as follows :
 MEASUREMENT AT INITIAL RECOGNITION
Building
Construction cost $1,000,000
Present value of dismantling and removal costs ($400,000 x 0.14864) $ 59,457
Total cost of the building $1,059,457
Machinery and Equipment
Construction cost $2,000,000
Present value of dismantling and removal costs ($100,000x0.14864) $ 14,864
Total cost of the machinery and equipment $2,014,864
The journal entry to record the initial cost of the assets would be :
Building $1,059,457
Machinery and equipment $2,014,864
Cash $ 3,000,000
Provision for dismantling and removal (long term liability) $74,321
 MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION
A substantive area of difference between IFRS and US GAAP relates to the measurement of PPE subsequent to initial
recognition. IAS 16 allows two treatments for reporting fixed assets on balance sheets subsequent to their acquisition :
the cost model and the revaluation model.
Under the cost model, an item of PPE is carried on the balance sheet at cost less accumulated depreciation and any
accumulated impairment losses. This is consistent with US GAAP.
Under the revaluation model, an item of PPE is carried at a revaluated amount, measured as fair value at the date of
revaluation, less any subsequent accumulated depreciation and any accumulated impairment losses. If an enterprise
chooses to follow this measurement model, revaluations must be made often enough that the carrying amount of assets
does not differ materially from the assets fair value.
Guidelines for applying this option are presented in more detail :
1. Determination of Fair Value
2. Frequency of Revaluation
3. Selection of Assets to be revalued
4. Accumulated Depreciation
 INVESTMENT PROPERTY
IAS 40, Investment Property, prescribes the accounting treatment for investment property, which
is defined as land and/or building held to earn rentals, capital appreciation, or both. The
principles related to accounting for PPE generally apply to investment property, including the
option to use either a cost model or a fair value model in measuring investment property
subsequent to acquisition.
The fair value model for investment property differs from the revaluation method for property,
plant and equipment in that changes in fair value are recognized as gains or loss in current
income and not as a revaluation surplus. Even if an entity chooses the cost model, it is required
to disclose the fair value of investment property in the notes to financial statements. In contrast
to IFRS, US GAAP generally requires use of the cost model for investment property.
 IMPAIRMENT OF ASSETS
IAS 36, Impairment of assets, requires impairment testing and recognition of impairment losses for PPE : intangible assets; goodwill; and
investments in subsidiaries, associates and joint ventures. It doesn’t apply to inventory, construction in progress, deferred tax assets,
employee benefit assets, or financial assets such as accounts and notes receivable. U.S. GAAP also requires impairment testing of assets.
Under IAS 36, an entity must assess annually whether there are any indicates that an asset is impaired. Events that might indicate an asset
is impaired are :
1. External events, such as decline in market value, increase in market interest rate, or economic legal, or technological changes that
adversely affect the value of an asset.
2. Internal assets, such as physical damage, obsolescence, idleness of an asset, the restructuring of part of an asset, or the worse-than-
expected economic performance of the asset.
Definition of Impairment
Under IAS 36, an asset is impaired when its carrying amount exceeds its recoverable amount.
Recoverable amount is the greater of net selling price and value in use

Net selling price is the price of an asset in an active market less disposal costs

Value in use is determined as the present value of future net cash flows expected to arise from continued use of the asset over its
remaining useful life and upon disposal.
Measurement of Impairment Loss
Reversal of Impairment Loss
 INTANGIBLE ASSETS
IAS 38, Intangible Assets, provides accounting rules for purchased intangible assets, intangible
assets acquired in a business combination, and internally generated intangible assets. Goodwill
is covered by IFRS 3, Business Combinations.
IAS 38 defines an Intangible Assets as an identifiable, nonmonetary asset without physical
substance held for use in the production of goods or services, for rental to others, or for
administrative purposes.
As an asset, it is a resource controlled by the enterprise as a result of past events from which
future economic benefits are expected to arise. If a potential intangible asset does not meet this
definition (i.e., it is not identifiable, not controlled, or future benefits are not probable) or cannot
be measured reliably, it should be expensed immediately, unless it is obtained in a business
combination, in which case it should be included in goodwill.
 GOODWILL
IFRS 3, Business Combination, contains the international rules related to the initial measurement of goodwill. Goodwill
is recognized only in a business combination and 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 (identifiable assets acquired less liabilities assumed)

When (a) excess (b) , goodwill is recognized as an asset. When (a) is less than (b), a “bargain purchase” is said to have
taken place and the difference between (a) and (b) (sometimes called “negative goodwill”) is recognized as a gain in net
income by the acquiring firm.
The amount recognized as goodwill depends on the option selected to measure any noncontrolling interest in the
acquired company that might exist. Under IFRS 3, no-controlling interest may be measured at either (1) a proportionate
share of the fair value of the acquired firm’s net assets excluding goodwill or (2) fair value, which includes the
noncontrolling interest’s share of goodwill.
 BORROWING COSTS
Prior to its revision in 2007, IAS 23 , Borrowing Costs, 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.
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