Professional Documents
Culture Documents
Contingencies:
Loss contingency
Page 2
Page 3
Executive summary
Both IFRS and US GAAP have similar recognition criteria for a liability. Both require recognition of the best estimate of a probable loss; however, US GAAP defines probable as likely and IFRS defines probable as more likely than not. When there is a range of possible provision requirements all with an equal probability of occurring, US GAAP requires the minimum amount in the range to be recorded, while IFRS requires the midpoint in the range to be recorded.
Generally, US GAAP only allows discounting when the liability and the timing of payments are fixed or reliably determinable. IFRS requires provisions to be discounted for the time value of money if the impact is material.
Page 4
Executive summary
Contingency differences IFRS Standard Definition of probable Amount of range of outcomes Discounting IAS 37 More likely than not Midpoint in range Requires that the liability be discounted US GAAP ASC 450-20-25 Likely Minimum in range Generally does not allow discounting
Page 5
Progress on convergence
Both the FASB and the IASB have current agenda items related to provisions and contingencies, the objectives of which are:
An IFRS working draft proposing a new IAS 37 was issued in February 2010. A new standard is expected in the latter half of 2010.
Page 6
Most liabilities, unless otherwise noted, are generally accounted for in the same manner for US GAAP and IFRS.
Page 7
US GAAP
IFRS
Requires refinancing to be in place before the audited financial statements are issued.
Page 8
Contingencies
Definition
US GAAP
IFRS
ASC 450-10-20 defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
Page 9
Contingencies
Gain contingency
US GAAP Gain contingencies are defined as possible assets that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Requires that certainty exists regarding its realization before a gain contingency can be recorded.
Current liabilities and contingencies Academic Resource Center
IFRS
Similar, although the term contingent assets is used for gain contingencies.
Similar
Page 10
Contingencies
Loss contingency
IFRS
As a result of a past event, the entity has an obligation to others. It is probable that an outflow of resources will be required to settle the obligation. The amount of the obligation can be reliably estimated. The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. When there is a large homogeneous population, the best estimate of the obligation is generally based on the expected value.
Current liabilities and contingencies
Similar
Page 11
Contingencies
Loss contingency
US GAAP Requires information about a contingent liability whose occurrence is more than remote but did not meet the recognition criteria to be disclosed in the notes to the financial statements.
IFRS
Similar
Page 12
Contingencies
US GAAP
IFRS
Defines probable as likely (this has been generally interpreted as greater than a 70% chance of occurring).
Probable is defined as more likely than not (more than a 50% chance of occurring).
Page 13
Assuming the attorneys can arrive at a reasonable estimate of the potential damages, should KCI recognize a provision using US GAAP in 2010 and in 2011? Should KCI recognize a provision using IFRS in 2010 and in 2011?
Page 14
IFRS:
In 2010 and 2011, you recognize a provision for this situation. Using IFRS, probable indicates that an outcome is more likely than not to occur (more than a 50% chance of occurring). Since this situation is above this threshold in both years, a provision would be required to be recognized.
Page 15
Contingencies
US GAAP
IFRS
Where there is a continuous range of possible outcomes and each point in the range is as likely as any other to occur, under ASC 450-20-30-1, the minimum amount in the range is used to measure the provision.
Page 16
Assuming all other criteria are met, how much should the entity book related to warranty repairs using US GAAP and IFRS? Show any required journal entries.
Page 17
Since the entity only had a range to work with, the treatment using the two sets of standards is different. If no particular outcome within the range is better than another, then for US GAAP the entity would book the minimum of the range, whereas for IFRS the entity would book the midpoint range.
Current liabilities and contingencies Academic Resource Center Page 18
Assuming all other criteria are met, how much should the entity book related to warranty repairs using US GAAP and IFRS? Show any required journal entries.
Page 19
Page 20
Contingencies
Loss contingency
US GAAP
IFRS
Provisions may be discounted only when the amount of the liability and the timing of the payments are fixed or reliably determinable.
Provisions should be recorded at the estimated amount to settle or transfer the obligation, taking into consideration the time value of money (utilizing a pretax discount rate).
Page 21
Contingencies convergence
A new standard, Liabilities, is expected in the latter half of 2010. This project is not part of the Memorandum of Understanding.
The proposed standard would remove the requirement under IAS 37 for recognizing a liability when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation (IAS 37, paragraph 14(b)). The result is that a company would recognize a liability for the amount it would rationally pay to be relieved of an obligation that can be reliably measured. The intent is to focus management on judging whether the company has an obligation rather than predicting the likely outcome.
This proposed change will create a bigger difference between IFRS and US GAAP.
Page 22
Restructuring costs
US GAAP
IFRS IAS 37 similarly limits restructuring programs to those that either change how business is conducted or change the scope of the business.
ASC 420 limits restructuring programs to those that relate to exit or disposal activities.
Page 23
Restructuring costs
US GAAP
IFRS
Focus is on the individual cost components and, as a result, costs are generally recognized later.
Focus is on the exit plan as a whole and, as a result, costs are generally recognized earlier.
Page 24
Disclosures
Current liabilities
The disclosure requirements for current liabilities are generally similar using US GAAP and IFRS.
Different accounting treatment, in areas such as short-term obligations to be refinanced, longterm debt covenants and income taxes, as discussed earlier, would impact the classification and, accordingly, the disclosure requirements.
Page 25
Disclosures
Contingencies
US GAAP Disclose a more than remote contingent liability when either it is probable that an outflow of resources will be required to settle the obligation or the amount of the obligation can be reliably estimated, but not both. The disclosure should describe the nature of the contingency. Additionally, an estimate of the possible loss or a statement that an estimate of the possible loss cannot be made should be disclosed.
IFRS
Similar
Page 26
Disclosures
Contingencies
US GAAP
IFRS
There is no provision for reduced disclosure requirements similar to the one allowed using IFRS.
In extremely rare cases, disclosure of some or all of the required information can be excluded if it is expected to severely sway the outcome of a lawsuit. In such cases, an entity does not need to disclose the information, but shall disclose the general nature of the dispute and the fact that and reason why the information has not been disclosed.
Page 27