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IFRS vs GAAP for Level-1

RaviVoodaRaviVooda IndiaPosts: 268 Portfolio Manager
edited September 2013 in 300 Hours
imageBelow is some info I have prepared during my preparation for level-1 CFA exam. IFRS and GAAP differences are through out the FSA and for me it was difficult to remember, hence prepared this notes. Make sure you are thorough with the differences before you step into the exam hall.

Remember in exam that the default standard to follow is IFRS when nothing is mentioned.

Please Note:
1. Though care has been taken please note this notes may contain some mistakes and I may have missed out some differences. Request you to please validate once while going through the points. You cannot afford to do silly mistakes in FSA given its weightage in the exam. Each question carries weightage of (1/240 = 0.42% approx)
2. The notes I prepared is for Dec-2012 exam.

Please do comment if to add/modify any content and I will do the same.
Discontinued operationsShown after continuing operations. Not separated from operationsShown as extraordinary net of tax
Investment Property[email protected] valueNot defined
Intangible assetsReporte[email protected] or revaluation modelOnly cost model
R&DOnly development capitalizedBoth not capitalized
Opinion on internal controls during AuditN/ACompulsory to comment on Internal controls
Required financial statementsP&L,CF, B/S, Stmt of Equity, Explanatory note of policies 
AssetResource for which economic benefit to flowProbable flow of economic benefit
Other comprehensive incomeCombined with P&L statement or can be separately reportedCan be shown in statement of shareholders equity or as in IFRS
Revenue RecognitionFor Goods
- Risk & Reward transferred
- No control on goods
- Revenue can be measured
- Cost can be measured
- Flow of economic benefit

For Services
- Amount of revenue can be measured
- Flow of economic benefit
- Stage of completion measured
- Cost incurred and cost of completion can be measured
Should be both earned and realizable
% completion revenue recognition (Long term contracts) (Aggressive method)Reliable: %complete (%complete method)
Unreliable: Revenue of %completion can be recognized but not
Losses: Immediate
Reliable: %complete (%complete method)

Unreliable: After completion of contract only (Completed contact method)

Losses: Immediate
Revenue recognition for installment sales (Used when future cash flows cannot be reasonably estimated)Present Value recognized. Other amount recognized as profit

Certain: Recognized @ timeofsale
Reasonably certain:
installment method used. Profit=
(cashcollected)*(total expected profit% of sales)
Highly uncertain
: Cost recovery method used. Profit recognized only
when cash collected exceeds cost incurred
Certain: Recognized @ timeofsale
Reasonably certain: installment method used.
Profit= (cashcollected)*(total expected profit% of sales)
Highly uncertain: Cost
recovery method used. Profit recognized only when cash collected exceeds cost incurred
Revenue recognition for barter salesRevenue must be based on fair value of revenue from similar non barter
transactions with unrelated parties
Can be recognized at fair value if historically received cash for such goods
else use carrying value of assets surrendered
Inventory methodFIFO, Weighted Average, Specific IdentificationLIFO, FIFO, Weighted Average, Specific Identification
InventoryReported at low(cost,NRV)

Reported at low(cost,Market)

Market=Replacement Cost
NRV-Net Profit Marging <= Market<=NRV
As a exception to above both IFRS and GAAP allow inventories of producers and
dealers of agricultural and forest products, agricultural produce after harvest
and minerals and mineral products to be carried out at NRV even if it is greater than cost.
Writing Inventory up allowed (but to written down value only)Not allowed
Interest & Dividends Paid/ReceivedCan be in CFO or CFF

Taxes reported as CFO except for the ones reported for CFF/CFI
CFO only
Cash Flow statementDirect & Indirect permitted by both. Direct recommended by both but firms prefer
Direct & Indirect permitted by both. Direct recommended by both but firms prefer
 Long Lived Assets 
Interest For long lived assets Can be capitalized and depreciated along with asset. Here interest
cost added to asset
Income earned on borrowed amountCannot be capitalizedNo restriction
SoftwareExpensed until feasibility established. After that only if can be capitalized.
This is same for s/w generated internally or for others
Internally: Can be capitalized Others: Expensed until feasibility established. After that only if can be capitalized.
Component depreciationCompulsory (Should be separately depreciated by type)Optional
Asset revaluationAllowed as long as active market existsDoes not allow
Impairment of PPE and Intangible assetsImpaired only if carrying value less than Recoverable amount.

Recoverable Amount= MAX(FairValue-SellingCost,Value in use)

Loss recognized to b/s

Tested for annual impairment.

Can be written back to the amount of written down and additional profit recognized as “revaluation surplus” If it is bought at cheaper value, then revaluation should not be shown and should only be reflected in equity. Revaluation shown only if written down.
Tested for impairment only if events and circumstances indicate that firm may not be able to recover carrying value through future use.

Impaired by 2 steps

1. Recoverability test: Impaired if Carrying Value > Discounted CF’s
2. Loss measurement a. Loss written to b/s b. Recovery not allowed Asset is written down to fair value in B/S and loss to the i/c sheet.

Loss= CV- Fair Value
Investment propertyIf firm owns property for collection of rental or earning capital appreciation,it is treated as investment property.

Can use cost model or fair value model. But must use same model for all such properties and model disclosure should be there.

Gain should be recognized only if loss is already recognized
Does not differentiate between long lived asset and investment property Cost model generally used.
 End of Long Lived Assets 
 Gain or Loss from Available for debt securities that result from exchange rate fluctuations are recorded on income statementNot recorded
Deferred tax and LiabilitiesClassified as non concurrentClassified as concurrent/non concurrent based on classification of underlying asset or liability
If DTA/DTL is occurred in past and but criteria of economic benefit is not metExisting DTA/DTL related to item is reversedValuation allowance is established.
Goodwill DTA/DTL is not recognized for goodwill arising out of a business combination
INITIAL Recognition of asset or liabilityProvides exemption if

1. Transaction not a business combination AND
2. Affects neither accounting profit or taxable profit
Not exempted
Tax losses and Tax creditsDTA/DTL is createdDTA/DTL is created
Bond Issuance costsInitial bond liability reduced by amount of issuance costs (thereby increasing effective interest rate). In effect issuance costs are treated as unamortized discountCapitalized as an asset and allocated to income statement as an expense over term of bond
Bond Issuance costsWhen bonds are redeemed prior to maturity, Nothing should be done as already capitalized (included in book value of bond liability)When bonds are redeemed prior to maturity, any remaining unamortized bonds issuance costs must be written off and gain/loss should be declared
Bond Issuance costs Bond issuance costs are netted against bond proceeds and reported on CF statements as CFF
Bond Issuance costs Debt is reported at fair value.

Gains and Losses when market yields change are reported in income statement
Finance lease (Lessee perspective)Title to leased asset transferred to lessee at the end of lease

- Lessee can purchase leased asset for price that is significantly lower than fair value of asset at some future date
- Lease covers major term of assets economic life
- PV(Lease payments)=fair value of leased asset
- Leased asset is so specialized that only lessee can use without significant modification
Title to leased asset transferred to lessee at the end of lease
- Lease period is for 75% of asset life time
- PV(Lease payments)= more than 90% of fair value
Distinction b/w Sales type and Direct finance leaseIFRS makes no distinctionIf PV>CV , sales lease If PV=CV, direct finance lease.
Sales type and Direct finance lease Both in o/p and finance lease firms should disclose payments for the next 5 years separately and cumulative amount of the next 5 years after that.
Funded status of Defined benefit planFirms remove unrecognized actuarial gains and losses and unrecognized prior service costs from funded costs. Economic reality may not be painted accurately.Funded status to be reported on B/S. Overfunded reported as Asset and Underfunded as Liability
Funded status of Defined benefit plan Firms disclose components of benefit obligation, plan assets and pension expense separately. They also disclose the assumptions used to calculate
To change inventory accounting method from FIFO to LIFODemonstrate the benefitExplain why you are changing


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