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Fair Value GAAP vs. IFRS

Fair Value GAAP vs. IFRS. Convergence or Conversion of GAAP-IFRS. World is going towards one set of accounting standards but is IFRS truly uniform ? United States conceded that IFRS is more widely used, so U.S. will change – but when? Canada changed as of January 1, 2011

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Fair Value GAAP vs. IFRS

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  1. Fair ValueGAAP vs. IFRS

  2. Convergence or Conversion of GAAP-IFRS • World is going towards one set of accounting standards but is IFRS truly uniform? • United States conceded that IFRS is more widely used, so U.S. will change – but when? • Canada changed as of January 1, 2011 • Securities and Exchange Commission: • Starting in 2010-11 voluntary adoption of IFRS by U.S. Companies • Starting in 2014-15 mandatory adoption of IFRS by all public companies – private companies will follow!

  3. Problems with Convergence • Principles vs. Rules • Business complexity = complex rules • Will IFRS have to adopt ‘Rules’ over time? • What happens if our SEC disagrees with IFRS? • Transition • Training of preparers – option for early adoption by large companies • Training of auditors

  4. Fair Value vs. Fair Market Value • There are real differences among: • Fair Market Value (not used for financial reporting) • Fair Value – GAAP • Fair Value – IFRS • Difference in concept of Fair Value between GAAP and IFRS has not been resolved

  5. Exit Value – GAAP Concept • Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. • This concept works for financial instruments and does not work for tangible and intangible assets

  6. Fair Value – IFRS Concept • Fair Value is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

  7. Exit Value • GAAP concept of valuing something at what it could be sold for today, to a ‘market participant’ works only if there is a market with market participants • U.S. and EU experience recently with sub-prime securities indicates that often there is no market, and no market participants willing to make a market

  8. Fair Value and Impairment: Key Differences ISRF vs. GAAP • Real Estate • Investment property • Agricultural/biological • IFRS permits/requires periodic revaluation up or down • U.S. GAAP absolutely prohibits write up • In U.S. this is a one-way street. Can take impairment loss but never an impairment gain – or even write back up to previous amount

  9. IFRS Permits Revaluations • A literal reading of IFRS suggests that if they want to, companies can revalue other assets – for example intangibles • Brand Names • Patents • Will Canadian companies take advantage of this?

  10. Fair Value Option • Companies are permitted to revalue LIABILITIES if they wish • Banks and financial institutions have had to write down investments because of credit problems in the economy • So if a company’s credit rating drops, they can record a ‘GAIN’ which may offset the Fair Value loss on the investments – Bear Stearns example

  11. Asset Impairment • Impairment indicators are essentially the same between GAAP and IFRS • IFRS writes down to Fair Value when FV is less than carrying value • No intermediate cash flow test • IFRS looks to the higher of: • Net selling price (exit value) • Value in Use (entity specific)

  12. Research & Development • ‘Research’ expensed in both systems • ‘Development’ is capitalized in IFRS and expensed in GAAP • Basic question: • Is the true Fair Value of R&D properly measured based on costs incurred?

  13. Valuing Liabilities and Contingencies • Rules calling for what you could pay someone to take on your liabilities makes no sense • Should allow companies to determine the Present Value or Expected Value of what they anticipate paying to settle liabilities and contingencies • GAAP values contingencies only in a Business Combination

  14. Can We Value Contingencies? • Contingent payment in a Business Combination • Settle Environmental Liabilities • ‘Fair Value’ of lawsuits

  15. Revenue Recognition • GAAP has over 200 items in the literature • IFRS is very general • Revenue Recognition is a big item at least in the U.S. • FASB looks to ‘Fair Value’ as one way of measuring Revenue Recognition.

  16. Is There Such a Thing as The Fair Value? • The value of an asset depends on who is going to use it, and for what purpose • How can anyone write a set of rules that provides ‘consistency’ among preparers and yet reflects economic reality? • FASB and IASB would like a “one size fits all” solution in terms of defining Fair Value

  17. Where Are We Going? • Recent problems in valuing subprime assets will slow down move to increased Fair Value • Convergence of IFRS and GAAP will be much harder (and slower) than anticipated • LIFO problem • Different versions of IFRS • Demand for Fair Value by Security Analysts will continue and even increase

  18. Further Study • Using the Internet, compare some of the Canadian GAAP with Canadian IFRS • From your textbook, find at least six GAAP’s and revise them according to the new Canadian IFRS

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