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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

Fair ValueGAAP vs. IFRS

Convergence or conversion of gaap 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

  • 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!

Problems with convergence
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

Fair value vs fair market value
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

Exit value gaap concept
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

Fair value ifrs concept
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.

Exit value
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

Fair value and impairment key differences isrf vs gaap
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

Ifrs permits revaluations
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?

Fair value option
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

Asset impairment
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)

Research development
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?

Valuing liabilities and contingencies
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

Can we value contingencies
Can We Value Contingencies?

  • Contingent payment in a Business Combination

  • Settle Environmental Liabilities

  • ‘Fair Value’ of lawsuits

Revenue recognition
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.

Is there such a thing as the fair value
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

Where are we going
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

Further study
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