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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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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