IFRS for Long-lived IFRS for Long-lived Assets & R&DAssets & R&D

With comparison to US GAAP

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IFRS for long-lived assets IFRS for long-lived assets including intangiblesincluding intangibles Relevant IFRS:

IAS 16, Property, Plant and EquipmentIAS 38, Intangible Assets, IAS 36, Impairment of AssetsIFRS 5, Non-current Assets Held for

Sale and Discontinued Operations)

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Plant, Property & EquipmentPlant, Property & Equipment

IFRS PP&E can be carried at historical

cost or revalued amount less accumulated depreciation & impairment

Interest costs are capitalized if criteria of IAS23 are met

No inclusion of ARO in cost of asset when used for production of inventories

US GAAP PP&E must be carried at

historical cost less accumulated depreciation

Interest costs must be capitalized if FAS34 requirements are met

AROs are recognized where there is a obligation to be met at retirement (no exception)

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Plant, Property & EquipmentPlant, Property & Equipment

Revaluation under IFRSEntity must choose cost model or revaluation

model for an entire class of property, plant & equipment [IAS16, para. 29]

If revaluation model is chosen, fair values that can be reliably determined must be done with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period [IAS16, para. 31]

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Revaluation under IFRSRevaluation under IFRS

Increase in value: Debit asset and report comprehensive income The associated AOCI is called “revaluation surplus”

Decrease in value: Credit asst and … First, debit revaluation surplus to the extent it exists

(for the specific asset) and report that portion of the loss in comprehensive income

Any remaining loss reduces profit & loss for the period

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Class Discussion - BrainstormClass Discussion - Brainstorm

What is it about American culture and history that makes upward revaluation unacceptable?

If you are not an American, what is it about your culture (or others) that make upward revaluation acceptable?

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Research & DevelopmentResearch & Development

IFRS Development costs must be

capitalized and amortize if criteria are met

Cost to develop websites must be capitalized if criteria are met, including probably future economic benefit

In-process R&D acquired as part of business combination is capitalized

Revaluation is allowed although rare

US GAAP Expense R&D as incurred Website cost capitalization

depends on phase of spending based on SOP 98-1 and/or FAS86

IPR&D acquired as part of business combination is expensed immediately

Revaluation is not allowed

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Research vs. Development Research vs. Development under IFRS under IFRS (IAS38, para. 54-57)(IAS38, para. 54-57) First step – classify internally generated

intangible assets as being in either (1) a research phase or (2) a development phaseResearch is expensed as incurredDevelopment costs are capitalized only when

the entity can demonstrate all of the following: Next slide – 6 criteria

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Capitalization Criteria [IAS38 ¶57]Capitalization Criteria [IAS38 ¶57]

a) The technical feasibility of completing the intangible

b) Its intention to complete the intangible asset

c) Its ability to use or sell the intangible asset

d) How the intangible asset will generate probable future economic benefits

e) The availability of adequate technical, financial and other resources to complete

f) Reliable measurement of related expenditures

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Caveats in IAS 38Caveats in IAS 38

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets.

Past expenses cannot not later be recognized as part of an intangible asset

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Compare to FAS 86Compare to FAS 86

R & D Costs

(Expense)

Deferred Costs

(Intangible Assets)

Inventory Costs

Software project initiated

Technological feasibility established

Software available for commercial production

Software sold

IFRS amortization rules – IFRS amortization rules – basically similar to US GAAPbasically similar to US GAAP Intangible assets with indefinite life are not

amortized – but are tested for impairment Intangible assets with finite useful lives

Allocated on a systematic basis over the useful life to reflect pattern of the economic benefits expected

Cease amortization at date asset is classified as held for sale

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Impairment of Impairment of Assets – IAS 36Assets – IAS 36

US GAAP

FAS 144 PP&E

FAS 142 Intangibles & Goodwill

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Impairment of long-lived assetsImpairment of long-lived assets

IFRS: 1-step process Recoverable amount is

higher of Fair value less cost to sell Value in use

Discounting required in evaluation stage

Impairment losses must be reversed if circumstances change (except goodwill)

FASB: 2-step process FAS 144—for an asset in use,

undiscounted future cash flows from use establish recoverability used for the impairment calculation Not considered impaired unless

undiscounted cash flows are less than carrying value

Discounting occurs only for the step 2 valuation stage

Impairment losses cannot be reversed

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IFRS 1-step testIFRS 1-step test

Impaired if recoverable amount > carrying value At end of each reporting period, look for indications of

impairment Impairment tests need not be done if there are no

indications of impairment EXCEPTION

Intangible assets with indefinite useful life (including goodwill) and intangible asset not yet available for use

For these assets, impairment test is at end of reporting period

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Similar to US GAAP which requires annual impairment tests for intangibles with indefinite lives but not for other long-lived assets

When there is an indication of When there is an indication of possible impairment:possible impairment:

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IAS 36

Impairmentloss = excessof BV over FV

No impairmentrecorded. Usecarrying value.

FASB 144 - Impairment ofAssets To Be Held and Used

No

Yes

Yes

Eventsindicate possible

impairment?

Is BV >undiscountedfuture CFs?

Yes Yes

No

Can FV beestimated based on

MV of similarassets?

Find FV bydiscountingfuture cashflows (CFs)

No

No

Quoted market prices

availablefor FV?

Step 1

Step 2

IAS36 – Indicators of impairmentIAS36 – Indicators of impairment

Decline in market value greater than expected as a result of normal use or passage of time

Significant adverse changes affecting entity including economic, technological, legal environment

Higher interest rates which would make future cash flows less valuable

Evidence of physical damage or obsolescence Plans to discontinue use, dispose of asset, etc.

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FAS 144 Indicators of impairmentFAS 144 Indicators of impairment

Events or changes in circumstances that could indicate that the carrying amount may not be recoverable

Decline in market value Change in way asset is used or physical change in

asset Adverse changes in legal factors or business

climate Probable sale of asset before end of useful life Current period losses with history of operating or

cash flow losses associated with asset

Timing of impairment testsTiming of impairment tests

IFRS When an indication of impairment is

observed (look for them at least annually)

Land, buildings, equipment Intangible assets with finite life

At least annually (at same time of year but not

necessarily at year end) Intangibles with indefinite life

including goodwill Intangibles not yet in use

(development costs)

US GAAP When indication of

impairment exists (FAS 144) long-lived assets intangibles subject to amortization (FAS142, para. 15)

At least annual tests for intangibles with indefinite life including goodwill

GW tested at reporting unit level – related to segment reporting rules FAS131

Detailed evaluation of fair value may not be required every year

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Very

Similar

Timing of impairment testsTiming of impairment tests

IFRS When an indication of impairment is

observed (look for them at least annually)

Land, buildings, equipment Intangible assets with finite life

At least annually (at same time of year but not

necessarily at year end) Intangibles with indefinite life

including goodwill Intangibles not yet in use

(development costs)

US GAAP When indication of

impairment exists (FAS 144) long-lived assets intangibles subject to amortization (FAS142, para. 15)

At least annual tests for intangibles with indefinite life including goodwill

GW tested at reporting unit level – related to segment reporting rules FAS131

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Very

Similar

IAS36 – Measuring recoverable IAS36 – Measuring recoverable amountamount (1)(1) Recoverable amount can be for an

individual asset unless the asset does not generate cash flows that are largely independent of other assets In this case, use a cash-generating unit (CGI)

to which the asset belongsThis is the usual case

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IAS36 – Measuring recoverable IAS36 – Measuring recoverable amountamount (2)(2) Value in Use – based on calculations that

include: Estimate of future cash flows related to asset Expectations about possible variations in amount or

timing of future cash flows The time value of money Price for bearing uncertainty inherent in the asset Other factors such as illiquidity

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IAS36 – VIUIAS36 – VIU (3)(3)

Discount rate to use Discount rate The discount rate (rates) shall be a pre-tax

rate (rates) that reflect(s) current market assessments of: the time value of money the risks specific to the asset for which the

future cash flow estimates have not been adjusted

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IAS36 – Compare recoverable IAS36 – Compare recoverable amountsamounts (4)(4) Value in Use (discounted cash flows)

Discount the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal using appropriate discount rate

Fair Value less costs to sell (market-based) Best FV would be a binding sales agreement in an arm’s length

transaction Next best would be based on identical or similar assets traded

in an active market Never actually recommends discounted expected cash flow

analysis

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Impairment ExampleImpairment Example

Johnson Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value.

Johnson's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment.

Impairment Example (con’t)Impairment Example (con’t)

The management of Johnson Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $80,000 per year. The fair value of the equipment is $240,000 (based on market values of similar equipment). No goodwill was associated with the purchase of the equipment.

FAS 144 solution (slide a)FAS 144 solution (slide a)

Determine if an impairment loss should be recognized. Annual depreciation for the equipment has been

$45,000 ($1,000,000 - $100,000)/20 years. Current book value of the equipment is:

Original cost $1,000,000 Accumulated depreciation 360,000

($45,000 * 8 years) Book value $ 640,000

FAS 144 solution (slide b)FAS 144 solution (slide b)

Determine if an impairment loss should be recognized.

Anticipated future cash flows $ 560,000  (7 years * $80,000 per year) Look at the flow chart – should we recognize an

impairment?

The fair value is lower, so an impairment loss should be recognized.  

FAS 144 solution (slide c)FAS 144 solution (slide c)

The “step 2” phase: Determine the amount of the loss and prepare the journal entry to record the loss. The impairment loss is equal to $400,000 ($640,000 -

$240,000) -- the difference between the book value of the equipment and its fair value. The impairment loss would be recorded as follows:

  Acc’d Depreciation 360,000  Loss on Impairment 400,000    Equipment 760,000 

VARIATION of ExampleVARIATION of Example(FAS144 solution, slide d)(FAS144 solution, slide d) What journal entry should Johnson Company make

if future cash flows related to the equipment were $980,000 in total? Since the future cash flows (undiscounted) equal

$980,000 and this amount is greater than the book value of $640,000, Johnson Company will not do anything.

No impairment is recognized and no upward revaluation is recorded.

No journal entry needed.

IFRS solution to the impairment IFRS solution to the impairment example (slide 1)example (slide 1) Synopsis of facts: Carrying value = $640,000 Future cash flows from use =

$80,000 per year for 7 years Market-based fair value less cost to sell =

$240,000 Determine VIU using 5% rate

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IFRS solution to the impairment IFRS solution to the impairment example (slide 2)example (slide 2) Determine VIU: N=7, i=5%, FV=0, PMT=$80,000.

PV = $462,910 Recoverable amount = higher of FV

($240,000) and VIE ($462,910) Therefore, loss is $177,090

(BV 640,000 – VIE 462,910)

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IFRS solution to the impairment IFRS solution to the impairment example (VARIATION)example (VARIATION) Synopsis of facts: Carrying value = $640,000 Future cash flows from use =

$140,000 per year for 7 years Market-based fair value less cost to sell =

$240,000 Determine VIU using 5% rate

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Your IAS36 Solution to Variation Your IAS36 Solution to Variation of Example:of Example: Fair value less cost to sell = $240,000 Carrying value = $640,000 Determine VIU: (n=7, i=5%, FV=0,

PMT=$140,000)

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Comparing the solutionsComparing the solutions

Under FAS144

Original facts Loss = $177,090

VARIATION No loss recognized

Under IAS36

Original facts Loss = $400,000

VARIATION No loss recognized

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