Ch13IFRS 8e Pp Slides

7/31/2019 Ch13IFRS 8e Pp Slides

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Prepared by:

Patricia Zima, CAMohawk College of Applied Arts and Technology

Updated for IFRS by:

Ingrid-McLeod Dick

Schulich School of Business, York University

Chapter 13


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Current Liabilities andContingencies

What is a liability?

What is a current liability?

Estimated liabilities Contingencies, commitments, and

guarantees

Presentation, analysis, and international


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Definition and Characteristics

Liabilities are:

Obligations of an enterprise

Arising from past transactions or events The settlement of which may result in the

transfer or use of assets, provision of services,or other yielding of economic benefits in the

future Defined in Section 1000 of CICA Handbook

IFRS states liabilities are present obligations

otherwise similar


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Three essential characteristics of a liability are:

1. Obligation requiring the transfer or use of anasset or provision of a service or giving upother economic benefits, to be settled on adeterminable date or on the occurrence of anevent or on demand

2. There is little or no discretion to avoid the

obligation3. Obligation arises from a transaction or event

which has already occurred


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IFRS has a similar definition for a liability

IFRS also includes liabilities arising due to

normal business practice or customs (givingrise to an expectation), not just by legalcontract.

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Financial Liabilities

Contractual obligations to either:

1. deliver cash or other financial asset toanother party, or

2. to exchange financial instruments withanother party under conditions that arepotentially unfavourable

Distinction between financial and non-financial is

significant as GAAP requires that certainfinancial liabilities are measured at fair valueinstead of historic (or amortized) cost

IFRS is similar


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Current Liabilities

Current liabilitydescribed as (not defined inCICA Handbook):

Amounts payable within one year from the date

of the balance sheet or within the normaloperating cycle where this is longer than a year.

Financial Liabilities short-term in nature are

normally reported at their maturity value (i.e. theamount of cash payable in the future)

IFRS has the same definition


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Current Liabilities

7. Rents and royaltiespayable

8. Returnable deposits

9. Unearned revenues10.Sales taxes payable

11.Goods and Services Taxpayable

12.Income taxes payable

13.Employee-relatedliabilities

1. Bank indebtedness andcredit facilities

2. Accounts Payable

3. Notes payable4. Current maturities of long-

term debt

5. Short-term debt expectedto be refinanced

6. Dividends payable

Common current liabilities include:

IFRS reports and measures these liabilities

similar to Canadian GAAP


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Bank Indebtedness

Line-of-credit (revolving debt) Generally, an agreement entered with the

bank that allows multiple borrowings up to anegotiated limit

Repayments made whenever there aresufficient funds available

Amount borrowed reported on the balance

sheet; availability of funds and restrictionsimposed by the financial institution requiresnote disclosure

IFRS is similar


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Accounts Payable

Amounts owed for goods, supplies orservices purchased on open account

Liability recorded when title has passed Recorded at amount payable


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Notes Payable

Notes payable are written promises to pay asum of money on a specified future date

Arises from purchases, financing or othertransactions

Notes payable may be classified as eithershort-term or long-term

Notes payable may be interest-bearing orzero-interest-bearing (non-interest-bearing)

In both cases, interest expense is determinedwhenever financial statements are prepared


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Notes Payable

For zero-interest-bearing notes, thedifferencebetween the present value of the

note and the face value of the noterepresents the discount on the note payableand the related interest

The discount is the interest expense recorded

over the life of the note This is the same treatment under IFRS


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Interest-BearingNotes Payable

Given:

Landscape Corp. borrows $100,000

Signs a 4-month, 12% note on March 1

Journal Entries to record

Signing of note

Interest accrual at June 30 year end and Note repayment


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Interest-BearingNotes Payable

March 1:

Cash 100,000

Notes Payable 100,000

June 30:Interest Expense 4,000

Interest Payable 4,000(100,000 x 12% x 4/12)

July 1:


Interest Payable 4,000

Cash 104,000


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Zero-Interest-BearingNotes Payable

Given:

Landscape Corp. issues a $104,000, 4-month,zero-interest-bearing note on March 1

Present value (PV) of note and cash received is$100,000

Journal entries to record the signing andrepayment of the note


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March 1:

Cash 100,000Discount on Note Payable 4,000


In effect: $100,000 borrowed for four months and $4,000interest = $104,000 maturity value


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June 30:

Interest Expense 4,000

Discount on Note Payable 4,000

July 1:

Note Payable 104,000

Cash 104,000


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Current Maturities ofLong-Term Debt

The portion of long-term debt maturing within 12months from the balance sheet date is reported as acurrent liability

Long-term debts should not be reported as current

liabilities if:1. they are retired by assets not classified as

current assets

2. they are refinanced or retired by new issues ofdebt

3. they are converted into share capital

Any liability due on demand, or due on demand within ayear or operating cycle, is reported as a current liability


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Short-Term Debt Expected to beRefinanced

Short-term debt may be excludedfrom currentliabilities to the extent that contractual

arrangements have been made for settlement

from other than current assets. Both of the following criteria must be met to

exclude amounts from current liabilities:

1. there is intent to refinance on a long-term

basis, and2. the entity demonstrates the ability to complete

the refinancing


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The entitys ability to refinance is

demonstrated if:

a.the debt is actually refinanced before issueof the financial statements, by issuing longterm debt or issuing shares after the

balance sheet date, orb.the entity enters into a refinancing

agreement


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IFRS has similar requirements, with onedifference

IFRS requires that the refinancing agreement bein place prior to the report date for the repaymentto be shown as long term, whereas CanadianGAAP requires the agreement in place prior to theissue date

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Short-Term Debt Replaced byLong-Term Debt (Illustration 13-2)

Liability

$40,000

How toclassify?

Dec. 31,

2008Balancesheetdate

Liabilityof$40,000

paid off

Jan. 17,

2009

Issueslong-termdebt of

$100,000

Feb. 3, 2009

Liability of$40,000classify

as current

Mar. 1,

2009Balance

sheetissued


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Dividends Payable

Cash Dividend

Becomes legal obligation on declaration date

Classified as current liability

Preferred Dividends in Arrears

Cumulative preferred dividends that have not beendeclared require note disclosure

Not recognized as a liability

Stock Dividends

Not a liability; does not meet the definition of aliability as no future outlays of assets/services

Recorded only through equity accounts i.e.represents a transfer of equity from retainedearnings to contributed capital


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Rents and Royalties Payable

This type of liability may be created by acontractual agreement in which payments areconditional on the amount of revenue that isearned or the quantity of product that is

produced or extracted. Examples include the following:

Franchisees often pay the franchisorfranchise fees calculated as a % of sales

Tenants in shopping centers may berequired to pay additional rents based onsales


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Returnable Deposits

Customers may pay deposits that guaranteethe payment of expected future obligations or

the performance of a future service They are classified as either current or non-

current liabilities depending on the timebetween the date of the deposit and the end

of the relationship


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Unearned Revenues

When cash is received before the product isdelivered or service is rendered

Examples include gift certificates, prepaymentfor subscription

A current liability is created by the transaction When cash is received:

Dr. Cash

Cr. Unearned Revenue

When revenue is earned (service or good isprovided)

Dr. Unearned Revenue

Cr. Revenue


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Goods and Services Tax (GST)

Most businesses in Canada pay GST As of July 1, 2006 GST is calculated at a rate

of 6%

GST Payable

Represents amount collected on eligiblesales

GST Recoverable

GST paid on eligible purchases

Net amountof GST Payable and GSTRecoverable remitted to (due from) CRA

(Canada Revenue Agency)


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Employee-Related Liabilities

Employee-related liabilities include thefollowing:

salaries or wages owed to employees at

end of the accounting period payroll deductions owed to CRA and

others

compensated absences obligations

bonuses

Reported as current liabilities


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Profit sharing and bonus plans -IFRS

IAS 19 recognizes a liability under profit-sharing and bonus plans when a legal orconstructive obligation exists as indicated by:

a documented plan showing the formula forcalculations, and

the amount is determined prior to the date ofauthorization to issue the statements, and

past practices indicate a constructiveobligation (arising due to normal businesspractices).

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Payroll Deductions

Payroll deductions include statutory and

discretionary deductions

Statutory (mandatory) deductions include:

Canada (Quebec) Pension Plan [CPP/QPP]

Employment Insurance (EI) Income Tax Withholding (Federal and

Provincial)

Discretionary deductions might include:

Insurance premiums

Union dues

Until these deductions are remitted to the

government, they are reported as current liabilities


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Compensated Absences

Compensated absences are absences fromemployment for which employees are paid

A liability for such absences must be accrued if:

employers liability relates to services alreadyrendered by employees

the liability relates to employees vested oraccumulated rights

payment of the compensation is probable, and

the amount can be reasonably estimated. The liability is recognized in the year the benefit is

earned by employees

The current rate is often used


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IAS 19 under IFRS provides detailed guidance onthese short term employee benefits

Similar treatment to Canadian GAAP for these shortterm benefits

Current or expected future rates may be used

IFRS recognizes termination payments when there isa detailed plan that includes: Location, function and approximate number of employees

impacted; Termination benefits for each job function;

Implementation date.

Canadian GAAP records termination payments at time ofcommunication 32

Compensated Absences -IFRS


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Restructuring Provisions - IFRS

IAS 37 has extensive guidance detailing thatthe restructuring plan should be recognizedas a provision when there is:

A formal detailed plan Valid expectation that the plan will be carried

out by either implementing or announcing theplan

Costs include only direct costs that: Are necessary to the plan and

Are not associated with ongoing activities of

the entity33


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Estimated Liabilities

Examples of estimated liabilities include:

Product guarantee and warrantyobligations

Obligations to provide premiums and pricereductions in the future

Recognized in the current period as it is likelythat an obligation will result

Obligations all relate to transactions of thecurrent period


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Provisions under IFRS

Provision is an obligation arising as a resultof past events, which is probable (more likelythan not) and can be reliably estimated, but

the timing and amount is uncertain Legal or constructive provision

Constructive provision arises due to past

actions resulting in an expectation Example the Entity has made refunds tocustomers in the past, giving an expectation thatthis will continue in the future, even though thereis no legal obligation to do so

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Where the time value of money is material,the future cash flows are discounted todetermine the amount of the provision

Measure provisions at the best estimate,which is the expected outcome

Large number of items use the expectedoutcome method

Large number of items in a continuous rangeuse the midpoint

Single event use most likely outcome

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Example: Company sells machines with a one-yearwarranty, under which the company will either fix orreplace the machine. During the year 1,000 unitswere sold; over the past 5 years, 3% of the machines

have been defective, and of that 3%, have requiredfull replacement at $5,000 each, and the other halfwere fixed at $500 each. Determine the warrantyprovision at the year end.

Answer: (1,000 X 3% X 50% X $5,000) + (1,000 X3% X 50% X $500 ) = $82,500

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From: IFRS Primer

International GAAP Basics, Wiecek and Young, 2009, page 50


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Product Guarantee andWarranty Obligations

Warranty - promise made by a seller to correctproblems experienced with a products

quantity, quality, or performance

Warranties entail future post-sale costs

Warranty accounting dependent on how thewarranty is sold; two different possibilities:

1. Warranty provided as part of the productprice

2. Warranty sold as a separate item


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Warranty Embedded in SalesPrice of Product

Considered an estimatedcost/liability

A liability is recorded if:

1. It is likely that future costs incurred as a result of thecurrent sales and

2. The amount can be reasonably estimated

Accounted for using the expense warranty method

Warranty costs estimated in advance

Warranty costs expensed in year of sale Warranty liability recognized

Two available methods for accounting as follows

IFRS has similar treatment as a provision


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Warranty costs charged to theexpense as incurred

Adjusting entry required atperiod end to accrueremaining estimated liabilityand expense on current periodsales

Warrantyliabilityreported forthe estimated amount ofoutstanding claims

Total estimated warrantyexpense and liability

recognized and recorded at thepoint of the sale

Warranty costs chargedagainst liability as incurred

Warrantyliability reported forthe estimated amount ofoutstanding claims

Method A Method B

Warranty Embedded in SalesPrice of Product

Treatment would be similar under IFRS


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Expense Warranty Method:Example

Given:

Units sold in 2008: 100 units at $5,000

Expected average repair cost (under 1-yearwarranty) per unit: $200

Actual repair costs incurred in 2008: $4,000

The entity has the calendar year as its fiscal

yearRecord the warranty expense for 2008


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Expense Warranty Method:Example (Method A)

Warranty Expense Recognition (Time of Sale):No entry made

Actual Warranty Costs in 2008:Warranty Expense 4,000

Cash/Inventory/Payroll 4,000

Year-end adjusting entry, Dec. 31, 2008:Warranty Expense 16,000

Estimated Warranty Liability 16,000


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Warranty Expense Recognition (Time of Sale):Warranty Expense 20,000


100 units @ $200

Actual Warranty Costs in 2008:


Cash/Inventory/Payroll 4,000

Year-end adjusting entry, Dec 31, 2008:

No entry required

Expense Warranty Method:Example (Method B)


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Product Guarantee and WarrantyObligations-Use of Cash Basis

Warranty costs charged to the period in whichthe costs are paid

No estimated liability recorded or reported Acceptable for accounting purposes when:

Warranty costs are immaterial, or

Warranty period is relatively short Required for income tax purposes


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Warranty Sold Separately

Applies to extended product warranties; orwarranties sold as separate product

Accounted for using sales warranty method Revenue from warranty sale deferred

Recognized over life of the warranty usingstraight-line method


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Sales Warranty Method: Example

You have just purchased a new vehicle and anextended warranty on your new vehicle

Cost of the vehicle: $20,000

Vehicle has a regular warranty (includedin price of car) for the first 25,000 km ortwo years

Cost of the extended warranty: $600

Extended Warranty period: 2 years or25,000 kilometers

Entries to record this warranty:


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Record the initial sale:Cash 20,600

Sales 20,000Unearned Warranty Revenue 600

Entries in Years 3 and 4:

Unearned Warranty Revenue 300

Warranty Revenue 300

($600 2 years)

Sales Warranty Method: Example

P i C R b t


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Premiums, Coupons, Rebates,and Loyalty Points

Many companies offer premiums and otherbenefits (such as frequent flyer miles, rebates andprizes) to customers

Costs of these offers are expensed in the period

that benefits from the premium or other benefit: theperiod of the underlying sale

Costs of outstanding offers are estimated andrecorded/reported as a current liability

Canadian recommend that a better approachwould be to allocate and defer a portion of therevenue that relates to the entitys obligation ofsupplying the customer premium/benefit in the

futurethis is also what IFRS recommends


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Asset Retirement Obligations(ARO)

CICA Handbook, Section 3110requires acompany to recognizean existing legalobligation associated with the retirement of a

tangible long-lived asset that results from itsacquisition, construction, development, ornormal operations, in the period it is incurred,provided a reasonable estimate can be made

of its fair value


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Asset Retirement Obligations(ARO)

Existing legal obligations include thoserelated to:

1. Decommissioning nuclear facilities2. Dismantling, restoring, and reclamation of

oil and gas properties,

3. Certain closure, reclamation, and removal

costs of mining facilities, and4. Closure and post-closure costs of landfills


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ARO Measurement andRecognition

Initial measurement at fair value

Amount paid in an active market to settle ARO

Estimate based on market prices of similar liabilities

Estimate based on PV calculations Recognition and allocation

Capitalized ARO costs are not recorded in separateaccount

Added to the carrying amount of the underlyingasset

ARO costs amortized over underlying assets

useful life


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ARO An Example

Oil Platform erected January 1, 2008

Platform must be dismantled at theend of the useful life: 5 years

Estimated cost of dismantling:$1,000,000

Discount rate: 10% PV of the dismantling cost (ARO):

$620,920


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ARO An Example

Journal entry to recognize ARO, Jan 1, 2008:

Drilling Platform 620,920

Asset Retirement Obligation 620,920

(Drilling Platform is the underlying asset account)

Year-end Adjustment journal entries (2008 2012):

Amortization Expense 124,184

Accumulated Amortization 124,184($620,920 5 years = $124,184)


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ARO Increase Due to interest

Interest on the ARO must also be recorded

Because the ARO is initially recorded andreported at PV

Interest cost may notbe classified as interestexpense

Generally called accretion expense

Accretion amount calculated using the samerate used to calculate the PV (the discountrate)


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ARO An Example

Year-end (December 31, 2008):

Accretion Expense 62,092

Asset Retirement Obligation 62,092($620,920 x 10% = $62,092)

Record ARO Settlement, January 2013:

Asset Retirement Obligation 1,000,000

Gain on Settlement of ARO 5,000

Cash 995,000Assuming that the actual cost of the dismantling andremoval was $995,000


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ARO Reporting and Disclosure

Must report description of the ARO and theunderlying asset

Disclose the following:

Assumptions used in determining reportedamounts

Reconciliation of the liability (opening and

closing balance) Fair value of legally restricted assets for

settling ARO


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ARO Measurement andRecognition under IFRS

IAS 37 has the same measuring and reportingtreatment of AROs with three major differences:

Discount rate used to present value is a pre-taxrate reflecting the risk specific to the liability andthis may change annually (under Canadian GAAPthis may remain the same for downwardadjustments)

Interest on the ARO is recorded as part of interestexpense

May arise due to constructive and legal obligations

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Contingency: Definition

A contingency is (CICA Handbook, Section3290):

An existing condition or situationinvolvinguncertaintyas to possible gain (gain

contingency) or loss (loss contingency)

that will ultimately be resolved when one or

more future eventsoccurorfail to occur


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Loss Contingencies: General

Loss contingencies involve situations ofpossible loss at the balance sheet date

A liability incurred as a result of a loss

contingency is a contingent liability The likelihood of occurrence of the future

event may be:

Likely (high chance)

Unlikely (slight chance) Not determinable (the chance of the event

occurrence cannot be determined)


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Loss Contingencies: Accrual

Estimated losses from loss contingenciesare accrued as liabilities if both of thefollowing conditions are met:

1. it is likely that a future event will confirmthat a liability has been incurred, at thebalance sheet date and

2. the amount of loss can be reasonably

estimated It is not necessary that the exact payee or

the exact date of payment be known

A ti d R ti


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Accounting and ReportingStandards for Loss Contingencies

* Disclose the nature of the contingency and either an estimate of the amount oran explanation that an estimate cannot be made

Notes* Notes*Not Determinable

No Disclosure No DisclosureNot Likely

Accrue NotesLikely

Loss can be reasonably estimated?

Yes No

Probability

Liti ti Cl i d


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Litigation, Claims, andAssessments

To determine whether a liability should berecorded, evaluate:

1. the time period in which the underlyingcause of action occurred

2. the probability of an unfavorable outcome*

3. the ability to make a reasonable estimate

of loss

Liti ti Cl i d


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Litigation, Claims, andAssessments

*To evaluate the likelihood of an unfavourableoutcome, consider:

nature of litigation and progress of case

opinion of legal counsel

experience in similar cases

company response to the lawsuit

For unfiled lawsuits:

the company must first determine thelikelihood that the lawsuit will be filed

If likely, it must be determined how probable itis that the outcome will be unfavourable


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Contingencies under IFRS

Terminology under IFRS means somethingdifferent

Contingent liability under IFRSis:

(a) a possible obligation that arises from past eventswhose existence will be confirmed by a futureevent; or

(b) an obligation that has arisen from a past event,but the outflow is not probable and/or is not

measurable is not recognized due to significant uncertainty

disclose unless remote

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IFRS i f i i


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IFRS comparison of provisionsand contingent liabilities

Provision Contingent liability

Obligation arisingfrom past event

Present obligation Possible obligation

Outflow is Probable Is not probableMeasurability Able to measure Unable to measure

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A pending lawsuit is reported as a provision if itarises from a past event, is probable and can be measured.


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Guarantees

New AcG-14 Disclosure of Guarantees

Supplements contingencies, contractualobligations, financial instruments

Disclose additional information about risksassumed by guarantees made

Examples: Standby letter of creditguaranteeing anothers payment of a loan,

lessees guarantee of the residual value ofleased property under an operating lease


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Financial Guarantees under IFRS

Under IFRS there are four possible methods toaccount for financial guarantees by the issuers: IAS 39 special accounting where there is continuing

involvement measure at amount that reflects obligationsretained

IAS 39 reflect at FVTPL with gain or loss into net income

IAS 39 at fair value at initial recognition, and thensubsequently measured at the greater of the provision

amount under IAS 37, or dollar amount determined underrevenue less amortization

IFRS 4 if considered an insurance contract and previoussimilar contracts were treated as insurance contracts

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N Fi i l G t d


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Non-Financial Guarantees underIFRS

IFRS provides guidance on recognizing andmeasuring non-financial guarantees anddisclosure and there are two possiblemethods for recognition and measurement:

IFRS 4 as an insurance contract

IAS 37 estimating a provision

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Contractual Obligations

Not liability as at balance sheet date, but dorepresent a commitment or contractualobligation of future funds

CICA Handbook, Section 3280highlights

contractual obligations that require disclosure:1. Unusual high speculative risk involved2. Expenditures high relative to size of

business

3. Involve share issue4. The level of expenditure dictated for a long

period of time

Similar disclosure required under IFRS


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Onerous Contracts under IFRS

Definition:

a contract in which the unavoidable costs of

meeting the obligations under the contractexceed the economic benefits to be received.

Recognize as a provision

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Example: Heinrich Limited purchases raw materials that areused to manufacture its products under non-cancellablepurchase contracts that require a fixed amount of products to bepurchased over a fixed term with a fixed price. Currently, thecompany is locked into buying 1,000 kilograms of raw materialat a cost that exceeds the market price.

This is an onerous contract since the costs to settle the contractexceed the benefits. The expected loss and obligation would beaccrued as a provision at the report date.

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Onerous Contracts under IFRS

From: IFRS PrimerInternational GAAP Basics, Wiecek and Young, 2009, page 53

S lf i d Ri k


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Self-insured Risks

Some companies do not carry insuranceand absorb potential losses themselves

No liability or loss is recognized until actual

damage occurs However, where an injury or other existing

condition exists with uncertainty as toamount and timing of loss in the futureconsidered a contingency

IFRS treatment is similar

Presentation of Current


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Presentation of CurrentLiabilities

Disclose separately: bank loans, tradecreditors and accrued liabilities, taxes,dividends, deferred revenue, future incometaxes, amounts owing to related parties

Identify secured liabilities and related assetspledged

In addition, IFRS requires that provisions beseparately disclosed along with areconciliation of the opening and endingbalances for each class of provision


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Analysis of Current Liabilities

Current Ratio:Current Assets

Current Liabilities

Acid-Test Ratio:

Cash + Marketable Securities + Net Receivables

Current Liabilities

Days Payables Outstanding:

Average Trade Accounts Payable

Average Daily Cost of Goods Sold

Current IFRS GAAP Comparisons


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IAS 19 provides more detailed guidance on employee short termbenefits, bonuses and termination payments. The standard providescriteria that must be met in order to record bonuses or terminationpayments as liabilities or provisions.

HB 3461 does not deal with these issues and recognizes expense ifpayment is probable and can be reliably measured

IAS 19 - Termination benefits should be recognized only when specificcriteria are met to indicate that the entity is committed to terminating theemployees.

HB 3461 distinguishes between termination payments required under a

contract, and those arising due to involuntary terminations, which will berecognized when management approves and commits to the plan andemployees have accepted the voluntary severance offer

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Current IFRS GAAP ComparisonsEmployee benefits


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A provision is a liability of uncertain timing and amount HB does not define a provision

IFRS requires constructive as well as legal obligations to be recognized

HB only requires obligations arising due to legal, moral, or ethical principlesto be recognized

A provision is to be measured at the best estimate required to settle theobligation and guidance is given as to how to make this calculation

HB does not address measurement of provisions

The present value of the provision should be recognized and anyincrease over time is recorded as an interest expense

HB 1000 does not provide guidance on present valuing liabilities only in

specific circumstances such as pension liabilities or AROs. Onerous contracts must also be recognized as provisions using the

best estimate of unavoidable costs that exceed the expected benefits

HB does not address onerous contracts

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IAS 37 recognizes a constructive provision for restructuring costs whenspecific criteria are met including a detailed formal plan and a validexpectation that the plan will be carried out

EIC 135 states that only a present obligation needs to be recorded and anexit plan, by itself, is not an indication of this but would also requirecommunication

A contingent liability is not recognized under IFRS because the futureoutflow is not probable and/or the amount is not measurable.

HB 3290 defines a contingent liability differently where there is uncertaintyas to how the obligation will be resolved in the future. If the loss is likelyand can be determined, then it is recognized.

Extensive disclosure is required for each type of provision including a

reconciliation of the opening and closing balances and an indication ofthe measurement uncertainties.

HB has no specific disclosure requirements for general liabilities

HB 1508 requires disclosure on measurement uncertainty

Disclosure for contingent losses are less extensive than under IFRS77


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IAS 37 requires constructive (as well as legal) obligations arising due toAROs to be measured at the best estimate and discounted at the pre-tax rate that effects the risk of the specific liability. The provisionshould be reviewed annually, and the discount rate may be changed toreflect the current market risk rate.

HB 3110 applies to legal obligations and downward adjustments will be

made using the original credit-adjusted risk free rate.

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GAAP versus IFRS Comparison

GAAP

HB 1000 defines liabilities very generally and provideslittle guidance on measurement and recognition

HB 1510 definition of current liability is lesscomprehensive than IAS 1

EIC 22 and EIC 59 allows long term debt payable in next12 months due to contract maturity or breach of covenantsto be excluded from current liabilities as long asrefinancing arrangement in place prior to issue date offinancial statements and managements intent is to

refinance

HB 1000 does not define a provision nor is guidance givenon measuring the provision

HB 3290 defines contingent liabilities to be uncertainliabilities that can be recognized if outflows are probableand the amount can be reasonably measured.

Onerous contracts are not addressed in HB

IFRS

Framework has a similar definition of liability but statesthat this is a present obligation

IAS 1 has a similar definition of current liability

IAS 1 requires long term debt due ( because of maturity orcovenant breach) in the next 12 months to be recognizedas current unless refinancing arrangement in place atbalance sheet date

IAS 37 provides specific guidance on provisions andcontingent liabilities

Both legal and constructive provisions are to berecognized

Provisions are measured at their best estimate andguidance is given as to how to determine this bestestimate based on the number of events that will occur

Contingent liabilities are not recognized under IFRSbecause of the high level of uncertainty about the

probability of out flows and/or measurability. IAS 37 requires onerous contracts be recognized as the

amount of excess costs over the benefits to be realized onexisting contracts


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GAAP versus IFRS Comparison

HB 3461 does not deal with short term employee benefitsprovided to employees while in active service

HB 3461 distinguishes between contractual and specialtermination benefits and EIC 134 provides detailedguidance on when these should be recognized. EIC 134allows for recognition of voluntary termination only whenthe employee has accepted the terms of the offer.

Asset retirement obligations, HB 3110, are limited to legal

obligations, are measured initially at fair value in theperiod the obligation is incurred and generally uses thediscount rate applied when the liability was originallyrecognized

HB is silent on loyalty points programs, but it is interpretedas a multiple deliverable, and under EIC 1412, should berecognized as deferral of a portion of the revenue at thetime of the initial sale.

AcG 14 details disclosure requirements for financialguarantees, but not for measurement and recognition

IAS 19 provides guidance on short term employee benefitswhile the employee is still providing active service

Profit sharing and bonus plans are covered in IAS 19requiring recognition when there is a legal or constructiveobligation and a reliable estimate can be determined

Termination payments under IAS 19 are recognized whenthe entity is demonstrably committed to the terminationbased on satisfying three criteria including a detailed plan

outlining employees affected, termination benefits, andtiming of implementation.

Restructuring plans under IAS 37 are recognized whenthere is a formal detailed plan and there is a validexpectation that the plan will be carried out. Disclosurerequirements with respect to the plan are also covered.

Asset retirement obligations are covered by IAS 37; applyto constructive and legal obligations, are measured at thebest estimate of amount to settle the obligation at thebalance sheet date, and uses current interest rates

IFRIC 13 outlines the recognition and measurement ofcustomer loyalty points and requires that a portion ofrevenue received on the initial sale should be deferreduntil the loyalty points are redeemed by the customer. Theliability is measured at the value of award credits to thecustomer.

IAS 39 and IFRS4 cover the recognition and measurementof financial and non-financial guarantees


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ED issued on Provisions and Contingent Liabilitiesand Contingent Assets addressing the following mainissues:

Recognize obligations that meet the definition of a liability(as determined under the revised definition in theFramework)

Restructuring obligations (IAS 37 and IAS19) to be revisedand to be aligned with US (FAS 146)

Eliminate the term provision, but redefine a liability andcontingency

Refine definitions of constructive obligations and onerouscontracts

Final revised standard expected in second half of 2009. 81

Looking Ahead to IFRS


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