Ifrs vs Us Gaap

ACCY200 Financial Accounting A Accounting for spot, Plant & Equipment using IFRS and US GAAP Submitted To Dr. Mufeed Rawashdeh Lecturer, ACCY200 UOWD Project done by Punit Hiro Lalwani 3948493 Anish Ahuja 3959569 Hitesh Kumar Bilochi 3949345 Date 29th November, 2011 circuit card of Contents Executive Summary 3 Introduction 4 Property, Plant & Equipment 5 Interest posered during construction of as get up 6 7 condition & substantiative equals incurred in self-constructed assets 8 9 Valuation/Reporting of Property, Plant & Equipments in the vestibular sense Sheet 10 11 Example of annual Reports for US GAAP and IFRS 12 13 Implication of Differences 1) Interest Incurred 2) Componentization 3) Subsequent of Valuation 14 15 Conclusion and Recommendation 16References 17 18 Executive Summary This Financial Accounting report contains information on a few key argonas in score for Property, Plant & Equipment, using ii slightly different standards which be the US Generally Acce pted Accounting Principles (US GAAP) and international Financial Reporting Standards.The objective of this report is to state how these two standards are slightly different in footing of accounting for items of PP&E such as Interest/Borrowing cost during the asset is being prepared for think use, How call for and indirect costs are allocated or measured for assets constructed by the company itself, and how their fixed assets are respectd at balance sheet, after initial recognition of cost. Both the standards, are pretty similar, yet gull some key points which conflict with each other. These points carry a degree of importance in terms of accounting.Each point is beneficial as well as It has its drawbacks, depending upon the scenario put in place. Moreover, the above mentioned content is evening widely exhibited by including Annual reports of two companies one IFRS, and the other US GAAP reports, to attest a practical example of dealing with Property, Plant and Equipment ite ms in the balance sheet. Introduction IFRS is a set of guidelines and rules formed by the International Accounting Standards Board (IASB) that companies and organizations female genital organ follow when compiling financial statements.The creation of international standards allows investors, organizations and governments to compare the IFRS-supported financial statements with greater ease. International Standards help investors to deal with comparing financial statements with more convenience. The International Financial Reporting Standards were previously called the International Accounting Standards (IAS). Generally Accepted Accounting Principles (GAAP) is the accounting standard used by the Organizations in the United States which is the common set of accounting principles, standards and procedures that companies use to ompile their financial statements. GAAP are a combination of important standards (set by policy boards) and simply the commonly accepted ways of recording and r eporting accounting information. GAAP are imposed on companies so that investors maintain a minimum level of consistency in the financial statements they use when analysing companies for investment purposes Property, Plant & Equipment (PP&E) Property, plant and equipment are tangible assets that 1. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and 2. re expected to be used during more than one period. Property, plant and equipment does non include 1. biological assets related to agricultural activity, or 2. mineral rights and mineral reserves, such as oil, natural gas and similar non-regenerative resources Asset Recognition The entity shall issue the cost of an item of property, plant and equipment as an asset if, and only if 1. it is probable that future economic benefits associated with the item pass on flow to the entity, and 2. the cost of the item ordure be measured reliably.Interest incurred durin g construction of asset IFRS US GAAP Definition Borrowing costs that are directly attributable to the skill, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. Similar to IFRS but US GAAP uses interest Costs instead of Borrowing Costs Qualifying asset A qualifying asset is an asset that necessarily takes a upstanding period of time to get ready for its intended use or sale. Similar to IFRS but US GAAP does not state the word hard Measurement Borrowing cost include * Exchange rate differences from foreign currency borrowings. * Borrowing cost is offset by investment income earned on those borrowings. * Actual Interest are Capitalized. * Interest costs do not include vary rate differences. * Interest earned on the investment of borrowed property planetaryly cannot offset interest costs incurred during the period. * Interest cost equal to the weighted average collect expenditures times the borrowing rate is capitalized. Commencing Capitalization An entity shall drive capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first gear meets all of the following conditions * (a) it incurs expenditures for the asset * (b) it incurs borrowing costs and * (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Similar to IFRS. Ceasing Capitalization An entity shall kibosh capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Similar to IFRS Direct & indirect costs incurred in self-constructed assets IFRS US GAAP Cost * The asset is carried at cost less accumulated wear and tear and impairment. Similar to IFRS Depreciation The depreciable meter (cost less residual value) should be allocated on a systematic basis over t he assets useful life.The residual value and the useful life of an asset should be re lieued at least at each financial year-end and, if expectations differ from previous enters, any change is accounted for prospectively as a change in estimate under IAS 8. Depreciation under US GAAP is similar to IFRS as the property plant and equipment are to be stated at cost of acquisition less accumulated derogation based on estimated useful lives of the assets. Revaluation * Under IFRS, an organization has an option to use the cost method or the brushup method to measure property, plant and equipment. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. US GAAP prohibits revaluations except for a discovery on a natural resource, in a business combination accounted for under the purchase method. Therefore uses only the cost model. Componentization Compon ent depreciation is a requirement under IFRS if the components of that particular asset have differing patterns of benefit. Component depreciation is permitted but rarely used under GAAP compared to IFRS in which it is a requirement. Valuation/reporting of property, plant equipments in the Balance Sheet IFRS US GAAP Measurement * Property, plant and equipment should initially be measured at cost. Cost is the fair value of consideration given for the asset. * The cost of an item of property, plant and equipment comprises the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be satisfactory of operating in the manner intended by circumspection.The cost also includes estimated costs of dismantling and removing the asset and restoring the site on which it is located * The costs that incur for completion of the asset construction can be added to the amount that has to be recognized initially, if these costs exc eed the recoverable amount, the excess should be expensed in the up-to-date period. * Property plant and equipment under GAAP are measured at historical cost. * Similar To IFRS * Self-constructed assets are put down at the incremental or direct costs to build (material, labor, and variable overhead) assuming idle capacity. Direct Costs Directly attributable costs include costs such as * Costs of site preparation. * Initial delivery and handling costs. * Installation and assembly costs. * Professional feesDirectly attributable costs do not include administration and other general overheads Similar to IFRS indirect Costs Non-directly attributable items are not permitted to be capitalized under IAS 16. Repair and maintenance costs are expensed as incurred, not capitalised. Indirect costs under GAAP are called overhead or burden.For example Power, heat, light . To handle these costs one of the following ways can be applied * Assign No Fixed Overhead to the Cost of the Constructed A sset * Assign a Portion of All Overhead to the Construction Process * A pro rata portion of the fixed overhead should be assigned to the asset to obtain its cost. Examples of an US GAAP and IFRS Report valuing Property, Plant and Equipment Property, Plant and Equipment (US GAAP Google Inc) Property and equipment stated at cost less accumulated depreciation and amortization.Depreciation is computed using straight line Method over estimate useful life of assets, by and large two to five years. Buildings are depreciated over periods of up to 25 years. Lease clutch improvements are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been put in service for their intended use.Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commence s once they are ready for their intended use. Land is not depreciated. Property and equipment value at end of 2009 and 2010 was $4,845 million and $ 7,759 million, respectively, with accumulated depreciation and amortization cost of $3,285 million for 2009 and $ 4,012 million for 2010. Property, Plant and Equipment (IFRS Puma)Property, plant and equipment are stated at acquisition costs net of accumulated depreciation, even though they have the option of revaluation, they havent used it. The depreciation period depends on the expected useful life of the respective item. The straight-line method of depreciation is applied. The useful life depends on the type of assets involved. Buildings are subject to a useful life of amidst ten to fifty years, and a useful life of between three to ten years is assumed for moveable assets. The cost of maintenance and repair is recorded as an expense at the time of origin.Significant improvements and renewals are capitalized to the extent that the criteria for capitalization of an asset item apply. As a general rule, lease items that qualify as a finance lease due to the terms of the underlying contract are shown under property, plant and equipment initially they are measured at the amount of the fair value or the lower defer value of the minimum lease payments and net of accumulated depreciation in subsequent accounting periods. Property, plant and equipment is valued at 236. 7 million in 2010 and 242. million in 2009. Accumulated depreciation of property, plant and equipment amounted to 233. 3 million (previous year 201. 9 million). As we can see from the above 2 examples, twain the methods of the companies are very similar, and there is very little difference in the way they report the value of their Property, Plant Equipment in the Balance Sheet. Implications of differences Interest incurred IFRS includes exchange rate differences and also allows the offsetting of interest revenue with interest costs, whereas US GAAP does not allow either.This method of IFRS can be very accurate because mend offsetting the interest revenue with the interest costs, it will only show one entry in the financial statement, whereas in US GAAP it will show two entries, one of cost and one of revenue. Hence there is only a difference in the presentation of information BUT the end publication will still be the same. IFRS can be more convenient and make things simpler because of offsetting compared to US GAAP. Exchange rate differences will most probably hold an mmaterial difference but to avoid any inaccuracies, they should be taken into consideration. Componentization Componentization is when the assets are segmented into the different parts and are depreciated separately. As stated above IFRS requires componentization, whereas US GAAP permits it but does not require it. A good example might be that under US GAAP, a car may be treated as a single depreciable asset, while under IFRS, every component of a car will be depreciated separately, including engine, car frame, brakes, and etc.This can be very confusing for users as not every company retains all the information about its components, but IFRS is still more accurate as it allows the companies to notice the real value of its components and its estimated life, where as US GAAP will only show the real value of its asset and not know the estimated life of the components of the assets, which can be a disadvantage because the companies will not know whether its components need maintenance or not. The disadvantage of componentization under IFRS might be that the depreciation expenses will mostly tend to be higher than US GAAP, therefore resulting in lower profits.This implication can also have an affect on the tax the company pays. Subsequent valuation differences * IFRS permits revaluation of property, plant and equipment whereas in US GAAP it is forbidden. Under the revaluation model, if the carrying amount of a property, plant and equipments asset is increased as a result of a revaluation, the increase is recognized in equity under the heading of revaluation profusion. The revaluation surplus amount recorded is then adjusted on an asset-by-asset basis by the amount of future revaluation increase.Adjustments to the revaluation surplus account are recorded in equity. Therefore, if there is an Increase in asset revaluation IFRS would be more beneficial compared to US GAAP since it gives an appropriate measurement of the current value of the asset and would show a higher income for the company due to increase in fair value. * A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.In this case US GAAP would be more preferable since it would state its assets value above the current market value (fair value). However from a technical point of view the value would be overstated. So over all, it is more advisable to use the IFRS standard for revaluation of assets. Conclusion and Recommendation There are many Similarities in IFRS US GAAP but they also have Differences that cannot be unnoticed. There are different scenarios in which one accounting method would prevail over the other.Difference between these two methods of accounting standards cause confusion which should be eliminated and there should be the need of uniform accounting standard. The best way to deal with differences in IFRS and US GAAP is to converge the both, with the most accurate method of each difference being retained. This will make it easier for the hoi polloi to interpret, understand and compare financial reports because the standards will be the same for everyone.In recent years there is a huge acceptance of IFRS over US GAAP which has led to benefits such has increased in transparency and consistency of financial information, more efficient use and availability of global resources, streamli ned internal controls, additional access to capital, and opportunities for improved cash management and income tax planning. References AICPA. 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(2009), Implications of an IFRS revolution on property, plant and equipment from a US tax perspective, online, Available http//www. pwc. om/en_US/us/ifrs-tax-issues/assets/ifrs_conversion_property_plant_equipment. pdf Access ed 24 November 2011 Wiley, 2002, Acquisition and Disposition of Property, Plant and Equipment, online, Available http//www. wiley. com/college/sc/kieso/samp/8658d_c10_469-518. pdf , Accessed 24 November 2011 World Gaap Info, N. D. , Property, plant and equipment, online, Available http//www. worldgaapinfo. com/pdf/IAS/IAS16. pdf Accessed 24 November 2011 Google Inc Annual Report, (2010), Available http//wwww. investor. google. com/pdf/20101231_google_10K. pdf Accessed 24th November 2011