Aswini Bajaj Sudarshan Agarwal Classes

Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
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CFA Level 1
Financial Reporting Analysis
Differences between IFRS and USGAAP

BASIS IFRS US GAAP

Study Session 7
Formulated by IASB FASB

Approach Principle Based Rule Based

Comprehensive Income Income Statement + OCI = Comprehensive Income can be a

Comprehensive Income part of statement of shareholders’
equity
Or can be reported separately

Internal control - Auditor must express an opinion

on internal control

Asset Definition Resource from which a future A future economic benefit.

economic benefit is expected to
The word probable is used in the
flow
definition

Upward revaluation of assets Mostly allowed Mostly not allowed

Components of performance  Income  Revenues / Expenses

 Expanse  Gains /Losses
 Comprehensive income
Conceptual Framework  Relevance & faithful
Representation

comparability, verifiability,
timeliness & understandability

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 Aswini Bajaj Sudarshan Agarwal Classes
Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
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Study Session 8

Revenue Recognition Goods Services  Revenue realized or realizable

& revenue earned
 Revenue  Revenue Note: SEC has 4 criteria
can be can be
reliably reliably  Evidence of arrangement
measured measured between buyer & seller
 Probable  Probable  Product delivered / Service
flow of flow of rendered
economic economic  Price determinable
benefit benefit  Seller sure of collecting
 Risk &  Stage of money
reward completio
transferre n can be
d measured
 No  Cost
continuing incurred
control determina
 Cost can ble
be reliably
measured
Long term contracts:

-If outcome can be Percentage of completion method Same

reasonably ascertained

-If outcome cannot be  Recognize revenue to the  Recognize revenue, cost &
ascertained reliably extent of cost. Recognize profit profit only at contract
on completion (cost recovery completion (completed
method) contract method)
-Expected Losses Immediately recognized Immediately recognized

Instalment sale If outcome of the project Collectability certain:

ascertainable:
- Revenue recognized at the
- PV of instalments time of sale
recognized at the time of Collectability cannot be
sale reasonably ascertained:
- Interest over time
If outcome unascertainable: - Instalment method
Collectability highly uncertain:
- Cost Recovery Method
- Cost recovery method

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 Aswini Bajaj Sudarshan Agarwal Classes
Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
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Barter transaction Fair value of similar non barter Fair value if the firm has received
transaction cash in the past, else at the
‘carrying value of asset
surrendered’

Gross revenue reporting Allowed if the firm:

 Is the Primary obligor of

contract
 Bears inventory & credit
risk
 Is able to choose its
supplier
 Has Reasonable latitude to
establish price

Extraordinary items Not allowed to be separated from Reported separately net of tax
operating results after income from continuing
operations

Balance sheet format Classified / liquidity based Classified

Inventory -Cost flow  FIFO  FIFO

assumption  Weighted average  Weighted average
 Specific identification  Specific identification
 LIFO

Inventory- Cost or NRV Cost or market value

Cost recognized -Lower – lower

Note: If NRV>cost, (cost-NRV) Note: market value = Replacement

transferred to P/L cost;

where ,

(NRV – normal profit margin) <

replacement cost < NRV

Write up of inventory Allowed; up to original cost Not allowed

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 Aswini Bajaj Sudarshan Agarwal Classes
Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
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Exception: commodity like

products

Cost model only

PP&E can be reported using  Cost model
 Revaluation model

Changes in cost flow Allowed if change will provide Allowed if firm can explain why
assumption- inventory more reliable and relevant change is preferable
information

 Includes assets that

Investment property generate rental income or Does not have a specific definition
capital appreciation
Of investment property
 Can be reported at
amortized cost or fair
value
Interest / dividend received CFO / CFI CFO

Dividend paid CFF / CFO CFF

Interest paid CFF CFO

Taxes paid Depending on the taxes - All taxes under CFO

CFO/CFI/CFO

Direct / indirect method – Both are allowed Both are allowed but if direct
CFO method followed reconciliation of
net income & CFO to be disclosed

Payment for interest & taxes To be disclosed separately in cash Can be reported in cash flow
flow statement statement of disclosed in notes

FCCFF = CFO + interest (1- Interest might not be added as it

tax) – FC inv. would have been deducted in CFF

FCFE If dividend paid subtracted from

CFO, then it needs to be added

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 Aswini Bajaj Sudarshan Agarwal Classes
Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
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Study Session 9
Interest earned by Reduces the interest capitalized No such reduction is allowed
temporarily investing shown as income
borrowed funds

Research and development Research is expensed while Both Expensed; except software
cost development is capitalized development

Software development cost Expensed till technological Same

feasibility established and then
-For sale to others expensed off

Software development cost Same as above Capitalize development costs

-For personal use

Component depreciation Required Allowed – but seldom used

Long lived asset Revaluation Both revaluation and cost model Not allowed
allowed
Depreciated Cost reported in B/S

Test for impairment Annually When events and circumstances

indicate that the firm may not be
able to recover the carrying value
of the asset

Test for impairment Carrying amount(CA) > Carrying amount > undiscounted
Recoverable amount (RA); where future cash flows
RA is higher of NRV or present
value of future cash flows)

Loss on impairment CA - RA CA- Fair value; if its known, or

CA- Discounted future cash flows

Loss recovery Allowed - limited to original Not allowed

impairment loss
Exception – impairment loss can be
reversed for assets reclassified as
available for sale

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 Aswini Bajaj Sudarshan Agarwal Classes
Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
CFA| SFM| FRM| MS Excel Classes Kolkata 700069
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Amortized expense An estimate for next 5 years needs

to be disclosed

Identifiable intangible asset Must be

 Capable of being separated

from the firm
 Controlled by the firm
 Expected to provide future
economic benefits
Investment property & long Distinguishes between the two Does not
lived assets

Valuation allowance If probability of DTA not being

realised > 50%; valuation
allowance to be created

Note: Refer the table in Schweser for Differences US GAAAP and IFRS for DTA/ DTL

Recognition of bond on Effective interest rate method Effective interest rate method
balance sheet required preferred, but straight line method
allowed

Issuance cost Initial bond liability in B/S reduced, Capitalized as an asset and
increasing the bond’s effective expensed over the life of the bond
interest rate. In effect treated as
unamortized discount.

(Netted under CFF) (netted under CFF)

(no write off required on [on derecognition of debt, balance

derecognition of debt ) write off]

Option to report debt at face Irrevocable option to do so and all Same

value gains and losses recognized in the
income statement

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 Aswini Bajaj Sudarshan Agarwal Classes
Completed: CA, CS, CCRA, CFA (US), FRM (US), CAIA (US), CIPM, AIM 1, Crooked Lane, 2nd Floor
CFA| SFM| FRM| MS Excel Classes Kolkata 700069
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Circumstances for  Title to the asset  Same

classification as finance transferred at the end of
lease. (by lessee) the life
 Bargain purchase option  Same
 Lease covers major portion  >75%
of asset’s life
 PV of lease payments = FV  PV of lease >= 90% of FV of
of asset asset
 Specialized asset - useless
to anyone except lessee
Classification as finance Same as lessee One of the criteria by lessee met,
lease by lessor Collectability certain and lessor has
substantially completed his
performance

Sales type or direct financing Not distinguished If PV of rentals > carrying value of
- lessor’s perspective asset - sales type lease ; else direct
financing

Funded status of pension  -Overfunded – asset;  Funded status

fund - B/S -Underfunded – liability; (-) unrecognized actuarial
gains and losses
(-) unrecognised prior
 Represents economic service cost
reality  Does not represent
economic reality

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Trainer: Aswini Bajaj [CA, CS, CCRA, CFA(US), FRM(US), CAIA(US), CIPM, AIM]

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