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IFRS
The basics
Spring 2011
Contents
Introduction
Inventories
Construction contracts
Income taxes
Leases
10
Revenue recognition
12
Employee benefits
14
Government grants
16
Foreign exchange
17
Borrowing costs
19
20
23
Impairment of assets
26
28
Intangible assets
29
30
Investment property
33
Business combinations
35
38
Introduction
May 2011
Inventories
Similarities
IAS 2 Inventories (IAS 2) and SSAP 9 Stocks and Long-term
Contracts (SSAP 9) use the principle that the primary basis of
accounting for inventories is cost unless the net realisable value
(NRV which represents the best estimate of the net amounts
inventories are expected to realise) is lower than cost, in which
case the inventories are written down to NRV. Generally, costs of
inventories comprise all costs of purchase, costs of conversion,
Significant differences
IFRS
UK GAAP
Classification
of spare parts
and service
equipment
Components
of cost
Scope
Inventory
purchased
on deferred
payment terms
Construction contracts
Similarities
IAS 11 Construction Contracts (IAS 11) and SSAP 9 Stocks
and Long-term Contracts (SAAP 9) prescribe the percentage
of completion method of accounting for contracts when the
outcome of a contract can be estimated reliably, although
differences exist in the way the method is applied under the two
standards. SSAP 9s requirements on long-term contracts need
to be read in conjunction with guidance on revenue recognition in
FRS 5 Application Note G Revenue Recognition (FRS 5
App G) and UITF 40 Revenue Recognition and Service Contracts
(UTIF 40). Accounting should be performed on a contract-bycontract basis, although in certain circumstances it is necessary
to combine or segment construction contracts in order to reflect
their substance.
Significant differences
IFRS
Definition of
construction
contract
UK GAAP
Contracts
with multiple
elements
Combining and
segmenting
construction
contracts
A contract that covers a number of assets should be Where a contractual arrangement consists of
various components that operate independently
segmented if separate proposals and negotiations
of each other and a reliable fair value can be
were held for each asset and the costs and revenues
attributed to each component, such components
of each asset can be identified.
are recognisedseparately.
A group of contracts should be combined if the
Conversely, the commercial substance of two or
contracts were negotiated as a single package, are
more separate contracts may require them to be
so closely interrelated that they are in effect part
accounted for as a single transaction (bundling).
of a single project with an overall profit margin,
and are performed concurrently or in a continuous
For service contracts, where there are
sequence.
distinguishable phases of a single contract, it may
be appropriate to account for the contract as two or
Where a contract provides for the construction of
more separate transactions provided the value of
an additional asset at the option of the customer,
each phase can be reliably estimated.
the construction of the additional asset is treated
as a separate construction contract if it differs
significantly in terms of technology or function from
the original assets, or its price is negotiated without
regard to the original contract price.
Construction contracts
Significant differences (contd)
IFRS
Percentage
of completion
method
UK GAAP
Contract
revenue
Contract costs
Income taxes
Similarities
IAS 12 Income Taxes (IAS 12) addresses the accounting for
current and deferred taxes under IFRS while FRS 16 Current Tax
(FRS 16)and FRS 19 Deferred Tax (FRS 19) provide guidance
under UK GAAP on the accounting for current tax effects and
expected future tax consequences of events that have been
recognised (i.e., deferred tax).
Current tax is measured at the amount expected to be paid or
recovered from the tax authorities and deferred tax is measured
using the tax rates and laws expected to apply when the asset is
realised or settled (or when the timing difference reverses under
UK GAAP) using tax rates and laws enacted or substantively
enacted at the end of the reporting period.
Both IAS 12 and FRS 19 require deferred tax liabilities to be
recognised in full subject to certain limited exceptions, although
these are not identical.
Similarly, they restrict the recognition of deferred tax assets
(arguably FRS 19 has stricter criteria) and require entities
Significant differences
IFRS
Calculation of
deferred tax
UK GAAP
Recognition of
a deferred tax
liability
Investment in
subsidiaries,
branches,
associates and
interests in joint
ventures
Income taxes
Significant differences (contd)
IFRS
Recognition of
a deferred tax
asset
UK GAAP
Discounting
Measurement
of tax
Deferred tax on
revalued assets
Tax benefit
in respect of
share-based
payments
*IAS 12 was amended in 2010, effective 1.1.2012 (if adopted by the EU). The amendment introduces a rebuttable presumption
that deferred tax on an investment property carried at fair value is determined on the basis that it is recovered through sale. The
presumption is rebutted if the investment property is depreciable and the business model is to consume substantially all its benefits over
time rather than through sale.
IFRS
Tax impacts
on business
combinations
UK GAAP
Significant differences
IFRS
Scope
Cost
UK GAAP
Cost of major
inspection and
overhaul
IFRS
Revaluation
model
UK GAAP
Revaluation
losses
Depreciation of
assets
Reassessment
of depreciation
methods and
residual values
Measurement
of residual
values
Leases
Similarities
Accounting for leases under IAS 17 Leases (IAS 17) and SSAP
21 Lease Accounting and Hire Purchase Contracts (SSAP 21) is
driven by the lease classification which is based on the extent to
which the risk and rewards of ownership are transferred under
the lease agreement. Both standards classify leases as either
finance leases (i.e., one that transfers substantially all the risks
and rewards incidental to ownership) and operating leases, with
different accounting treatments for each.
UK GAAP, SSAP 21 addresses the classification of standalone
lease transactions. FRS 5 Reporting the Substance of
Transactions (FRS 5) requires leases to be classified
in accordance with their substance and for some lease
arrangements, e.g., for sale and leasebacks with repurchase
options, FRS 5 includes more specific guidance. This section is a
comparison of the requirements in IAS 17 and SSAP 21.
Significant differences
IFRS
Lease
classification
UK GAAP
Lease classification is made at the inception of the lease Inception is the earlier of the time the asset is brought
into use and the date from which rentals first accrue.
which is the earlier of the date of the lease agreement
and the date of commitment by the parties to the
principal provisions of the lease.
Embedded
derivatives
Leases of land
and buildings
Determining
whether an
arrangement
contains a lease
10
IFRS
Lessee
accounting
finance lease
Lessor
accounting
finance lease
UK GAAP
Operating
leases lease
incentives
Sale and
leaseback
transactions
In addition to the differences highlighted above, and despite the basic similarities between the two standards, there are some further
differences of detail in the requirements (including key definitions) and some areas where practice has developed in the UK (including
where there are no explicit requirements in the standards) e.g., contingent rentals, the treatment of initial direct costs, grant-financed
assets held under a lease, and any reassessments or modifications to leases.
11
Revenue recognition
Similarities
The requirements of IAS 18 Revenue Recognition (IAS 18), on
the recognition of revenue arising from the sale of goods and
provision of services, are generally similar to those of FRS 5 App
G, although the underlying approach differs and IAS 18 includes
more extensive guidance.
Significant differences
IFRS
Scope
UK GAAP
Exchange
transactions
A transaction where goods or services are exchanged UK GAAP does not include guidance on exchange
transactions, therefore practice may vary. Generally,
or swapped for goods or services of a similar nature
the principles under UITF 26 Barter Transactions for
and value does not generate revenue.
Advertising (UITF 26) may be applied in practice.
Where they are exchanged for dissimilar goods or
services, the transaction generates revenue which
should be measured at the fair value of the goods
received, (or if not reliably measurable, the fair value
of goods or services given up) adjusted by any cash and
cash equivalents transferred.
For barter transactions involving advertising, SIC 31
Revenue Barter Transactions Involving Advertising
Services provides similar guidance to UITF 26.
Recognition of
revenue from
sale of goods
12
IFRS
Customer
loyalty
programmes
UK GAAP
Transfers of
assets from
customers
Revenue from
rendering of
services
13
Employee benefits
Similarities
IAS 19 Employee Benefits (IAS 19) and FRS 17 Retirement
Benefits (FRS 17) provide similar guidance in distinguishing
between and accounting for employee pension schemes as
defined contribution schemes and defined benefit schemes.
Under both GAAPs, the periodic post-retirement benefit cost
under defined contribution plans is based on the contribution
Significant differences
IFRS
UK GAAP
Short-term
compensated
absences
Defined
contribution
schemes
discounting
Recognition of
actuarial gains
and losses
Frequency of
valuations and
using experts
Defined benefit
plans group
schemes
Scope
14
Recovery of
surplus and
minimum
funding
requirement
Defined
benefit plans
settlements
and
curtailments
IFRS
UK GAAP
In addition to the key differences highlighted above, there are slight differences in terminology between the two standards and related
guidance (e.g., the definition of expected return or discount rate) which could lead to a different treatment in certain circumstances.
15
Government grants
Similarities
IAS 20 Government Grants (IAS 20) and SSAP 4 Accounting for
Government Grants (SSAP 4) provide guidance in respect of
government grants and other forms of government assistance.
Both standards restrict the recognition of grant income in profit
or loss until theres reasonable assurance of receipt of the grant
and the entitys fulfilment of associated conditions. If the grant
Significant differences
IFRS
Scope
UK GAAP
Non-monetary
grants
Presentation of
a grant related
to anasset
16
Foreign exchange
Similarities
FRS 23 The Effects of Changes in Foreign Exchange Rates (FRS
23) implements IAS 21 The Effects of Changes in Foreign
Exchange Rates (IAS 21) guidance into UK GAAP. However,
FRS 23 is only applicable to UK companies that apply FRS 26.
All other companies apply SSAP 20 Foreign currency translation
(SSAP 20) which is the basis for the comparison given below.
Similar to IAS 21 (FRS 23), SSAP 20 requires an entity to
determine its main currency, i.e., local currency (IAS 21/FRS
23 uses the term functional currency) and provides guidance
as to how this should be determined. Both standards provide
guidance as to how entities should translate their transactions
and balances denominated in any other currencies (i.e., foreign
Significant differences
IFRS
Determining
functional
currency
UK GAAP
Translation
of foreign
currency
transactions
Translation to
a presentation
currency
17
Foreign exchange
Significant differences (contd)
IFRS
Translation
of a foreign
operation with
a non-hyperinflationary
currency
UK GAAP
Net
investment
in a foreign
operation
monetary
items
Hedges of net
investment
in a foreign
operation
Disposal of
a foreign
operation
IAS 29 (FRS 24 under UK GAAP) Financial Reporting in Hyper-inflationary Economies (IAS 29) and UITF 9 Accounting for Operations
in Hyper-inflationary Economies (UITF 9) deal with the translation of results and balances of an entity whose functional currency is a
hyper-inflationary currency. There are different rules under IAS 29 and UITF 9 for the translation of results and balances of a foreign
operation whose currency is the currency of a hyper-inflationary economy. .
18
Borrowing costs
Similarities
IAS 23 Borrowing Costs (IAS 23) addresses the treatment
of borrowing costs directly attributed to the acquisition,
construction or production of a qualifying asset (i.e., an asset
that necessarily takes a substantial period of time to get ready
for its intended use or sale). Accounting Regulations under the
Companies Act 2006 (CA 2006) allow capitalisation of finance
costs. FRS 15 addresses the capitalisation of finance costs
relating to tangible fixed assets where an entity takes the option
to capitalise finance costs as permitted under CA 2006. Thus
under IFRS, entities must capitalise borrowing costs that meet
certain criteria while under UK GAAP capitalisation is optional.
IFRS and UK GAAP address the treatment of borrowing costs on
Significant differences
IFRS
UK GAAP
Scope
Capitalisation
of borrowing
costs
Capitalisation
rate
19
Significant differences
IFRS
UK GAAP
Scope
Control
Specialpurpose
entities
20
IFRS
Employee
Share Option
Plans/
Employee
Benefit Trusts
(ESOPs/ EBTs)
UK GAAP
Noncontrolling
interest (NCI)
21
UK GAAP
The carrying amounts of the controlling and noncontrolling interests are adjusted to reflect the changes
in their relative ownership interests in the subsidiary.
Any difference between such amount and the fair value
of the consideration paid or received is recognised
directly in equity and attributed to the owners of the
parent.
The proportionate share of the cumulative exchange
differences recognised in OCI is reattributed to the
NCI in the foreign operation where the subsidiary is a
foreign operation. Similar adjustments are needed for
other elements of OCI.
Loss of control
of a subsidiary
Accounting for
investments in
the separate
financial
statements
22
Significant differences
IFRS
Scope
UK GAAP
23
UK GAAP
Types of joint
ventures
Accounting for
JCEs
Loss-making
associates and
JCE
24
IFRS
Gains or loss on
an investment
ceasing to be
an associate
of JCE
UK GAAP
Impairment of
associates and
JCEs
25
Impairment of assets
Similarities
IAS 36 Impairment of Assets (IAS 36) and FRS 11 Impairment
of Fixed Assets and Goodwill (FRS 11) specify the timing
and process for impairment testing as well as the treatment
of impairment charges. However, the impairment of certain
types of assets, e.g., financial assets (IAS 39/FRS 26) and
biological assets (IAS 41) are addressed in those standards.
This comparison covers the IAS 36 and FRS 11 impairment
rules only. Both standards require that assets should be tested
for impairment when events or changes in circumstances
indicate that the carrying amount of the assets (or the cash
generating unit/income generating unit of which the assets
are part) may not be recoverable. They also specify the
Significant differences
IFRS
Timing of
impairment
reviews
UK GAAP
Cash vs.
Incomegenerating
units
Allocating
goodwill to
CGUs
Disposals and
reorganisations
of CGUs
containing
goodwill
26
IFRS
UK GAAP
Acquired
business
merged with
existing
business
Allocation of an
impairment loss
for a CGU/IGU
Reversal of
impairment
losses
27
In reaching its best estimate, the entity should take into account
the risks and uncertainties that surround the underlying events.
Restructuring provisions should include only direct expenditures
caused by the restructuring, not costs that are associated with
the ongoing activities of the entity.
Contingent liabilities and contingent assets should not be
recognised, but should be disclosed unless the possibility of an
inflow or outflow of economic resources is remote. When the
realisation of income is virtually certain, then the related asset is
not a contingent asset and its recognition is appropriate.
Significant differences
IFRS
Future
operating
losses
UK GAAP
28
Intangible assets
Similarities
The definition of intangible assets identifiable non-monetary
assets without physical substance is superficially similar under
IAS 38 Intangible Assets (IAS 38) and FRS 10 Goodwill and
Intangible (FRS 10), but there is much greater recognition of
intangible assets under IFRS than has been traditionally the
case under UK GAAP, which has a more restrictive definition and
recognition criteria.
The recognition criteria under both standards require that
there be probable future economic benefits and costs that
can be reliably measured. Intangible assets acquired as part
of a business combination may be recognised separately from
goodwill if certain conditions are met. With the exception of
development costs (under SSAP 13 Research and development)
or the development phase of an internally developed intangible
Significant differences
IFRS
Recognition
intangible
assets
UK GAAP
Recognition
intangible
assets
acquired in
a business
combination
Recognition
internally
developed
intangible
assets
Goodwill
amortisation
and
impairment
29
Significant differences
IFRS
Scope
Classification
and
measurement
of financial
assets and
financial
liabilities
UK GAAP
30
IFRS
Recognition/
derecognition
of financial
assets and
liabilities
UK GAAP
Derivatives
Extinguishing
financial
liabilities
with equity
instruments
(IFRIC 19)
Allocation of
finance costs
Exchange and
modification
of financial
liabilities
31
UK GAAP
Impairment of
An entity must assess at the end of each reporting
financial assets period whether there is any objective evidence of
impairment of a financial asset or group of financial
assets.
Impairment charges for financial assets classified as
loans and receivables, or held to maturity are measured
as the difference between the assets carrying amount
and the present value of the estimated future cash
discounted using the original effective interest rate and
are recognised immediately in profit or loss.
If there is a decline in fair value of an available-forsale financial asset and there is objective evidence of
impairment the impairment loss (and any cumulative
amounts previously recognised in OCI) are recognised
in profit or loss.
Reversal of impairment is permitted except for
unquoted equity instruments carried at cost less
impairment (because their fair value cannot be reliably
measured).
Hedge
accounting
32
Investment property
Similarities
IAS 40 Investment Property (IAS 40) and SSAP 19 Accounting
for Investment Properties (SSAP 19) address the accounting
for an investors interests in land and/or buildings (i.e., property)
that are used to earn rental income and/or held for capital
appreciation. Both standards exclude properties held for own use
but include leased properties.
Significant differences
IFRS
Definition and
scope
UK GAAP
Measurement
at initial
recognition
33
Investment property
Significant differences (contd)
IFRS
Subsequent
measurement
UK GAAP
Change of
use of an
investment
property
34
Business combinations
Similarities
IFRS 3 Business Combinations (IFRS 3) and FRS 6 Acquisitions
and Mergers (FRS 6) specify similar (but not identical)
requirements for accounting for business combinations.
Under the acquisition method of accounting, both standards
require that the acquirer recognises identifiable assets
acquired and liabilities assumed (including any assets and
liabilities previously not recognised by the acquiree e.g.,
contingent liabilities) measured at their acquisition-date fair
values, measures consideration transferred at fair value, and
determines goodwill arising from the transaction.
Significant differences
IFRS
Scope
UK GAAP
Definition of a
business
Reverse
acquisitions
35
Business combinations
Significant differences (contd)
IFRS
Pre-existing
relationship
between
acquirer and
acquiree
UK GAAP
Recognition
of bargain
purchase
Measurement
of goodwill at
acquisition
36
IFRS
Measurement
of other assets
acquired and
liabilities
assumed
UK GAAP
Business
combinations
achieved in
stages
37
Significant differences
IFRS
Definitions
UK GAAP
Classification
Measurement
of assets held
for sale
Depreciation
38
IFRS
Changes to a
plan of sale
UK GAAP
39
IFRS resources
Ernst&Young has developed a number of publications that contain details and discussions on IFRS matters, all of which can be
downloaded from our website www.ey.com/ifrs, including:
International GAAP
2011
This is the 2011 edition of our
comprehensive, in-depth guide
to interpreting and implementing
International Financial Reporting
Standards (IFRS) written by
Ernst&Youngs IFRS professionals around
the world. The guide is an essential tool for anyone involved in
applying, auditing, interpreting, regulating, studying or teaching
international financial reporting. It offers insights on how to
approach issues in the complex, global world of international
financial reporting, where IFRS has become the financial
reporting system in more than 100 countries.
International GAAP
Disclosure Checklist
Our International GAAP Disclosure
Checklist captures the full list of disclosure
requirements to help companies
comply with IFRS in their IFRS financial
statements.
International GAAP
illustrative financial
statements
This publication is an illustrative set of
financial statements (both interim and
annual) incorporating the new disclosures
that arise from the changes required to
standards effective.
This is supplemented by illustrative financial statements
that are aimed at specific sectors and industries including
Good Bank (International) Limited, Good Investment Ltd,
Good Insurance (International) Limited and Good Petroleum
(International)Limited.
ey.com/IFRS
March/April 2011
IFRS Outlook
11
Resources
12
The IASB and the US FASB continue to focus on a number of projects, including revenue
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revised standards during the second half of 2011. With the new standards on the horizon, the
Boards requested feedback on when and how the new standards should be applied. Read
about our views on the effective dates of the new standards and the feedback the IASB
received from other stakeholders.
O`Ylo]l`afcg^l`]f]ohjghgk]\YhhjgY[`^gjaehYaje]flg^fYf[aYd
assets
The IASB and US FASB jointly proposed a new common approach for determining when
[j]\aldgkk]kk`gmd\Z]j][g_fak]\gf[]jlYaffYf[aYdYkk]lk&>af\gmlo`Ylgmjna]okYj]
on this proposed approach.
IFRS update
Find out which projects the IASB and the IFRS Interpretations Committee are currently
discussing.
Resources
Look here for an up-to-date list of our recent publications, including Good Construction
Group (International) Limited 31 December 2010, an illustrated set of consolidated
fYf[aYdklYl]e]flkg^Y[lalagmk_jgmhg^[gfkljm[lagf[gehYfa]k$Yf\Joint Project
Watch, which provides a snapshot of the key developments on the various joint projects
of the IASB and the US FASB.
IFRS Outlook
This bi-monthly publication addresses
matters such as Ernst & Youngs views
on activities of the IASB and IFRS
Interpretations Committee, the political
environment surrounding the current
state of standard setting or the broader
implications of IFRS.
IFRS Developments
Ernst&Young creates this newsletter to
announce significant decisions on topics
that have a broad audience, application
or appeal.
Applying IFRS
This publication contains analyses of
proposals, standards or interpretations to
enable you to better understand the effect
they may have and how to applythem.
40
Who to contact
Please talk to your regular Ernst&Young contact
if you have any questions relating to IFRS reporting
in the UK and Ireland. Alternatively, please email
the Future of UK GAAP (FoUKG) team on
foukg@uk.ey.com.
41
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