Long Term Liabilities
Examining US GAAP vs. IFRS
Brett Donner, Nick Ioriatti, Mike Nowaczyk, Mike OHara and James Peters
Definition: Long- Term Liabilities
Probable future sacrifices arising from present obligations that are not payable within a year or the operating cycle of the company.
Whichever is longer
FASB Codification 5.20.22
Examples of Long Term Liabilities
Bonds Payable
Long- Term Notes Payable Mortgages Payable Pension Liabilities Deferred Income Taxes
Product Warranties
Other Contingencies
Selling Price of Bonds
Discount-Stated Interest Rate less than Market Interest
Rate
Premium- Stated Interest Rate is greater than Market
Interest Rate
Face Value-Stated Interest Rate equals Market Interest
Rate
Bonds: Troubled Debt
Impairments of Long- Term Debt:
Probable that the amounts due will not be collected Journal Entry:
(DR) Bad Debt Expense XXX (CR) Allowance for Doubtful Accounting
XXX
Troubled Debt Continued
Restructuring:
Creditor grants concession to the debtor Two Types:
1.
Settling the debt at less than the carrying value
2.
Continuation of the debt with modified terms
GAAP Bond Disclosure
Premium and discount on the bond is reported separately
Terms of bond agreement are stated in financial statements per SEC Regulations
Bonds are Classified along with loans and notes as Long Term Debt
FASB Codification: 5-.02-24
Disclosure Example
Kieso, pg. 181
IFRS vs. GAAP Differences
Bonds:
IFRS: Premiums or discounts on debt directly reduce
carrying value of debt upon initial recognition, requires that issue costs reduce carrying value of debt
US GAAP: these amounts are recorded separately
costs are deferred
Discounts and Premiums Example
December 31, 2012 US Steel issued $1 million in bonds at 5% annual interest, at a discount of $100,000
Cash $900,000 Bonds Payable $900,000
IFRS
US GAAP
Cash
$900,000
Discounts on Bonds Payable Bonds Payable
$100,000
$1,000,000
Effective Interest Method
Compute interest expense
Multiply carrying value at the beginning of the period by effective interest rate
Compute interest paid
Multiply face value by stated interest rate
Determine Discount or premium amortization
Compose interest expense with interest cash to be paid
Effective Interest Amortization Example
IFRS vs. GAAP Differences
Minority Interests
IFRS states its reported in balance sheet with equity GAAP states its reported with non-current liabilities, not with
equity
IFRS Example of Disclosure
GAAP Example
IFRS vs. GAAP Differences
IFRS allows upwards revisions to the CV of an investment in a loan after a write down
US GAAP does not permit this
IAS 40: Recognition
IFRS vs. GAAP Similarities
Bonds are recorded at present value of future interest and principal payments
Discounts and premiums are amortized over the life of the bond using the effective interest method
Potential Audit Problems
Potential audit problems in regards to long term
liabilities include:
Obtaining information proving that all long-term liabilities are included in the financial statements and are accurately stated. Proving all relevant information in regards to an entitys long term liabilities is properly disclosed within the financial statements. Proving all long term liabilities disclosed by the entity are legitimate obligations.
Off Balance Sheet Financing
Attempt to borrow money in way to prevent the
recording of obligations.
Keeps debt off the Balance sheet.
Allows for previous loan commitments to be met, while
incurring more debt.
In response to the amount of entities using Off Balance
Sheet Financing the FASB has increased disclosure (note) requirements.
Our Opinion
GAAP is the better option
GAAP does not permit upward revisions of an investment in a loan
IFRS does not address troubled debt restructuring as adequately as GAAP
Under GAAP convertible debt must be classified a liability
Sources
"IFRS GAAP | International Financial Reporting Standards | Accounting, Accountant | Barry Epstein, Ph.D., CPA, Author, Expert." IFRS GAAP | International Financial Reporting Standards | Accounting, Accountant | Barry Epstein, Ph.D., CPA, Author, Expert. N.p., n.d. Web. 20 Feb. 2013. Securities and Exchange Commission. "A Comparison of US GAAP and IFRS." SEC.gov. Securities and Exchange Commission Staff Paper, 16 Nov. 2011. Web. 20 Feb. 2013. <http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-workplan-paper-111611-gaap.pdf>. "Summary of Statement No. 78." FASB: Financial Accounting Standards Board. N.p., n.d. Web. 20 Feb. 2013. <http://www.fasb.org/summary/stsum78.shtml>. Kieso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate Accounting. Hoboken, NJ: Wiley, 2012. Print.
