Ok, so this may be considered a shotgun approach, but I’m just going to list various IFRS vs GAAP differences. It doesn’t relate to a specific topic, like pensions per se, but there will definitely be a little bit of stuff on pension. If you want to know more about pensions, btw, check out my “What you want to know about pensions” post. There are also a few other good pensions post, like one called “Pensions made easy” by some gentleman out there in the internet ether. ----------------- 1. IFRS allows partial OR full goodwill method. I assume you all know how to calculate it. GAAP requires full goodwill only. 2. IFRS prefers PC method for Proportionate Consolidation, but is OK with the Equity method as well. GAAP, however, requires the Equity method. As a brief aside, GAAP does allow PC but only for unincorporated entities in specialised industries (like construction). But, for purposes of the test, GAAP only allows equity 99% of the time. 3. HTM securities under IFRS are initially reported at FV + transaction costs. Under GAAP, they are reported at COST + transaction costs. 4. AFS securities are allowed, under IFRS, to experience impairment reversals. HOWEVER, equity reversals are immediately recognized in the Income Statements. Debt securities (remember, this is AFS here) can be marked back up on the Balance Sheet. 5. AFS forex gains and losses under IFRS are recognised for DEBT securities in the Income Statement, and EQUITY securities are in OCI in the Equity statement. Under GAAP, both DEBT and EQUITY securities are in OCI in the Equity statement. 6. Impairment. Under IFRS, it’s if the carrying value > recoverable amount. Under GAAP, it’s a two-pronged test. First Carrying Value must be > FV goodwill. Then the loss is calculated as the Carrying Value - Implied FV Goodwill (simply is FV subsidiary - FV subsidiary’s net assets). 7. Contingent Considerations. IFRS recognizes liabilities and equity only, and if they can be measured reliably. GAAP recognizes liabilities, equity, AND assets. Basically, this is if I buy a firm, do I also buy a contingent liability they own, like if they were in the middle of a lawsuit, do I incur the liability and recognize it on the BS? 8. Off balance sheet stuff. IFRS calls them SPEs. The key here is if the parent owns a residual interest, then consolidate it. GAAP calls them VIEs. The key here is if there is not enough at-risk equity to fund the VIEs operations, then consolidate it. Yes, I know there’s a lot more requirements as well, but they’re similar to eachother, like no right to a return, no obligation to absorb loss, yada yada yada. 9. Voting stock interest. IFRS uses ALL securities with potential voting interests (think warrants and options here guys). GAAP uses only outstanding stock with voting rights. 10. Effective interest rate method (think HTM debt here). IFRS uses the estimated cashflows over the asset’s estimated life. If that can’t be calculated reliably, they do what GAAP does, which is use the contractual cashflows over the contractual life. Btw, all you do is take the market interest rate in existence when the bond was ISSUED (not purchased) and multiply it by the bond’s current amortized cost and you get the interest income. Anything else is amortization. Not hard, just breathe and think about it. 11. Reclassification. IFRS prohibits into/out of Designated at Fair Value. They also severly restrict into/out of HTM securities (once every 2 years). And, if you reclassify HFT into AFS, you must expense (put on the IS) any unrealised gains or losses first. For GAAP, it’s different. They pretty much allow any reclassification as long as it’s at FV. The only caveat is that if you reclassify an HTM security, you’re not allowed to classify any more debt as HTM. (equity can’t be HTM, but of course, you knew that) 12. Equity method at Fair Value reporting. IFRS allows this only for financial firms like unit trusts, mutual funds, etc. GAAP allows this, but is not so restrictive. It is IRREVOCABLE. 13. Goodwill allocated to? IFRS calls them “cash generating units”. GAAP calls them “reporting units”. ____________________________________ And that’s pretty much it folks. I hope you find this helpful. There is one more thing. CFO-CFI-CFF = change in cash. And beyond that, there is one last thing, a shameless plug. Some of you have seen my “What you want to know” posts. I think there are five or six of them. Anyhow, I am attending a top grad school this Fall, and will be searching for an internship in investment banking for Summer 2011. If you believe you could assist, please email. I wish all of you the best in this exam. Just remember to breathe. Assuming you’ve studied, it’s mostly mental at this point. Cheers.
Thanks for your notes. I found them very helpful. In fact could you do a favor and create one single thread with all the notes you have posted. I have bookmarked quite a few but don’t want to miss any. http://www.analystforum.com/phorums/read.php?12,1145307
Excellent. Do you have an example for 6.
hey guys About 4. “AFS securities are allowed, under IFRS, to experience impairment reversals. HOWEVER, equity reversals are immediately recognized in the Income Statements. Debt securities (remember, this is AFS here) can be marked back up on the Balance Sheet.” Available for sale securities under IFRS may experience reversal only for debt securities , it is not allowed for equity securities, right??
#6. Impairment of Goodwill example. Ok, this refers to IFRS. I carry goodwill from a recent acquisition of $600. I find, during my annual test, that the recoverable amount (which is the higher of “value in use” or “net selling price”) is $400. I realise a $200 loss from impairment on the IS. Now, I’m a GAAP guy, and I carry goodwill from a recent acquisition of $600. I conduct my test and first calculate Implied FV Goodwill. Let’s say the FV of my subsidiary os $1000 and the FV of its net assets are $800. That means the Implied FV of the Goodwill is $200. I have an impairment because the Carrying Value of $600 is greater than the Implied FV of Goodwill of $200. I recognize a $400 impairment loss, and kick myself for overpaying for SKype…(that’s a joke folks) _______ IWILLPASS, great name first, very cool. You’ll do fine. You are right, but think deeply here. Impairment reversals are allowed for AFS debt under IFRS, but this means they can write the asset back up on the books. For equity securities, they simply realize a gain on their P&L. Thus, it’s not really an impairment reversal for equity securities because the securities is still being carried at its impaired value…but they still realised a gain…
kh.asif, yes that’s it…
Thank you so much , its clear now.
as for 6. I understand it differently IFRS you compare carrying value and recoverable value of the unit and the positive difference decreases the reported goodwill (impairment) US GAAP first you compare carrying value and fair value of the unit and if carrying > fair value, you say impairment and go to next step otherwise nothing next step you calculate implied goodwill, compare it with reported and (negative) difference is reported as impairment loss
Thanks David. Can you clear up some of my confusions? 1. AFS securities are allowed, under IFRS, to experience impairment reversals. HOWEVER, equity reversals are immediately recognized in the Income Statements. Debt securities (remember, this is AFS here) can be marked back up on the Balance Sheet (I thought AFS equity cannot be reversed) 2. 11. Reclassification. IFRS prohibits into/out of Designated at Fair Value. They also severly restrict into/out of HTM securities (once every 2 years). And, if you reclassify HFT into AFS, you must expense (put on the IS) any unrealised gains or losses first. For GAAP, it’s different. They pretty much allow any reclassification as long as it’s at FV. The only caveat is that if you reclassify an HTM security, you’re not allowed to classify any more debt as HTM. (I thought HFT couldn’t be reclassified into AFS) 3. Is Net Income and Equity same for Equity, Prop Consolidation and Consolidation?
kh.asif, 1. Yes, you’re right. You are not reversing equity when you recognize an unrealised gain in the IS…that’s essentially what is happening to the previously impaired equity security. You aren’t reversing the impairment, because the asset is still carried at the impaired value. It is different than the standard treatment of unrealised gains for AFS securities, of course…more like HFT securities b/c the gain is in the IS. 2. HFT can be reclassified into AFS. 3. NI and Equity are the same for Equity Method, PC, and Consolidation. That’s why the ROE is the same for them, but the ROA is not…I expect a question testing this on the exam.
firstname.lastname@example.org Wrote: ------------------------------------------------------- > 3. NI and Equity are the same for Equity Method, > PC, and Consolidation. That’s why the ROE is the > same for them, but the ROA is not…I expect a > question testing this on the exam. David, I am no FRA specialist by anyway, but isn’t there a particular case when equity is higher under consolidation than PC and Equity methods? Something due to minority interest?
David - your notes are amazing contributions. thank you for taking the time to post them. I’m with you reebs81 - Net income is the same in all 3 methods. SH equity is higher in Acquisition. ROE is the same for equity method or prop consolidation. But it’s lower in Acquisition method. That’s my story and I’m sticking to it. I’m not a retaker, but I believe some of the confusion stems from a change in rules from last year.
yep equity same under equity and prop consol, equity higher (inc MI) under acquisition thus ROE lower. KNowing all these impairments, different categories of securities, reversals is a fc.kin nightmare! I wish I was Johnny 5!
Wow, you guys are absolutely right. My apologies. Errata: Equity is the same under Equity Method and Proportionate Consolidation Method. Under Acquisition Method, it is higher. That means that ROE is the same for EQ and PC methods, but lower for ACQUISITION method. Thank you for pointing that out.
Please can someone help, what is the summary about SPE, VIE or QSPE? I think regardless, both standard setters agree we should consolidate at all time?