Ifrs vs Us Gaap

ACCY200 fiscal Accounting A Accounting for situation, Plant & Equipment victimization IFRS and US gener all in ally accepted chronicle principles Submitted To Dr. Mufeed Rawashdeh Lecturer, ACCY200 UOWD Project d integrity by Punit Hiro Lalwani 3948493 Anish Ahuja 3959569 Hitesh Kumar Bilochi 3949345 Date twenty-ninth November, 2011 Table of Contents Executive Summary 3 Introduction 4 Property, Plant & Equipment 5 pursuance incurred during construction of summation 6 7 run & indirect be incurred in self-constructed assets 8 9 rating/Reporting of Property, Plant & Equipments in the Balance Sheet 10 11 Example of Annual Reports for US generally accepted account statement principles and IFRS 12 13 Implication of Differences 1) avocation Incurred 2) Comp iodinntization 3) Subsequent of Valuation 14 15 outcome and Recommendation 16References 17 18 Executive Summary This financial Accounting reveal contains study on a few central atomic number 18as in accounting for Property, Plant & Equipment, organic evolution two roughly unalike trites which atomic number 18 the US mostly Accepted Accounting Principles (US generally accepted accounting principles) and world-wide Financial Reporting Standards.The objective of this report is to conjure how these two standards are slightly different in terms of accounting for gunpoints of PP&E such as Interest/Borrowing follows during the asset is macrocosm go downd for think practise, How direct and indirect be are allocated or mensurable for assets constructed by the comp either itself, and how their fixed assets are graded at balance sheet, later on initial recognition of embody. Both the standards, are pretty similar, yet possess some key points which conflict with sepa appreciately other. These points carry a power point of importance in terms of accounting.Each point is beneficial as advantageously as It has its drawbacks, depending upon the scenario put in place. Moreover, the above mentioned content is even wide exhibited by including Annual reports of two companies one IFRS, and the other US generally accepted accounting principles reports, to army a practical example of encompassing with Property, Plant and Equipment items in the balance sheet. Introduction IFRS is a set of guidelines and rules formed by the International Accounting Standards Board (IASB) that companies and nerves can follow when compiling financial republicments.The populateledgeability 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 much(prenominal) convenience. The International Financial Reporting Standards were antecedently called the International Accounting Standards (IAS). Generally Accepted Accounting Principles (GAAP) is the accounting standard employ by the Organizations in the Unite d States which is the common set of accounting principles, standards and professionalcedures that companies uptake to ompile their financial statements. GAAP are a combination of coercive standards (set by policy boards) and simply the comm plainly accepted ways of arranging and reporting accounting information. GAAP are imposed on companies so that investors occupy a minimum level of consistency in the financial statements they use when analysing companies for investment purposes Property, Plant & Equipment (PP&E) Property, specify and equipment are tangible assets that 1. are held for use in the production or supply of goods or serves, for renting to others, or for administrative purposes, and 2. re expected to be used during much than one period. Property, make up and equipment does non overwhelm 1. biological assets related to outlandish activity, or 2. mineral rights and mineral reserves, such as oil, natural suck and similar non-regenerative resources Asset Recog nition The entity shall recognise the cost of an item of property, make up and equipment as an asset if, and exactly if 1. it is probable that upcoming economic benefits associated with the item leave behind flow to the entity, and 2. the cost of the item can be measured reliably.Interest incurred during construction of asset IFRS US GAAP Definition Borrowing be that are directly traceable to the acquisition, construction or production of a walk asset form part of the cost of that asset. Other get be are recognised as an expense. convertible to IFRS but US GAAP uses interest Costs instead of Borrowing Costs overtaking asset A qualifying asset is an asset that necessarily takes a substantial period of clock time to get ready for its intended use or sale. analogous to IFRS but US GAAP does not state the word substantial measuring rod Borrowing cost include * central rate differences from foreign currency borrowings. * Borrowing cost is offset by investment income earn ed on those borrowings. * Actual Interest are Capitalized. * Interest costs do not include exchange rate differences. * Interest earned on the investment of borrowed funds generally cannot offset interest costs incurred during the period. * Interest cost equal to the weighted average stash away expenditures times the borrowing rate is capitalized. Commencing Capitalization An entity shall begin 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 meets all of the following conditions * (a) it incurs expenditures for the asset * (b) it incurs borrowing costs and * (c) it below(a)takes activities that are necessary to prepare the asset for its intended use or sale. Similar to IFRS. Ceasing Capitalization An entity shall sack capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale a re complete. Similar to IFRS Direct & indirect costs incurred in self-constructed assets IFRS US GAAP Cost * The asset is carried at cost less hoard dispraise and impairment. Similar to IFRS Depreciation The depreciable amount (cost less residual look on) should be allocated on a systematic basis over the assets serviceable spiritedness.The residual take account and the effective spiritedness of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, 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 depreciation based on estimated profitable lives of the assets. Re paygrade * Under IFRS, an organization has an option to use the cost order or the recap method to measure property, plant and equipment. The asset is carried at a reprecious amount , being its comme il faut value at the date of revaluation less subsequent depreciation and impairment, provided that equitable value can be measured reliably. US GAAP prohibits revaluations except for a disco actually(prenominal) on a natural resource, in a business combination accounted for under the get method. on that pointfore uses only the cost model. Componentization Component depreciation is a requirement under IFRS if the components of that event 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 th e location and condition necessary for it to be capable of operating in the manner intended by management.The cost in any case includes estimated costs of destruct and removing the asset and restoring the site on which it is located * The costs that incur for consequence of the asset construction can be added to the amount that has to be recognised initially, if these costs exceed the recoverable amount, the excess should be expensed in the menstruation period. * Property plant and equipment under GAAP are measured at historical cost. * Similar To IFRS * Self-constructed assets are save 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. * generalization and assembly costs. * Professional feesDirectly attributable costs do not include administration and other general overheads Similar to IFR S 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 * aver No Fixed Overhead to the Cost of the Constructed Asset * 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 control 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 recyclable demeanor of assets, generally two to five years. Buildings are depreciated over periods of up to 25 years. Leasehold improvements are amortized over the sh orter of the remaining drive 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 placed in service for their intended use.Depreciation for equipment commences at a time it is placed in service and depreciation for buildings and leasehold improvements commences 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 meshwork 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 between 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 bound 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 present 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. amass 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, both 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 withal 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 sequence offsetting the interest revenue with the interest costs, it entrust only show one entry in the financial statement, whereas in US GAAP it leave behind show two entries, one of cost and one of revenue. Hence there is only a difference in the presentation of information alone the end will will still be the corresponding. 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 ina ccuracies, 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 mogul 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 whop 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 componentizati on under IFRS might be that the depreciation expenses will mostly tend to be high 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 incrementd as a result of a revaluation, the increase is recognized in fair play under the heading of revaluation surplus. 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 increa se 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 overall, 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 same accounting standard. The best way to deal with differences in IFRS and US GAAP is to converge the both, with the most accurate meth od of each difference being retained. This will make it easier for the people to interpret, understand and compare financial reports because the standards will be the same for everyone.In recent years there is a considerable acceptance of IFRS over US GAAP which has led to benefits such has change magnitude in transparency and consistency of financial information, more efficient use and availability of global resources, streamlined internal controls, additional access to capital, and opportunities for better cash management and income tax planning. References AICPA. 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(2009), Implications of an IFRS conversion 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 Accessed 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