Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards

Terminology

The three categories of contingencies are:

• Estimated loss accrued for a loss contingency (i.e., a contingent loss recognized as a liability).
• Loss contingency that is not recognized as a liability (e.g., when a loss contingency cannot be reasonably estimated).
• Gain contingency that is not recognized as an asset until it is realized or realizable.

The three categories of contingencies are:

• Provision, an accrued liability or loss contingency recognized in the financial statements.
• Contingent liability, a loss contingency that does not meet the criteria to be recognized in the financial statements.
• Contingent asset, which is similar to a gain contingency under U.S. GAAP.

U.S. GAAP and IFRS Accounting Standards use different terminology to describe contingencies. Under U.S. GAAP, this terminology is related to financial statements’ elements of performance (two key terms are “gain contingency” and “loss contingency”), whereas under IFRS Accounting Standards, the terminology used is related to financial statements’ elements of financial position (the three key terms are “contingent asset,” “contingent liability,” and “provision”). However, the two sets of terms may be applied similarly so that no difference between them arises in practice.

Recognition of loss contingencies/provisions

One of the conditions for loss accrual is that it must be probable that (1) an asset has been impaired or (2) a liability has been incurred. “Probable” is defined as “likely to occur” (i.e., generally 70 percent or more), which is a higher threshold than “more likely than not” (i.e., greater than 50 percent).

One of the conditions for recognizing a provision (as a liability) is that it must be probable that an outflow of resources will be required to settle the obligation. “Probable” is defined as “more likely than not” (i.e., greater than 50 percent).

More contingencies may qualify for recognition as liabilities under IFRS Accounting Standards than under U.S. GAAP.

Initial measurement — range of estimates

When there is a range of possible outcomes and each point is as likely as the other points, the minimum aamount in the range is used to measure the contingency.

When there is a range of possible outcomes and each point is as likely as the other points, the midpoint of the range should be used for initial measurement.

Discounting

In general, an entity is not required to discount loss contingencies. However, for certain obligations for which the timing and amounts of outflows are fixed or reliably determinable, discounting is permitted.

The provision for a loss contingency should be the present value of the cost required to settle the obligation, discounted by using a pretax discount rate that reflects both (1) the time value of money and (2) the risks related to the liability. Discounting is required even if the timing of the outflows is not fixed or determinable.

Onerous contracts

Unless there is specific U.S. GAAP guidance on recognizing a contingent liability related to a firmly committed executory contract, recognition of a contingent liability when the fair value of remaining contractual rights declines below the remaining costs to be incurred is not supported by U.S. GAAP. See Section 2.2.1 for additional discussion.

Under IFRS Accounting Standards, an entity is required to recognize and measure the present obligation under an onerous contract as a provision. An onerous contract is one “in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.”

Levies

There is no specific guidance on levies. Therefore, an entity generally applies the guidance in ASC 450 to account for levies as well as the related fines and penalties.

Levies are transfers of resources that governments impose on entities in accordance with laws or regulations. This definition excludes transfers of resources that are (1) within the scope of other IFRS Accounting Standards and (2) fines or other penalties for breaches of laws or regulations. IFRIC 21 addresses the accounting for levies that are within the scope of IAS 37.

Constructive obligations

According to the doctrine of promissory estoppel, a constructive obligation may arise when, as a result of an entity’s actions, a third party reasonably expects that the entity will accept and discharge certain responsibilities. This concept is narrower than the definition of a constructive obligation under IFRS Accounting Standards.

Constructive obligations are recognized only if specific Codification topics require such recognition.

A constructive obligation arises when, as a result of an entity’s actions, a third party has a valid expectation that the entity will accept or discharge certain responsibilities.

A provision is recognized for a constructive obligation that arises from a past event if it is probable that an outflow of resources will be required and the amount can be reliably estimated.

Disclosure of prejudicial information

There are no exemptions from the requirement to disclose information that may be prejudicial to an entity.

In extremely rare cases, if disclosure of certain information could prejudice the position of the entity in a dispute with other parties, that information does not need to be disclosed. However, an entity must disclose the nature of the dispute, along with the reason why the information has not been disclosed.

Gain contingencies/contingent assets

A gain contingency is recognized at the earlier of when it is realized or becomes realizable. An entity is not permitted to recognize a gain contingency before it is realized or becomes realizable.

When realization of a contingent asset is virtually certain, recognition is appropriate. Because the thresholds in U.S. GAAP are very similar to those in IFRS Accounting Standards, no differences are expected to arise in practice.