Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards
The primary sources of guidance on the accounting for contingencies
are ASC 450 under U.S. GAAP and IAS 37 under IFRS Accounting Standards. Throughout
this appendix, terminology applicable to both U.S. GAAP and IFRS Accounting
Standards is used, depending on the applicable guidance (e.g., “contingent gain” in
U.S. GAAP versus “contingent asset” in IFRS Accounting Standards).
The table below summarizes commonly encountered differences between
the accounting for contingencies under U.S. GAAP and that under IFRS Accounting
Standards. For detailed interpretive guidance on IAS 37, see Chapter A12,
“Provisions, Contingent Liabilities and Contingent Assets,” of Deloitte’s
iGAAP publication.
Subject
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U.S. GAAP
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IFRS Accounting Standards
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Terminology
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Three categories:
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Three categories:
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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 “contingent gain”
and “contingent loss”), 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.
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Recognition of contingent
losses/provisions
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One of the conditions for loss accrual is
that it is 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).
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One of the conditions for recognizing a
provision (as a liability) is that it is 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.
|
Measurement of contingent losses/provisions
— range of estimates
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If no amount in the range is more likely
than any other amount in the range, the minimum amount in the range is used to measure the
amount to be accrued for a loss contingency.
|
If no amount in the range is more likely
than any other amount in the range, the midpoint of the range is used to measure the
liability.
|
Measurement of contingent losses/provisions
— discounting
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Discounting is permitted only when the
timing of related cash flows is fixed or reliably
determinable.
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Discounting is required if the effect of
discounting is material.
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Onerous contracts
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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.
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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.
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Disclosure of prejudicial information
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Exemptions from disclosure of information
that may be prejudicial to an entity are not permitted.
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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 (U.S. GAAP) versus
contingent assets (IFRS Accounting Standards)
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At the earlier of when a gain contingency is
realized or becomes realizable, recognition is
appropriate.
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When realization of a contingent asset is
virtually certain, recognition is appropriate. Because the
thresholds between U.S. GAAP and IFRS Accounting Standards
are very similar, no differences are expected to arise in
practice.
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