Comparison between U.S. GAAP and International ... - Grant Thornton

Comparison between U.S. GAAP and International Financial Reporting Standards 62
IFRS
U.S. GAAP
Introduction
A provision is defined as a liability of uncertain timing or
amount (IAS 37.10).
• Recognition: A provision shall be recognised when
there is a present obligation (legal or constructive)
as a result of a past event, transfer of economic
benefits is probable, and a reliable estimate can be
made. Probable means more likely than not
(IAS 37.14 and .23).
• Measurement: A provision shall be measured at the
best estimate of the amount required to settle the
present obligation at the end of the reporting period.
The best estimate is the amount that an entity would
rationally pay to settle the obligation or transfer it to
a third party. Uncertainties about the amount to
recognise shall be considered based on the
circumstances. For example,
For a large population of items, a provision is
estimated using an expected value method
Where there is a continuous range of possible
outcomes and each point in the range is as
likely as any other, the mid-point of the range is
used
For a single item being measured, the best
estimate may be the most likely outcome.
However, other possible outcomes should be
considered (IAS 37.36-.40)
• Discounting: Where the effect of the time value of
money is material, the provision shall be discounted
at a pre-tax discount rate that reflects current
market assessments of the time value of money and
the risks specific to the liability (IAS 37.45-.47).
A contingent liability (asset) is a possible obligation
(asset) that arises from past events (IAS 37.10).
Contingent liabilities shall not be recognised; however,
disclosures are required unless the possibility of any
outflow is remote (IAS 37.27-.28 and .86).
A contingent asset shall not be recognised (IAS 37.31).
Where an inflow of benefits is probable, a contingent
asset shall be disclosed (IAS 37.89).
Disclosures regarding provisions and contingent assets
and liabilities may be omitted if they can be expected to
seriously prejudice the position of the entity in a dispute
with other parties on the subject matter of the related
provision, continent asset, or contingent liability.
However, the entity shall disclose the general nature of
Unlike IFRS, the guidance for provisions, contingent
liabilities, and contingent assets is included in several
ASC topics and that guidance is not always consistent.
ASC 450-20 on loss contingencies is similar to IFRS;
however, there are some differences.
• Recognition: Under ASC 450-20, a loss contingency
is recognized when it is probable that an asset has
been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated.
The ASC Master Glossary defines probable as “the
future event or events are likely to occur,” a higher
threshold than more likely than not under IFRS.
• Measurement: ASC 450-20 requires that the amount
of the loss be reasonably estimated (best estimate).
However, when the reasonable estimate of the loss
is a range and some amount within the range
appears at the time to be a better estimate than any
other amount within the range, that amount is
accrued. If no amount within the range is a better
estimate than any other amount, the minimum
amount in the range is accrued (ASC 450-20-30-1).
• Discounting: Accruals for loss contingencies
provisions are not discounted unless the timing of
the related cash flows is fixed or reliably
determinable
Under ASC 450-20, disclosure is required for loss
contingencies that are not recognized if it is reasonably
possible that a loss may have been incurred
(ASC 450-20-50-3).
Gain contingencies are not reflected in financial
statements (ASC 450-30-25-1).
A similar exception does not exist under U.S. GAAP.
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