Saturday, February 9, 2013

Reporting for Long-Term Liabilities for U.S. GAAP and IFRS


GLOBAL VIEW
This section discusses similarities and differences between U.S. GAAP and IFRS in accounting and reporting for long-term liabilities such as bonds and notes.

Accounting for Bonds and Notes

The definitions and characteristics of bonds and notes are broadly similar for both U.S. GAAP and IFRS. Although slight differences exist, accounting for bonds and notes under U.S. GAAP and IFRS is similar. Specifically, the accounting for issuances (including recording discounts and premiums), market pricing, and retirement of both bonds and notes follows the procedures in this chapter. Nokia describes its accounting for bonds, which follows the amortized cost approach explained in this chapter (and in Appendix 14B), as follows: Loans payable [bonds] are recognized initially at fair value, net of transaction costs incurred. In the subsequent periods, they are stated at amortized cost.


Both U.S. GAAP and IFRS allow companies to account for bonds and notes using fair value (different from the amortized value described in this chapter). This method is referred to as the fair value option Reporting option that permits a company to use fair value in reporting certain assets and liabilities, which is presently based on a 3-level system to determine fair value.. This method is similar to that applied in measuring and accounting for debt and equity securities. Fair value is the amount a company would receive if it settled a liability (or sold an asset) in an orderly transaction as of the balance sheet date. Companies can use several sources of inputs to determine fair value, and those inputs fall into three classes (ranked in order of preference):
Level 1: Observable quoted market prices in active markets for identical items.
Level 2: Observable inputs other than those in Level 1 such as prices from inactive markets or from similar, but not identical, items.
Level 3: Unobservable inputs reflecting a company’s assumptions about value.
The exact procedures for marking liabilities to fair value at each balance sheet date are in advanced courses.

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