This is significant to THL companies, since companies may choose to revalue certain asset groups (e.g. land and buildings), but not revalue other groups (e.g. machinery and furniture and fixtures). In turn, Consumer Product companies will also need to determine the impact this will have on their accounting systems. Systems will need to be established to track these changes and recompute the related depreciation. Similarly, the decrease in fair value of the asset will trigger a decrease in the annual depreciation.
IFRS requires a component approach for depreciation where assets must be separated into individual components and depreciated over their useful lives. For example, components of a Consumer Product company’s building may include, building, roof, flooring, furnishings and parking lot, etc. Each of these assets could represent a separate component and may have a different depreciation method or rate. Subsidiary ledgers will need to be set up to ensure that asset components are properly recorded as individual components.
Estimates of useful life and residual value, and the method of depreciation are reviewed at least annually. The residual value may be adjusted up or down, and any changes that result in differences in expectations from previous estimates, shall be accounted for as a change in an accounting estimate under IFRS. These changes also have a direct effect on the depreciation taken on the asset, as the higher values would result in higher depreciation and vice versa. Additionally, IFRS requires that the depreciation method applied to an asset be reviewed at each financial year- end. If there is a significant change in the expected pattern of consumption of the future economic benefits of the assets, the method shall be changed to reflect the changed pattern.
Additional Differences Additional technical accounting differences of specific interest to consumer product companies include:
Generally, for U.S. GAAP under SAB Topic 13A, “Revenue Recognition,” delivery is required to have occurred to provide sufficient evidence that risks and rewards of ownership have passed. IAS 18, “Revenue,” accepts that delivery is not always necessary for revenue to be recognized, because the risks and rewards of ownership may be transferred to the buyer even though the goods have not yet been delivered. For example, it is possible to recognize revenue on bill-and-hold sales and lay-away sales under IAS 18, when those sales would not be recognized under U.S. GAAP.
IFRS 5 requires that a discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and:
represents a separate major line of business or geographical area of operations, or
is part of a single coordinated plan to dispose of a separate major line of business or geographical area
of operations, or
is a subsidiary acquired exclusively with a view to resale.
U.S. GAAP allows discontinued operations treatment for a component of an entity rather than a separate major line of business or geographical area of operations. Therefore, many routine dispositions of components do not meet the criteria for discontinued operations treatment under IFRS.
Asset Retirement Obligations
Under U.S. GAAP, FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” states, in part: upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability.
Conversely, IAS 16, “Property, Plant and Equipment,” states that an entity applies IAS 2, inventories to the costs of obligations for dismantling, removing and restoring the site on which an item is located that are incurred during a particular period as a consequence of having used the item to produce inventories during that period. The obligations for costs accounted for in accordance with IAS 2 or IAS 16 are recognized and measured in accordance with IAS 37, “Provisions, Contingent Liabilities and Contingent Assets.” In other words, IFRS allows asset retirement obligation costs to be added to the carrying amount of the inventory in the period in which they are incurred.
Under U.S. GAAP, advertising costs are expensed as incurred or capitalized and then expensed the first time the advertisement runs. The timing of expense recognition could be different under IFRS based on facts and circumstances.
Under IFRS, accounting for vendor allowances, which commonly include volume rebates, advertising contributions, promotional discounts, and slotting fees, is not as clearly defined as under U.S. GAAP. Three criteria should be considered in identifying the accounting treatment of vendor allowances under IAS 18: 1) benefit to the vendor; 2) whether services provided are separable from the purchases; 3) whether the service is billed at fair value. If these three criteria are met, expensing these costs would appear appropriate. If not, these costs should be recorded as a reduction of revenue.