# Impairment Example 6 under IFRS soluion

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```					Acct 414                                                                                                                                                    Prof. Teresa Gordon

IFRS vs. US GAAP - Loan Impairment (creditor)
12/31/2006
6-9. On December 31, 2006, Jones Company sold manufacturing equipment to Steel                           At loan initiation, record sales at PV of cash flows
Corporation. Steel Corporation gave Jones Company a 5 year \$200,000, zero interest note. The             i=                    10%
market rate of interest for a note with similar risks is 10%. At December 31, 2008 Jones                 n=                       5
Company reviews its financial assets for impairment. Jones Company concludes that the value of           pmt=                     0
the note is impaired and it only expects to collect \$150,000 of the principal at maturity. By            FV=        \$     200,000
December 31, 2009 Jones Company has determined they will probably collect \$160,000 on the                  PV= \$ 124,184 Starting figure for Table 1
manufacturing equipment. Prepare the appropriate journal entries for December 31, 2008 and
December 31, 2009 according to a) IFRS b) US GAAP. Explain why the journal entries differ
under the two sets of standards.

Original schedule as of         12/31/2006
Creditor’s Books                     Debit             Credit                            Creditor’s Original Amortization Table:
Period   Cash Flows        Interest     Difference     Carrying
12/31/2006 Initiation of loan                                                           Table 1                                      Revenue                      Value
Note receivable                              \$    124,184                    12/31/2006              0                          10%                     124,184
Sales                                                         \$      124,184 12/31/2007              1                0       12,418         12,418     136,603
COGS                                                     xx                  12/31/2008              2                0       13,660         13,660     150,263
Inventory                                                                 xx 12/31/2009              3                0       15,026         15,026     165,289
[SAME UNDER IFRS & US GAAP]                                                  12/31/2010              4                0       16,529         16,529     181,818
12/31/2011              5        200,000         18,182         18,182            0
6
12/31/2007 Recognition of interest revenue                                                  12/31/2012
Interest revenue (from Table 1)                               \$       12,418
Notes receivable                             \$     12,418

12/31/2008 Recognition of interest revenue
Interest revenue (from Table 1)                                      13,660
Notes receivable                                  13,660                         12/31/2008 Now it looks like that only \$150,000 will be received from debtor
Loan impairment recognized
12/31/2008 Recognition of impairment                                                                   i=                  10%
US GAAP Allowance for bad loans                         \$     37,566                                    n=                      3
Notes receivable (new)                      \$    112,697                                    pmt=                    0
Notes receivable (old)                                        \$     150,263                 FV=       \$     150,000
12/31/2008 PV= \$           112,697 Starting figure for Table 2
IFRS        Provision for bad and doubtful debts        \$     37,566                                              \$     150,263 carrying value Table 1
Notes receivable                                              \$      37,566                           \$      37,566 impairment loss

292a4cf1-0048-41b6-84a4-52fda0519a71.xlsx                                     IFRS Example                                                                               Page 1
Acct 414                                                   Prof. Teresa Gordon

(or used old and new accts)

292a4cf1-0048-41b6-84a4-52fda0519a71.xlsx   IFRS Example               Page 2
Acct 414                                                                                                                                                Prof. Teresa Gordon

###### Change in expectations
US GAAP No change - we don't recognize recoveries of                                                                                          IFRS & US GAAP
impairments previously recorded - continue to use Table 2                                                 New schedule upon impairment               12/31/2008
###### Note receivable                                11,270                                           Creditor’s NEW Amortization Table (after impairment):
Period    Cash Flows      Interest     Difference    Carrying
Interest revenue (from Table 2)                                           11,270 Table 2                              Revenue                      Value
12/31/2006         0                        10%
###### Note receivable                                              12,397                   12/31/2007         1
Interest revenue (from Table 2)                                                12,397 12/31/2008         2                                               112,697
12/31/2009         3             0        11,270        11,270     123,967
###### Assuming \$160,000 is collected                                                        12/31/2010         4             0        12,397        12,397     136,364
Cash                                                        160,000                   12/31/2011         5      150,000         13,636        13,636            0
Interest revenue (from Table 2)                                                13,636
Note receivable                                                               136,364
Allowance for bad loans                                                        10,000     ####### Now \$160,000 may be collected
or "recovery of impaired loan"                                                                              12/31/2009
TRUE \$    521,758   \$      521,758              Under IFRS, partial recovery recognized
###### Change in expectations                                                                            i=                10%
Recovery of impairments ARE acceptable - use Table 3                                          n=                   2 PV=             \$ 132,231
IFRS        Note receivable                                         11,270                                pmt=                 0 carrying            123,967 Table 2
Interest revenue (from Table 2)                                           11,270              FV=            160000                       8,264 loss recovey
PV= \$           132,231 Starting figure for Table 3
###### Notes receivable                                              8,264                       ##### Alternately:
Provision for bad and doubtful debts                                           8,264               Notes Receivable (new)             \$ 132,231
To adjust N/R for improved expectations                                                       Provision for bad & doubtful debts                      8,264
At this point, the carrying value = new present                                                                                                   123,967
Notes Receivable (old)
value of expected cash flows at original interest
rate.
IFRS ONLY - new table        12/31/2009
###### Note receivable                                              13,223                          IFRS ONLY - Creditor’s NEW Amortization Table after recovery:
Period    Cash Flows    Interest     Difference     Carrying
Interest revenue (Table 3)                                                13,223 Table 3                             Revenue                       Value
To recognize interest revenue                                                    12/31/2006         0                        10%
12/31/2007          1
###### Assuming \$160,000 is collected                                                        12/31/2008          2
Cash                                                        160,000                   12/31/2009          3                                              132,231
Interest revenue (Table 3)                                                     14,545 12/31/2010          4             0        13,223       13,223     145,455
Note receivable                                                               145,455 12/31/2011          5       160,000        14,545       14,545           0

292a4cf1-0048-41b6-84a4-52fda0519a71.xlsx                                         IFRS Example                                                                       Page 3
Acct 414                                                                    Prof. Teresa Gordon

TRUE   192,757       192,757

292a4cf1-0048-41b6-84a4-52fda0519a71.xlsx                    IFRS Example               Page 4

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