Write a brief essay highlighting the difference between IFRS and accounting standards for private enterprises

Write a brief essay highlighting the difference between IFRS and accounting standards for private enterprises noted in this chapter, discussing the conceptual justification for each.

There are many differences between IFRS and PE GAAP with respect to measurement and reporting for pension and other employee future benefits.  Primarily, PE GAAP has been written to keep recognition and measurement issues simple and therefore requiring less cost and time to calculate and report.   Finally, PE GAAP has been designed with the primary user in mind of being the creditor, rather than outside shareholders and creditors.   Given that generally creditors have access to management; the disclosure has also been simplified.

These differences are highlighted below:

a) PE GAAP has more choices available on reporting pensions and other future benefits.  An enterprise may choose to follow the immediate recognition approach which results in the accrued benefit liability or asset being equal to the actual funded status of the plan in most cases (unless the plan is in a surplus position and then only the amount of future benefits accruing to the enterprise would be reported as an asset, which might be lower than the actual surplus).  For this approach the accrued benefit obligation is determined using the funding valuation basis, and all past services and actuarial gains and losses are immediately recognized into income.  This method is simpler and less costly to implement and maintain.

b) PE GAAP also allows the defer-and-amortize approach to be followed which is similar to IFRS.  In this case, the valuation method for the accrued benefit obligation is the projected benefit approach under both standards.  For past service costs, IFRS requires that these be amortized over the remaining vesting period, whereas PE GAAP requires amortization over the time to full eligibility or any shorter period.  For actuarial gains and losses, both IFRS and PE GAAP allow the corridor approach to be used, with amortization over EARSL or some shorter period. 

c) IFRS has one other choice with respect to actuarial gains and losses and that is that they can be recognized directly into OCI and never impact current earnings.  As PE GAAP does not have OCI, this is not an option.

d) There are differences in the discount rates that can be used for the determination of the obligation.  PE GAAP allows a choice of either the current yield rate on high quality corporate bonds (as does IFRS) or the current settlement rate (which is not allowed under IFRS).  These options again make it easier to determine the information for the private enterprise.

e) For the value of the plan assets at the report date, IFRS requires that the fair value be used.  Under PE GAAP, there is a choice to use either the fair value of the plan assets or a market-related value which is a calculated amount that recognizes changes in the value of the assets over no more than a five year period.

f) For other types of employee future benefits which are not complex, PE GAAP would allow similar treatment as for the pension plans.  For IFRS, the only difference is that past service contributions and actuarial gains and losses would be immediately recognized.

g) The disclosure under PE GAAP is greatly reduced in comparison with IFRS, keeping in mind that the primary users of PE GAAP statements are creditors that would likely have access to information from management.  This is not the case for IFRS prepared statements, where all types of investors and creditors could be users, so there is a significant amount of disclosure required.