Both IFRS and US GAAP require companies to write down the carrying amount of impaired assets. Impairment reversals for identifiable, long-lived assets are permitted under IFRS but typically not under US GAAP. An asset is considered to be impaired when its carrying amount exceeds its recoverable amount. Although IFRS and US GAAP define recoverability differently…
Intangible assets are non-monetary assets lacking physical substance. Intangible assets include items that involve exclusive rights, such as patents, copyrights, trademarks, and franchises. Under IFRS, identifiable intangible assets must meet three definitional criteria. They must be In addition, two recognition criteria must be met: Goodwill, which is not considered an identifiable intangible asset, arises when…
The choice of inventory valuation method affects the financial statements. The financial statement items affected include cost of sales, gross profit, net income, inventories, current assets, and total assets. Therefore, the choice of inventory valuation method also affects financial ratios that contain these items. Ratios such as current ratio, return on assets, gross profit margin,…
The allocation of the total cost of goods available for sale to cost of sales on the income statement and to ending inventory on the balance sheet varies under the different inventory valuation methods. In an environment of declining inventory unit costs and constant or increasing inventory quantities, first-in, first-out (FIFO) (in comparison with weighted…
IFRS states that inventories shall be measured (and carried on the balance sheet) at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale and estimated costs to get the inventory in condition for…
The excess of operating cash flow over capital expenditure is known generically as free cash flow. For purposes of valuing a company or its equity securities, an analyst may want to determine and use other cash flow measures, such as free cash flow to the firm (FCFF) or free cash flow to equity (FCFE). FCFF…
In common-size analysis of a company’s income statement, each income and expense line item is expressed as a percentage of net revenues (net sales). For the common-size balance sheet, each asset, liability, and equity line item is expressed as a percentage of total assets. The common-size cash flow statement has two alternative approaches. The first…
Evaluation of the cash flow statement should involve an overall assessment of the sources and uses of cash between the three main categories as well as an assessment of the main drivers of cash flow within each category, as follows: Step 1. Evaluate the major sources and uses of cash flow For a mature company,…
Most significantly, IFRS allow more flexibility in the reporting of such items as interest paid or received and dividends paid or received and in how income tax expense is classified. US GAAP classify interest and dividends received from investments as operating activities, whereas IFRS allow companies to classify those items as either operating or investing…
