Question

All of the following are differences between IFRS and GAAP in accounting for liabilities except:

(a) When a bond is issued at a discount, GAAP records the discount in a separate contra liability account. IFRS records the bond net of the discount.

(b) Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP, these costs are recorded as an asset and amortized to expense over the terms of the bond.

(c) GAAP, but not IFRS, uses the term “troubled-debt restructurings.”

(d) GAAP, but not IFRS, uses the term “provisions” for contingent liabilities which are accrued.

Short answer

The correct option is(d) GAAP, but not IFRS, uses the term “provision” for contingent liabilities which are accrued

Step-by-step solution

Definition of Contingent Liability

A liability that will arise in a future period because of any future event which is not certain is known as a contingent liability. Such liability is reported only when the amount of liability can be estimated, and there are possibilities of happening of such an event.

Explanation of correct option

Option (d) is correct because GAAP reports the contingencies for the liabilities, and the IFRS reports the liability arising from the past event as provision.

Explanation for incorrect options

1. Option (a) is incorrect because,under the GAAP, the business entity uses a separate account to record the bond discount in the balance sheet. Such an account is reported as a contra-liability account, and the amount is deducted from the liability account while reporting into the balance sheet. While under IFRS, the bonds payable are reported at net value, and no additional account is reported for discount.
2. Option (b) is incorrect because the business entity reporting under GAAP capitalizes the issuance cost and amortizes it over the bond's life. While under IFRS the business entity reports the bonds payable after deducting the discount that will reduce the carrying value of the bond payable.
3. Option (c) is correct because the GAAP only uses the terminology “trouble debt restructuring” while IFRS restricting is considered a debt extinguishment.