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USGAAP vs. IFRS
 

USGAAP vs. IFRS

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    USGAAP vs. IFRS USGAAP vs. IFRS Document Transcript

    • US GAAP vs. IFRSThe basicsJanuary 2009
    • Table of contents2 Introduction5 Financial statement presentation7 Interim financial reporting8 Consolidations, joint venture accounting and equity method investees11 Business combinations13 Inventory14 Long-lived assets16 Intangible assets18 Impairment of long-lived assets, goodwill and intangible assets20 Financial instruments24 Foreign currency matters26 Leases29 Income taxes32 Provisions and contingencies34 Revenue recognition36 Share-based payments38 Employee benefits other than share-based payments40 Earnings per share41 Segment reporting42 Subsequent events43 Related parties44 Appendix — The evolution of IFRS
    • IntroductionIt is not surprising that many people who follow No publication that compares two broad sets ofthe development of worldwide accounting accounting standards can include all differencesstandards today might be confused. Convergence that could arise in accounting for the myriad ofis a high priority on the agendas of both the business transactions that could possibly occur.US Financial Accounting Standards Board (FASB) The existence of any differences — and theirand the International Accounting Standards materiality to an entity’s financial statements —Board (IASB) — and “convergence” is a term depends on a variety of specific factors including:that suggests an elimination or coming the nature of the entity, the detailed transactionstogether of differences. Yet much is still made it enters into, its interpretation of the moreof the many differences that exist between general IFRS principles, its industry practices,US GAAP as promulgated by the FASB and and its accounting policy elections whereInternational Financial Reporting Standards US GAAP and IFRS offer a choice. This guide(IFRS) as promulgated by the IASB, suggesting focuses on those differences most commonlythat the two GAAPs continue to speak found in present practice and, where applicable,languages that are worlds apart. This apparent provides an overview of how and when thosecontradiction has prompted many to ask just differences are expected to converge.how different are the two sets of standards?And where differences exist, why do they exist,and when, if ever, will they be eliminated? Why do differences exist? As the international standards were developed,In this guide, “US GAAP v. IFRS: The basics,” the IASB and its predecessor, the Internationalwe take a top level look into these questions Accounting Standards Committee (IASC),and provide an overview, by accounting area, had the advantage of being able to draw onboth of where the standards are similar and the latest thinking of standard setters fromalso where they diverge. While the US and around the world. As a result, the internationalinternational standards do contain differences, standards contain elements of accountingthe general principles, conceptual framework, standards from a variety of countries. Andand accounting results between them are often even where an international standard lookedthe same or similar, even though the areas of to an existing US standard as a starting point,divergence seem to have disproportionately the IASB was able to take a fresh approachovershadowed these similarities. We believe to that standard. In doing so, the IASB couldthat any discussion of this topic should not lose avoid some of the perceived problems in thesight of the fact that the two sets of standards FASB standard — for example, exceptionsare generally more alike than different for most to the standard’s underlying principlescommonly encountered transactions, with IFRS that had resulted from external pressurebeing largely, but not entirely, grounded in the during the exposure process, or practicesame basic principles as US GAAP. difficulties that had emerged subsequent2 US GAAP vs. IFRS The basics
    • to the standard’s issuance — and attempt to Will the differences ever beimprove them. Further, as part of its annual eliminated?“Improvements Project,” the IASB reviews its Both the FASB and IASB (the Boards) publiclyexisting standards to enhance their clarity and declared their commitment to the convergenceconsistency, again taking advantage of more of IFRS and US GAAP in the “Norwalkcurrent thinking and practice. Agreement” in 2002, and since that time haveFor these reasons, some of the differences made significant strides toward that goal,between US GAAP and IFRS are embodied in including formally updating their agreement inthe standards themselves — that is, they are 2008. Additionally, the United States Securitiesintentional deviations from US requirements. and Exchange Commission (SEC) has been very active in this area. For example, within the pastStill other differences have emerged two years, the SEC eliminated the requirementthrough interpretation. As a general rule, for foreign private issuers to reconcile theirIFRS standards are more broad than their IFRS results to US GAAP and proposed anUS counterparts, with limited interpretive updated “Roadmap” addressing the future useguidance. The IASB has generally avoided of IFRS in the United States. The Roadmapissuing interpretations of its own standards, includes the potential for voluntary adoptionpreferring to instead leave implementation of IFRS by certain large companies as early asof the principles embodied in its standards 2009 and contemplates mandatory adoptionto preparers and auditors, and its official for all companies by 2014, 2015 or 2016. Theinterpretive body, the International Financial SEC has stated that continued progress towardsReporting Interpretations Committee (IFRIC). convergence is an important milestone that itWhile US standards contain underlying will assess when ultimately deciding on the useprinciples as well, the strong regulatory and of IFRS in the United States.legal environment in the US market has resultedin a more prescriptive approach — with far more Convergence efforts alone will not totally“bright lines,” comprehensive implementation eliminate all differences between US GAAPguidance and industry interpretations. and IFRS. In fact, differences continue to exist in standards for which convergence effortsTherefore, while some might read the broader already have been completed, and for whichIFRS standard to require an approach similar no additional convergence work is planned.to that contained in its more detailed US And for those standards currently on thecounterpart, others might not. Differences also Boards’ convergence agenda, unless theresult from this divergence in interpretation. words of the standards are totally conformed, interpretational differences will almost certainly continue to arise. US GAAP vs. IFRS The basics 3
    • The success of a uniform set of globalaccounting standards also will depend on thewillingness of national regulators and industrygroups to cooperate and to avoid issuinglocal interpretations of IFRS and guidancethat provides exceptions to IFRS principles.Some examples of this have already begun toemerge and could threaten the achievement ofinternational harmonization.In planning a possible move to IFRS, it isimportant that US companies monitor progresson the Boards’ convergence agenda to avoidspending time now analyzing differences thatmost likely will be eliminated in the near future.At present, it is not possible to know the exactextent of convergence that will exist at thetime US public companies may be required toadopt the international standards. However,that should not stop preparers, users andauditors from gaining a general understandingof the similarities and key differences betweenIFRS and US GAAP, as well as the areaspresently expected to converge. We hope youfind this guide a useful tool for that purpose.January 20094 US GAAP vs. IFRS The basics
    • Financial statement presentationSimilarities financial statements. Further, both frameworks require that the financial statements beThere are many similarities between US GAAP prepared on the accrual basis of accountingand IFRS relating to financial statement (with the exception of the cash flows statement)presentation. For example, under both except for rare circumstances. Both GAAPsframeworks, the components of a complete set have similar concepts regarding materiality andof financial statements include: balance sheet, consistency that entities have to consider inincome statement, other comprehensive income preparing their financial statements. Differencesfor US GAAP or statement of recognized income between the two tend to arise in the level ofand expense (SORIE) for IFRS, statement of specific guidance.cash flows, and accompanying notes to theSignificant differences US GAAP IFRSFinancial periods Generally, comparative financial Comparative information must berequired statements are presented; however, a disclosed in respect of the previous single year may be presented in certain period for all amounts reported in the circumstances. Public companies must financial statements. follow SEC rules, which typically require balance sheets for the two most recent years, while all other statements must cover the three-year period ended on the balance sheet date.Layout of balance sheet No general requirement within IAS 1 Presentation of Financialand income statement US GAAP to prepare the balance sheet Statements does not prescribe a and income statement in accordance standard layout, but includes a list with a specific layout; however, public of minimum items. These minimum companies must follow the detailed items are less prescriptive than the requirements in Regulation S-X. requirements in Regulation S-X.Presentation of debt Debt for which there has been a Debt associated with a covenantas current versus non- covenant violation may be presented violation must be presented as currentcurrent in the balance as non-current if a lender agreement to unless the lender agreement wassheet waive the right to demand repayment reached prior to the balance sheet date. for more than one year exists prior to Deferred taxes are presented as non- the issuance of the financial statements. current. (Note: In the joint convergence Deferred taxes are presented as project on income taxes, IFRS is current or non-current based on the expected to converge with US GAAP.) nature of the related asset or liability.Income statement — SEC registrants are required to present Entities may present expenses based onclassification of expenses based on function (for either function or nature (for example,expenses example, cost of sales, administrative). salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes. US GAAP vs. IFRS The basics 5
    • US GAAP IFRSIncome statement — Restricted to items that are both Prohibited.extraordinary items unusual and infrequent.Income statement — Discontinued operations classification Discontinued operations classificationdiscontinued operations is for components held for sale or to is for components held for sale or to bepresentation be disposed of, provided that there disposed of that are either a separate will not be significant continuing cash major line of business or geographical flows or involvement with the disposed area or a subsidiary acquired component. exclusively with an intention to resale.Changes in equity Present all changes in each caption of At a minimum, present components stockholders’ equity in either a footnote related to “recognized income and or a separate statement. expense” as part of a separate statement (referred to as the SORIE if it contains no other components). Other changes in equity either disclosed in the notes, or presented as part of a single, combined statement of all changes in equity (in lieu of the SORIE).Disclosure of SEC regulations define certain key Certain traditional concepts such asperformance measures measures and require the presentation “operating profit” are not defined; of certain headings and subtotals. therefore, diversity in practice exists Additionally, public companies are regarding line items, headings and prohibited from disclosing non-GAAP subtotals presented on the income measures in the financial statements statement when such presentation is and accompanying notes. relevant to an understanding of the entity’s financial performance.Convergence face of the financial statements, and may ultimately result in significant changes in theIn April 2004, the FASB and the IASB (the current presentation format of the financialBoards) agreed to undertake a joint project statements under both GAAPs.on financial statement presentation. As partof “Phase A” of the project, the IASB issued In September 2008, the Boards issueda revised IAS 1 in September 2007 (with an proposed amendments to FAS 144 and IFRS 5effective date for annual reporting periods to converge the definition of discontinuedending after January 1, 2009) modifying operations. Under the proposals, a discontinuedthe requirements of the SORIE within IAS 1 operation would be a component of an entityand bringing it largely in line with the FASB’s that is either (1) an operating segment (asstatement of other comprehensive income. As defined in FAS 131 and IFRS 8, respectively)part of “Phase B,” the Boards each issued an held for sale or that has been disposed of, orinitial discussion document in October 2008, (2) a business (as defined in FAS 141(R)) thatwith comments due by April 2009. This phase meets the criteria to be classified as held forof the project addresses the more fundamental sale on acquisition.issues for presentation of information on the6 US GAAP vs. IFRS The basics
    • Interim financial reportingSimilarities financial statements (which are similar but not identical) and provide for comparable disclosureAPB 28 and IAS 34 (both entitled Interim requirements. Neither standard mandatesFinancial Reporting) are substantially similar which entities are required to present interimwith the exception of the treatment of certain financial information, that being the purviewcosts as described below. Both require an of local securities regulators. For example,entity to use the same accounting policies US public companies must follow the SEC’sthat were in effect in the prior year, subject Regulation S-X for the purpose of preparingto adoption of new policies that are disclosed. interim financial information.Both standards allow for condensed interimSignificant difference US GAAP IFRSTreatment of certain Each interim period is viewed as an Each interim period is viewed as acosts in interim periods integral part of an annual period. As discrete reporting period. A cost that a result, certain costs that benefit does not meet the definition of an asset more than one interim period may at the end of an interim period is not be allocated among those periods, deferred and a liability recognized at an resulting in deferral or accrual of interim reporting date must represent certain costs. For example, certain an existing obligation. For example, inventory cost variances may be inventory cost variances that do not deferred on the basis that the interim meet the definition of an asset cannot statements are an integral part of an be deferred. However, income taxes annual period. are accounted for based on an annual effective tax rate (similar to US GAAP).ConvergenceAs part of their joint Financial StatementPresentation project, the FASB will addresspresentation and display of interim financialinformation in US GAAP, and the IASB mayreconsider the requirements of IAS 34. Thisphase of the Financial Statement Presentationproject has not commenced. US GAAP vs. IFRS The basics 7
    • Consolidations, joint venture accounting andequity method investeesSimilarities for all of the entities within a consolidated group, with certain exceptions under US GAAPThe principle guidance for consolidation (for example, a subsidiary within a specializedof financial statements under US GAAP is industry may retain the specialized accountingARB 51 Consolidated Financial Statements policies in consolidation). Under both GAAPs,(as amended by FAS 160 Noncontrolling the consolidated financial statements of theInterests in Consolidated Financial Statements) parent and its subsidiaries may be basedand FAS 94 Consolidation of All Majority- on different reporting dates as long as theOwned Subsidiaries; while IAS 27 (Amended) difference is not greater than three months.Consolidated and Separate Financial However, under IFRS a subsidiary’s financialStatements provides the guidance under statements should be as of the same date asIFRS. Special purpose entities are addressed the financial statements of the parent’s unlessin FIN 46 (Revised) Consolidation of Variable is it impracticable to do so.Interest Entities and SIC 12 Consolidation —Special Purpose Entities in US GAAP and IFRS An equity investment that gives an investorrespectively. Under both US GAAP and IFRS, significant influence over an investee (referredthe determination of whether or not entities to as “an associate” in IFRS) is considered anare consolidated by a reporting enterprise is equity-method investment under both US GAAPbased on control, although differences exist (APB 18 The Equity Method of Accounting forin the definition of control. Generally, under Investments in Common Stock) and IFRS (IAS 28both GAAPs all entities subject to the control of Investments in Associates), if the investee isthe reporting enterprise must be consolidated not consolidated. Further, the equity method of(note that there are limited exceptions in accounting for such investments, if applicable,US GAAP in certain specialized industries). generally is consistent under both GAAPs.Further, uniform accounting policies are usedSignificant differences US GAAP IFRSConsolidation model Focus is on controlling financial Focus is on the concept of the power interests. All entities are first evaluated to control, with control being the as potential variable interest entities parent’s ability to govern the financial (VIEs). If a VIE, FIN 46 (Revised) and operating policies of an entity to guidance is followed (below). Entities obtain benefits. Control presumed to controlled by voting rights are exist if parent owns greater than 50% consolidated as subsidiaries, but of the votes, and potential voting rights potential voting rights are not included must be considered. Notion of “de facto in this consideration. The concept of control” must also be considered. “effective control” exists, but is rarely employed in practice.8 US GAAP vs. IFRS The basics
    • US GAAP IFRSSpecial purpose entities FIN 46 (Revised) requires the primary Under SIC 12, SPEs (entities created to(SPE) beneficiary (determined based on the accomplish a narrow and well-defined consideration of economic risks and objective) are consolidated when the rewards) to consolidate the VIE. substance of the relationship indicates that an entity controls the SPE.Preparation of Required, although certain industry- Generally required, but there is a limitedconsolidated financial specific exceptions exist (for example, exemption from preparing consolidatedstatements — general investment companies). financial statements for a parent company that is itself a wholly-owned subsidiary, or is a partially-owned subsidiary if certain conditions are met.Preparation of The effects of significant events The effects of significant eventsconsolidated financial occurring between the reporting dates occurring between the reporting datesstatements — different when different dates are used are when different dates are used arereporting dates of parent disclosed in the financial statements. adjusted for in the financial statements.and subsidiary(ies)Presentation of Presented outside of equity on the Presented as a separate component innoncontrolling or balance sheet (prior to the adoption of equity on the balance sheet.“minority” interest FAS 160).Equity-method FAS 159 The Fair Value Option for IAS 28 requires investors (other thaninvestments Financial Assets and Financial Liabilities venture capital organizations, mutual gives entities the option to account funds, unit trusts, and similar entities) for their equity-method investments to use the equity-method of accounting at fair value. For those equity-method for such investments in consolidated investments for which management financial statements. If separate does not elect to use the fair value financial statements are presented option, the equity method of accounting (that is, those presented by a parent or is required. investor), subsidiaries and associates can be accounted for at either cost or Uniform accounting policies between fair value. investor and investee are not required. Uniform accounting policies between investor and investee are required.Joint ventures Generally accounted for using the IAS 31 Investments in Joint Ventures equity-method of accounting, with the permits either the proportionate limited exception of unincorporated consolidation method or the equity entities operating in certain industries method of accounting. which may follow proportionate consolidation. US GAAP vs. IFRS The basics 9
    • Convergence At the time of this publication, the FASB is proposing amendments to FIN 46 (Revised).As part of their joint project on business Additionally, the IASB is working on acombinations, the FASB issued FAS 160 consolidation project that would replace IAS 27(effective for fiscal years beginning on or after (amended) and SIC 12 and is expected to provideDecember 15, 2008) and the IASB amended for a single consolidation model within IFRS.IAS 27 (effective for fiscal years beginning It is currently unclear whether these projectson or after July 1, 2009, with early adoption will result in additional convergence, and futurepermitted), thereby eliminating substantially all developments should be monitored.of the differences between US GAAP and IFRSpertaining to noncontrolling interests, outsideof the initial accounting for the noncontrollinginterest in a business combination (see theBusiness Combinations section). In addition,the IASB recently issued an exposure draftthat proposes the elimination of proportionateconsolidation for joint ventures.10 US GAAP vs. IFRS The basics
    • Business combinationsSimilarities assets, liabilities and noncontrolling interests of the acquired entity are measured (as describedThe issuance of FAS 141(R) and IFRS 3(R) in the table below, IFRS 3(R) provides an(both entitled Business Combinations), alternative to measuring noncontrolling interestrepresent the culmination of the first major at fair value), with limited exceptions. Evencollaborative convergence project between the though the new standards are substantiallyIASB and the FASB. Pursuant to FAS 141(R) converged, certain differences will exist onceand IFRS 3(R), all business combinations are the new standards become effective. The newaccounted for using the acquisition method. standards will be effective for annual periodsUnder the acquisition method, upon obtaining beginning on or after December 15, 2008,control of another entity, the underlying and July 1, 2009, for companies followingtransaction should be measured at fair value, US GAAP and IFRS, respectively.and this should be the basis on which theSignificant differences US GAAP IFRSMeasurement of Noncontrolling interest is measured Noncontrolling interest is measurednoncontrolling interest at fair value, which includes the either at fair value including goodwill or noncontrolling interest’s share of its proportionate share of the fair value goodwill. of the acquiree’s identifiable net assets, exclusive of goodwill.Assets and liabilities Initial Recognition Initial Recognitionarising from Distinguishes between contractual Contingent liabilities are recognizedcontingencies and noncontractual contingencies. as of the acquisition date if there is Contractual contingencies are measured a present obligation that arises from at fair value at the acquisition date, past events and its fair value can be while noncontractual contingencies measured reliably. Contingent assets are recognized at fair value at the are not recognized. acquisition date only if it is more likely than not that the contingency meets the definition of an asset or liability. Subsequent Measurement Subsequent Measurement Contingently liabilities are Contingent liabilities are subsequently subsequently measured at the higher measured at the higher of its acquisition- of its acquisition-date fair value, or date fair value less, if appropriate, the amount that would be recognized cumulative amortization recognized in if applying FAS 5, Accounting for accordance with IAS 18, Revenue, or Contingencies. (See “Provisions and the amount that would be recognized if contingencies” for differences between applying IAS 37, Provisions, Contingent FAS 5 and IAS 37.) Liabilities and Contingent Assets.. US GAAP vs. IFRS The basics 11
    • US GAAP IFRSAcquiree operating If the terms of an acquiree operating Separate recognition of an intangibleleases lease are favorable or unfavorable asset or liability is required only if the relative to market terms, the acquirer acquiree is a lessee. If the acquiree is recognizes an intangible asset or the lessor, the terms of the lease are liability, respectively, regardless of taken into account in estimating the fair whether the acquiree is the lessor or value of the asset subject to the lease the lessee. – separate recognition of an intangible asset or liability is not required.Combination of entities Accounted for in a manner similar to a Outside the scope of IFRS 3R. Inunder common control pooling of interests (historical cost). practice, either follow an approach similar to US GAAP or apply the purchase method if there is substance to the transaction.Other differences may arise due to different Convergenceaccounting requirements of other existing No further convergence is planned at thisUS GAAP-IFRS literature (for example, identifying time. Note, however, that as of the date of thisthe acquirer, definition of control, definition of publication, the FASB has issued a proposedfair value, replacement of share-based payment FSP that would change the accounting forawards, initial classification and subsequent preacquisition contingencies under FAS 141(R).measurement of contingent consideration, initial The proposed FSP proposes a model that isrecognition and measurement of income taxes, very similar to the existing requirements ofand initial recognition and measurement of FAS 141 for purposes of initial recognition.employee benefits). Assets and liabilities measured at fair value would continue to be subject to subsequent measurement guidance similar to that currently described in FAS 141(R).12 US GAAP vs. IFRS The basics
    • InventorySimilarities for cost measurement, such as standard cost method or retail method, are similar underARB 43 Chapter 4 Inventory Pricing and IAS both US GAAP and IFRS. Further, under both2 Inventories are both based on the principle GAAPs the cost of inventory includes all directthat the primary basis of accounting for expenditures to ready inventory for sale,inventory is cost. Both define inventory as including allocable overhead, while sellingassets held for sale in the ordinary course of costs are excluded from the cost of inventories,business, in the process of production for such as are most storage costs and generalsale, or to be consumed in the production of administrative costs.goods or services. The permitted techniquesSignificant differences US GAAP IFRSCosting methods LIFO is an acceptable method. LIFO is prohibited. Same cost formula Consistent cost formula for all must be applied to all inventories inventories similar in nature is not similar in nature or use to the entity. explicitly required.Measurement Inventory is carried at the lower of cost Inventory is carried at the lower of cost or market. Market is defined as current or net realizable value (best estimate replacement cost as long as market is of the net amounts inventories are not greater than net realizable value expected to realize. This amount may (estimated selling price less reasonable or may not equal fair value). costs of completion and sale) and is not less than net realizable value reduced by a normal sales margin.Reversal of inventory Any write-downs of inventory to the Previously recognized impairmentwrite-downs lower of cost or market create a new losses are reversed, up to the amount cost basis that subsequently cannot be of the original impairment loss when reversed. the reasons for the impairment no longer exist.Permanent inventory Permanent markdowns do not affect Permanent markdowns affect themarkdowns under the the gross margins used in applying the average gross margin used in applyingretail inventory method RIM. Rather, such markdowns reduce RIM. Reduction of the carrying cost of(RIM) the carrying cost of inventory to net inventory to below the lower of cost or realizable value, less an allowance for net realizable value is not allowed. an approximately normal profit margin, which may be less than both original cost and net realizable value.Convergence abnormal amounts of idle facility expense, freight, handling costs and spoilage. At present,In November 2004, the FASB issued FAS 151 there are no other ongoing convergence effortsInventory Costs to address a narrow difference with respect to inventory.between US GAAP and IFRS related to theaccounting for inventory costs, in particular, US GAAP vs. IFRS The basics 13
    • Long-lived assetsSimilarities between US GAAP and IFRS in the specific costs and assets that are included withinAlthough US GAAP does not have a these categories as well as the requirement tocomprehensive standard that addresses long- capitalize these costs.lived assets, its definition of property, plant andequipment is similar to IAS 16 Property, Plantand Equipment, which addresses tangible assets Depreciationheld for use that are expected to be used for Depreciation of long-lived assets is requiredmore than one reporting period. Other concepts on a systematic basis under both accountingthat are similar include the following: models. FAS 154 Accounting Changes and Error Corrections and IAS 8 AccountingCost Policies, Changes in Accounting Estimates and Error Corrections both treat changesBoth accounting models have similar recognition in depreciation method, residual value andcriteria, requiring that costs be included in the useful economic life as a change in accountingcost of the asset if future economic benefits estimate requiring prospective treatment.are probable and can be reliably measured. Thecosts to be capitalized under both models aresimilar. Neither model allows the capitalization Assets held for saleof start-up costs, general administrative and Assets held for sale are discussed in FASoverhead costs or regular maintenance. 144 and IFRS 5 Non-Current Assets Held forHowever, both US GAAP and IFRS require that Sale and Discontinued Operations, with boththe costs of dismantling an asset and restoring standards having similar held for sale criteria.its site (that is, the costs of asset retirement Under both standards, the asset is measuredunder FAS 143 Accounting for Asset Retirement at the lower of its carrying amount or fairObligations or IAS 37 Provisions, Contingent value less costs to sell; the assets are notLiabilities and Contingent Assets) be included depreciated and are presented separately onin the cost of the asset. Both models require the face of the balance sheet. Exchanges ofa provision for asset retirement costs to be nonmonetary similar productive assets are alsorecorded when there is a legal obligation, treated similarly under APB 29 Accounting foralthough IFRS requires provision in other Nonmonetary Exchanges as amended by FAScircumstances as well. 153 Accounting for Nonmonetary Transactions and IAS 16, both of which allow gain/lossCapitalized interest recognition if the exchange has commercial substance and the fair value of the exchangeFAS 34 Capitalization of Interest and IAS 23 can be reliably measured.Borrowing Costs address the capitalizationof borrowing costs (for example, interestcosts) directly attributable to the acquisition,construction or production of a qualifyingasset. Qualifying assets are generally definedsimilarly under both accounting models.However, there are significant differences14 US GAAP vs. IFRS The basics
    • Significant differences US GAAP IFRSRevaluation of assets Revaluation not permitted. Revaluation is a permitted accounting policy election for an entire class of assets, requiring revaluation to fair value on a regular basis.Depreciation of asset Component depreciation permitted but Component depreciation required ifcomponents not common. components of an asset have differing patterns of benefit.Measurement of Eligible borrowing costs do not include Eligible borrowing costs includeborrowing costs exchange rate differences. Interest exchange rate differences from foreign earned on the investment of borrowed currency borrowings. Borrowing costs funds generally cannot offset interest are offset by investment income earned costs incurred during the period. on those borrowings. For borrowings associated with a For borrowings associated with a specific qualifying asset, borrowing specific qualifying asset, actual costs equal to the weighted average borrowing costs are capitalized. accumulated expenditures times the borrowing rate are capitalized.Costs of a major Multiple accounting models have Costs that represent a replacementoverhaul evolved in practice, including: expense of a previously identified component costs as incurred, capitalize costs and of an asset are capitalized if future amortize through the date of the next economic benefits are probable and overhaul, or follow the IFRS approach. the costs can be reliably measured.Investment property Investment property is not separately Investment property is separately defined and, therefore, is accounted for defined in IAS 40 as an asset held to as held for use or held for sale. earn rent or for capital appreciation (or both) and may include property held by lessees under a finance/ operating lease. Investment property may be accounted for on a historical cost basis or on a fair value basis as an accounting policy election. Capitalized operating lease classified as investment property must be accounted for using the fair value model.Other differences include: (i) hedging gains Convergenceand losses related to the purchase of assets, No further convergence is planned at this time.(ii) constructive obligations to retire assets,(iii) the discount rate used to calculate assetretirement costs, and (iv) the accounting forchanges in the residual value. US GAAP vs. IFRS The basics 15
    • Intangible assetsSimilarities internally developed intangibles are not recognized as an asset under either FAS 142The definition of intangible assets as non- or IAS 38. Moreover, internal costs relatedmonetary assets without physical substance is to the research phase of research andthe same under both US GAAP’s FAS 141(R) development are expensed as incurred underand FAS 142 Goodwill and Other Intangible both accounting models.Assets and the IASB’s IFRS 3(R) and IAS 38Intangible Assets. The recognition criteria Amortization of intangible assets over theirfor both accounting models require that estimated useful lives is required under boththere be probable future economic benefits US GAAP and IFRS, with one minor exception inand costs that can be reliably measured. FAS 86 Accounting for the Costs of ComputerHowever, some costs are never capitalized Software to be Sold, Leased or Otherwiseas intangible assets under both models, such Marketed related to the amortization ofas start-up costs. Goodwill is recognized only computer software assets. In both, if there isin a business combination in accordance no foreseeable limit to the period over whichwith FAS 141(R) and IFRS 3(R). In general, an intangible asset is expected to generateintangible assets that are acquired outside net cash inflows to the entity, the useful life isof a business combination are recognized at considered to be indefinite and the asset is notfair value. With the exception of development amortized. Goodwill is never amortized.costs (addressed in the following table),Significant differences US GAAP IFRSDevelopment costs Development costs are expensed as Development costs are capitalized incurred unless addressed by a separate when technical and economic feasibility standard. Development costs related of a project can be demonstrated to computer software developed for in accordance with specific criteria. external use are capitalized once Some of the stated criteria include: technological feasibility is established in demonstrating technical feasibility, accordance with specific criteria (FAS intent to complete the asset, and ability 86). In the case of software developed to sell the asset in the future, as well as for internal use, only those costs incurred others. Although application of these during the application development stage principals may be largely consistent (as defined in SOP 98-1 Accounting with FAS 86 and SOP 98-1, there for the Costs of Computer Software is no separate guidance addressing Developed or Obtained for Internal Use) computer software development costs. may be capitalized.Advertising costs Advertising and promotional costs are Advertising and promotional costs are either expensed as incurred or expensed expensed as incurred. A prepayment when the advertising takes place for the may be recognized as an asset only first time (policy choice). Direct response when payment for the goods or advertising may be capitalized if the services is made in advance of the specific criteria in SOP 93-07 Reporting entity’s having access to the goods or on Advertising Costs are met. receiving the services.16 US GAAP vs. IFRS The basics
    • US GAAP IFRSRevaluation Revaluation is not permitted Revaluation to fair value of intangible assets other than goodwill is a permitted accounting policy election for a class of intangible assets. Because revaluation requires reference to an active market for the specific type of intangible, this is relatively uncommon in practice.Convergence the 2008 MOU, the FASB indicated that it will consider in the future whether to undertake aWhile the convergence of standards on intangible project to eliminate differences in the accountingassets was part of the 2006 “Memorandum of for research and development costs by fullyUnderstanding” (MOU) between the FASB and adopting IAS 38 at some point in the future.the IASB, both boards agreed in 2007 not toadd this project to their agenda. However, in US GAAP vs. IFRS The basics 17
    • Impairment of long-lived assets, goodwill andintangible assetsSimilarities that an asset found to be impaired be written down and an impairment loss recognized. FASBoth US GAAP and IFRS contain similarly 142, FAS 144 Accounting for the Impairmentdefined impairment indicators for assessing the or Disposal of Long-Lived Assets, and IAS 36impairment of long-lived assets. Both standards Impairment of Assets apply to most long-livedrequire goodwill and intangible assets with and intangible assets, although some of theindefinite lives to be reviewed at least annually scope exceptions listed in the standards differ.for impairment and more frequently if Despite the similarity in overall objectives,impairment indicators are present. Long-lived differences exist in the way in which impairmentassets are not tested annually, but rather is reviewed, recognized and measured.when there are indicators of impairment. Theimpairment indicators in US GAAP and IFRSare similar. Additionally, both GAAPs requireSignificant differences US GAAP IFRSMethod of determining Two-step approach requires a One-step approach requires thatimpairment — long-lived recoverability test be performed impairment testing be performed ifassets first (carrying amount of the asset impairment indicators exist. is compared to the sum of future undiscounted cash flows generated through use and eventual disposition). If it is determined that the asset is not recoverable, impairment testing must be performed.Impairment loss The amount by which the carrying The amount by which the carryingcalculation — long-lived amount of the asset exceeds its fair amount of the asset exceeds itsassets value, as calculated in accordance with recoverable amount; recoverable FAS 157. amount is the higher of: (1) fair value less costs to sell, and (2) value in use (the present value of future cash flows in use including disposal value). (Note that the definition of fair value in IFRS has certain differences from the definition in FAS 157.)Allocation of goodwill Goodwill is allocated to a reporting Goodwill is allocated to a cash- unit, which is an operating segment or generating unit (CGU) or group of one level below an operating segment CGUs which represents the lowest level (component). within the entity at which the goodwill is monitored for internal management purposes and cannot be larger than an operating segment as defined in IFRS 8, Operating Segments.18 US GAAP vs. IFRS The basics
    • US GAAP IFRSMethod of determining Two-step approach requires a One-step approach requires thatimpairment — goodwill recoverability test to be performed an impairment test be done at the first at the reporting unit level (carrying cash generating unit (CGU) level by amount of the reporting unit is comparing the CGU’s carrying amount, compared to the reporting unit fair including goodwill, with its recoverable value). If the carrying amount of the amount. reporting unit exceeds its fair value, then impairment testing must be performed.Impairment loss The amount by which the carrying Impairment loss on the CGU (amountcalculation — goodwill amount of goodwill exceeds the implied by which the CGU’s carrying amount, fair value of the goodwill within its including goodwill, exceeds its reporting unit. recoverable amount) is allocated first to reduce goodwill to zero, then, subject to certain limitations, the carrying amount of other assets in the CGU are reduced pro rata, based on the carrying amount of each asset.Impairment loss The amount by which the carrying The amount by which the carryingcalculation — indefinite value of the asset exceeds its fair value. value of the asset exceeds itslife intangible assets recoverable amount.Reversal of loss Prohibited for all assets to be held and Prohibited for goodwill. Other long- used. lived assets must be reviewed annually for reversal indicators. If appropriate, loss may be reversed up to the newly estimated recoverable amount, not to exceed the initial carrying amount adjusted for depreciation.ConvergenceImpairment is one of the short-termconvergence projects agreed to by the FASBand IASB in their 2006 MOU. However, as partof their 2008 MOU, the boards agreed to deferwork on completing this project until their otherconvergence projects are complete. US GAAP vs. IFRS The basics 19
    • Financial instrumentsSimilarities and Financial Liabilities. IFRS guidance for financial instruments, on the other hand, isThe US GAAP guidance for financial limited to three standards (IAS 32 Financialinstruments is contained in several standards. Instruments: Presentation, IAS 39 FinancialThose standards include, among others, FAS Instruments: Recognition and Measurement,65 Accounting for Certain Mortgage Banking and IFRS 7 Financial Instruments: Disclosures).Activities, FAS 107 Disclosures about Fair Value Both GAAPs require financial instruments to beof Financial Instruments, FAS 114 Accounting classified into specific categories to determineby Creditors for Impairment of a Loan, FAS115 the measurement of those instruments,Accounting for Certain Investments in Debt clarify when financial instruments shouldand Equity Securities, FAS 133 Accounting for be recognized or derecognized in financialDerivative Instruments and Hedging Activities, statements, and require the recognition ofFAS 140 Accounting for Transfers and Servicing all derivatives on the balance sheet. Hedgeof Financial Assets and Extinguishments of accounting and use of a fair value option isLiabilities, FAS 150 Accounting for Certain permitted under both. Each GAAP also requiresFinancial Instruments with Characteristics of detailed disclosures in the notes to financialboth Liabilities and Equity, FAS 155 Accounting statements for the financial instrumentsfor Certain Hybrid Financial Instruments, reported in the balance sheet.FAS 157 Fair Value Measurements, and FAS 159The Fair Value Option for Financial AssetsSignificant differences US GAAP IFRSFair value measurement One measurement model whenever Various IFRS standards use slightly fair value is used (with limited varying wording to define fair value. exceptions). Fair value is the price Generally fair value represents that would be received to sell an asset the amount that an asset could be or paid to transfer a liability in an exchanged for, or a liability settled orderly transaction between market between knowledgeable, willing parties participants at the measurement date. in an arm’s length transaction. Fair value is an exit price, which may differ from the transaction (entry) At inception, transaction (entry) price price. generally is considered fair value.Use of fair value option Financial instruments can be measured Financial instruments can be measured at fair value with changes in fair value at fair value with changes in fair value reported through net income, except reported through net income provided for specific ineligible financial assets that certain criteria, which are more and liabilities. restrictive than under US GAAP, are met.20 US GAAP vs. IFRS The basics
    • US GAAP IFRSDay one gains and losses Entities are not precluded from Day one gains and losses are recognizing day one gains and losses recognized only when all inputs to the on financial instruments reported at measurement model are observable. fair value even when all inputs to the measurement model are not observable. For example, a day one gain or loss may occur when the transaction occurs in a market that differs from the reporting entity’s exit market.Debt vs. equity US GAAP specifically identifies certain Classification of certain instruments withclassification instruments with characteristics of characteristics of both debt and equity both debt and equity that must be focuses on the contractual obligation to classified as liabilities. deliver cash, assets or an entity’s own shares. Economic compulsion does not constitute a contractual obligation. Certain other contracts that are indexed Contracts that are indexed to, and to, and potentially settled in, a company’s potentially settled in, a company’s own own stock may be classified as equity stock are classified as equity when if they: (1) require physical settlement settled by delivering a fixed number of or net-share settlement, or (2) give the shares for a fixed amount of cash. issuer a choice of net-cash settlement or settlement in its own shares.Compound (hybrid) Compound (hybrid) financial instruments Compound (hybrid) financialfinancial instruments (for example, convertible bonds) are not instruments are required to be split split into debt and equity components into a debt and equity component and, unless certain specific conditions are if applicable, a derivative component. met, but they may be bifurcated into The derivative component may be debt and derivative components, with subjected to fair value accounting. the derivative component subjected to fair value accounting.Impairment recognition — Declines in fair value below cost may Generally, only evidence of creditAvailable for Sale (AFS) result in an impairment loss being default results in an impairment beingfinancial instruments recognized in the income statement recognized in the income statement of on an AFS debt security due solely to an AFS debt instrument. a change in interest rates (risk-free or Impairment losses recognized through otherwise) if the entity does not have the income statement for available- the positive ability and intent to hold for-sale equity securities cannot be the asset for a period of time sufficient reversed through the income statement to allow for any anticipated recovery in for future recoveries. However, fair value. impairment losses for debt instruments When an impairment is recognized classified as available-for-sale may be through the income statement, a reversed through the income statement new cost basis in the investment is if the fair value of the asset increases in established. Such losses can not be a subsequent period and the increase reversed for any future recoveries. can be objectively related to an event occurring after the impairment loss was recognized. US GAAP vs. IFRS The basics 21
    • US GAAP IFRSHedge effectiveness — Permitted. Not permitted.shortcut method forinterest rate swapsHedging a component The risk components that may be Allows entities to hedge componentsof a risk in a financial hedged are specifically defined by the (portions) of risk that give rise toinstrument literature, with no additional flexibility. changes in fair value.Measurement — effective Requires catch-up approach, Requires the original effective interestinterest method retrospective method or prospective rate to be used throughout the life of the method of calculating the interest for instrument for all financial assets and amortized cost-based assets, depending liabilities, except for certain reclassified on the type of instrument. financial assets, in which case the effect of increases in cash flows are recognized as prospective adjustments to the effective interest rate.Derecognition of Derecognition of financial assets (sales Derecognition is based on a mixedfinancial assets treatment) occurs when effective model that considers both transfer of control has been surrendered over risks and rewards and control. If the the financial assets. Control has been transferor has neither retained nor surrendered only if certain specific transferred substantially all of the criteria have been met, including risks and rewards, there is then an evidence of legal isolation. evaluation of the transfer of control. Special rules apply for transfers involving Control is considered to be surrendered if the transferee has the practical ability “qualifying” special-purpose entities. to unilaterally sell the transferred asset to a third party, without restrictions. There is no legal isolation test The concept of a qualifying special- purpose entity does not exist.Measurement — loans Unless the fair value option is elected, Loans and receivables are carried atand receivables loans and receivables are classified as amortized cost unless classified into either (1) held for investment, which the “fair value through profit or loss” are measured at amortized cost, or category or the “available for sale” (2) held for sale, which are measured category, both of which are carried at at the lower of cost or fair value. fair value on the balance sheet.Other differences include: (i) application of sale exception, (v) foreign exchange gain and/fair value measurement principles, including or losses on AFS investments, (vi) recognitionuse of prices obtained in ‘principal’ versus of basis adjustments when hedging future‘most advantageous’ markets, (ii) definitions transactions, (vii) macro hedging, (viii) hedgingof a derivative and embedded derivative, net investments, (ix) impairment criteria for(iii) cash flow hedge — basis adjustment and equity investments, (x) puttable minority interesteffectiveness testing, (iv) normal purchase and and (xi) netting and offsetting arrangements.22 US GAAP vs. IFRS The basics
    • Convergence The FASB and the IASB have separate, but related, projects on reducing complexity inThe IASB is currently working on a project to this area, with both Boards issuing documentsestablish a single source of guidance for all fair in 2008. The FASB issued an exposure draftvalue measurements required or permitted directed at simplifying hedge accounting, andby existing IFRSs to reduce complexity and the IASB issued a discussion paper on reducingimprove consistency in their application (similar complexity in reporting financial instruments.to FAS 157). The IASB intends to issue an Additionally, the FASB and the IASB have a jointexposure draft of its fair value measurement project to address the accounting for financialguidance in Q2 of 2009. instruments with characteristics of equity, with aIn September 2008, FASB issued a proposed goal of issuing a converged standard by 2011.amendment to FAS 140. The proposed The IASB has a project on its agenda tostatement would remove (1) the concept of develop a new standard on derecognition thata qualifying SPE from FAS 140, and (2) the is more consistent with the IASB conceptualexceptions from applying FASB Interpretation framework of financial reporting. Ultimately,No. 46 (revised December 2003) Consolidation the two Boards will seek to issue a convergedof Variable Interest Entities to qualifying SPEs. derecognition standard. US GAAP vs. IFRS The basics 23
    • Foreign currency mattersSimilarities income. Once a subsidiary’s financial statements are remeasured into its functional currency, bothFAS 52 Foreign Currency Translation and IAS standards require translation into its parent’s21 The Effects of Changes in Foreign Exchange functional currency with assets and liabilitiesRates are quite similar in their approach being translated at the period-end rate, andto foreign currency translation. While the income statement amounts generally at theguidance provided by each for evaluating the average rate, with the exchange differencesfunctional currency of an entity is different, reported in equity. Both standards also permitit generally results in the same determination the hedging of that net investment with exchange(that is, the currency of the entity’s primary differences from the hedging instrumenteconomic environment). Both GAAPs offsetting the translation amounts reportedgenerally consider the same economies to be in equity. The cumulative translation amountshyperinflationary, although the accounting for reported in equity are reflected in incomean entity operating in such an environment can when there is a sale, or complete liquidationbe very different. or abandonment of the foreign operation, butBoth GAAPs require foreign currency there are differences between the two standardstransactions of an entity to be remeasured into when the investment in the foreign operation isits functional currency with amounts resulting reduced through dividends or repayment of long-from changes in exchange rates being reported in term advances as indicated below.Significant differences US GAAP IFRSTranslation/functional Local functional currency financial Local functional currency financialcurrency of foreign statements are remeasured as if the statements (current and prior period)operations in a functional currency was the reporting are indexed using a general price index,hyperinflationary currency (US dollar in the case of a and then translated to the reportingeconomy US parent) with resulting exchange currency at the current rate. differences recognized in income.Treatment of translation Translation difference in equity is A return of investment (for example,difference in equity recognized in income only upon dividend) is treated as a partial disposalwhen a partial return of sale (full or partial), or complete of the foreign investment and aa foreign investment is liquidation or abandonment of the proportionate share of the translationmade to the parent foreign subsidiary. No recognition is difference is recognized in income. made when there is a partial return of investment to the parent.24 US GAAP vs. IFRS The basics
    • US GAAP IFRSConsolidation of foreign The “step-by-step” method is used The method of consolidation is notoperations whereby each entity is consolidated specified and, as a result, either the into its immediate parent until the ”direct” or the “step-by-step” method ultimate parent has consolidated the is used. Under the “direct” method, financial statements of all the entities each entity within the consolidated below it. group is directly consolidated into the ultimate parent without regard to any intermediate parent. The choice of method could affect the cumulative translation adjustments deferred within equity at intermediate levels, and therefore the recycling of such exchange rate differences upon disposal of an intermediate foreign operation.ConvergenceNo convergence activities are underway orplanned for foreign currency matters. US GAAP vs. IFRS The basics 25
    • LeasesSimilarities Under both GAAPs, a lessee would record a capital (finance) lease by recognizing an assetThe overall accounting for leases under and a liability, measured at the lower of theUS GAAP and IFRS (FAS 13 Accounting for present value of the minimum lease paymentsLeases and IAS 17 Leases, respectively) is or fair value of the asset. A lessee would recordsimilar, although US GAAP has more specific an operating lease by recognizing expenseapplication guidance than IFRS. Both focus on a straight-line basis over the lease term.on classifying leases as either capital (IAS 17 Any incentives under an operating lease areuses the term “finance”) or operating, and amortized on a straight line basis over the termboth separately discuss lessee and lessor of the lease.accounting. Lessor accountingLessee accounting (excluding real estate)(excluding real estate) Lessor accounting under FAS 13 and IAS 17 isBoth standards require the party that bears similar and uses the above tests to determinesubstantially all the risks and rewards of whether a lease is a sales-type/direct financingownership of the leased property to recognize lease or an operating lease. FAS 13 specifiesa lease asset and corresponding obligation, and two additional criteria (that is, collection ofspecify criteria (FAS 13) or indicators (IAS 17) lease payments is reasonably expected and noto make this determination (that is, whether important uncertainties surround the amounta lease is capital or operating). The criteria of unreimbursable costs to be incurred by theor indicators of a capital lease are similar in lessor) for a lessor to qualify for sales-type/that both standards include the transfer of direct financing lease accounting that IAS 17ownership to the lessee at the end of the lease does not have. Although not specified in IASterm and a purchase option that, at inception, 17, it is reasonable to expect that if theseis reasonably expected to be exercised. Further, conditions exist, the same conclusion may beFAS 13 requires capital lease treatment if the reached under both standards. If a lease is alease term is equal to or greater than 75% sales-type/direct financing lease, the leasedof the asset’s economic life, while IAS 17 asset is replaced with a lease receivable. If arequires such treatment when the lease term lease is classified as operating, rental incomeis a “major part” of the asset’s economic life. is recognized on a straight-line basis over theFAS 13 specifies capital lease treatment if the lease term and the leased asset is depreciatedpresent value of the minimum lease payments by the lessor over its useful life.exceeds 90% of the asset’s fair value, while IAS17 uses the term “substantially all” of the fairvalue. In practice, while FAS 13 specifies brightlines in certain instances (for example, 75% ofeconomic life), IAS 17’s general principles areinterpreted similarly to the bright line tests. Asa result, lease classification is often the sameunder FAS 13 and IAS 17.26 US GAAP vs. IFRS The basics
    • Significant differences US GAAP IFRSLease of land and A lease for land and buildings that The land and building elements ofbuilding transfers ownership to the lessee or the lease are considered separately contains a bargain purchase option when evaluating all indicators unless would be classified as a capital lease the amount that would initially be by the lessee, regardless of the relative recognized for the land element is value of the land. immaterial, in which case they would be treated as a single unit for purposes If the fair value of the land at inception of lease classification. There is no 25% represents 25% or more of the total test to determine whether to consider fair value of the lease, the lessee the land and building separately when must consider the land and building evaluating certain indicators. components separately for purposes of evaluating other lease classification criteria. (Note: Only the building is subject to the 75% and 90% tests in this case.)Recognition of a If the seller does not relinquish more Gain or loss is recognized immediately,gain or loss on a sale than a minor part of the right to use the subject to adjustment if the sales priceand leaseback when asset, gain or loss is generally deferred differs from fair value.the leaseback is an and amortized over the lease term.operating leaseback If the seller relinquishes more than a minor part of the use of the asset, then part or all of a gain may be recognized depending on the amount relinquished. (Note: Does not apply if real estate is involved as the specialized rules are very restrictive with respect to the seller’s continuing involvement and they may not allow for recognition of the sale.)Recognition of gain or Generally, same as above for operating Gain or loss deferred and amortizedloss on a sale leaseback leaseback where the seller does not over the lease term.when the leaseback is a relinquish more than a minor part ofcapital leaseback the right to use the asset. US GAAP vs. IFRS The basics 27
    • Other differences include: (i) the treatment Convergenceof a leveraged lease by a lessor under FAS 13 The Boards are jointly working on a long-term(IAS 17 does not have such classification), convergence project on lease accounting(ii) real estate sale-leasebacks, (iii) real estate with an overall objective of comprehensivelysales-type leases, and (iv) the rate used to reconsidering the existing guidance issueddiscount minimum lease payments to the by both standard setters. The Boards havepresent value for purposes of determining lease tentatively decided to defer the development ofclassification and subsequent recognition of a a new accounting model for lessors and to adoptcapital lease, including in the event of a renewal. an approach that would apply the existing capital lease model, adapted as necessary, to all leases. A joint discussion paper is planned to be issued in the first quarter of 2009, with the Boards then moving towards publication of an exposure draft.28 US GAAP vs. IFRS The basics
    • Income taxesSimilarities Significant differences andFAS 109 Accounting for Income Taxes and convergenceIAS 12 Income Taxes provide the guidance The IASB is expected to publish an exposurefor income tax accounting under US GAAP draft to replace IAS 12 in 2009 that will eliminateand IFRS, respectively. Both pronouncements certain of the differences that currently existrequire entities to account for both current tax between US GAAP and IFRS. The table beloweffects and expected future tax consequences highlights the significant differences in theof events that have been recognized (that is, current literature, as well as the expecteddeferred taxes) using an asset and liability proposed accounting under the IASB’sapproach. Further, deferred taxes for temporary exposure draft. While initially participating indifferences arising from non-deductible goodwill the deliberations on this proposed standard,are not recorded under either approach, and the FASB decided to suspend deliberations ontax effects of items accounted for directly in this project until the IASB issues its exposureequity during the current year also are allocated document on the proposed replacement todirectly to equity. Finally, neither GAAP permits IAS 12 for public comment. The FASB is expectedthe discounting of deferred taxes. to solicit input from US constituents regarding the IASB’s proposed replacement to IAS 12 and then determine whether to undertake a project to fully eliminate the differences in the accounting for income taxes by adopting the revised IAS 12. US GAAP IFRS IASB exposure draftTax basis Tax basis is a question of Tax basis is generally the IFRS is expected to fact under the tax law. amount deductible or propose a new definition For most assets and taxable for tax purposes. for tax basis that will liabilities there is no The manner in which eliminate consideration dispute on this amount; management intends of management’s intent however, when uncertainty to settle or recover the in determination of the exists it is determined in carrying amount affects tax basis. accordance with FIN 48 the determination of tax Accounting for Uncertainty basis. in Income Taxes. US GAAP vs. IFRS The basics 29
    • US GAAP IFRS IASB exposure draftUncertain tax positions FIN 48 requires a two- Does not include specific IFRS is expected to step process, separating guidance. IAS 12 address uncertain tax recognition from indicates tax assets positions; however, the measurement. A benefit and liabilities should approach is expected to is recognized when it is be measured at the be different from FIN 48. “more likely than not” to amount expected to be The IFRS exposure draft be sustained based on the paid. In practice, the is not expected to include technical merits of the recognition principles separate recognition position. The amount of in IAS 37 on provisions criteria; instead it is benefit to be recognized and contingencies are expected to require, based is based on the largest frequently applied. on the technical merits of amount of tax benefit Practice varies regarding the position, measurement that is greater than 50% consideration of detection of the benefit to be likely of being realized risk in the analysis. recognized based on upon ultimate settlement. the probability weighted Detection risk is precluded average of the possible from being considered in outcomes, including the analysis. consideration of detection.Initial recognition Does not include an Deferred tax effects IFRS is expected toexemption exemption like that under arising from the initial converge with US GAAP IFRS for non-recognition recognition of an requirements by of deferred tax effects asset or liability are eliminating the initial for certain assets or not recognized when recognition exemption. liabilities. (1) the amounts did not arise from a business combination and (2) upon occurrence the transaction affects neither accounting nor taxable profit (for example, acquisition of non-deductible assets).Recognition of deferred Recognized in full (except Amounts are recognized IFRS is expected totax assets for certain outside basis only to the extent it converge with US GAAP differences), but valuation is probable (similar to requirements. allowance reduces asset “more likely than not” to the amount that is under US GAAP) that more likely than not to they will be realized. be realized.Calculation of deferred Enacted tax rates must Enacted or “substantively IFRS is expected totax asset or liability be used. enacted” tax rates as of clarify the definition of the balance sheet date “substantively enacted” must be used. to indicate that for US jurisdictions, it equates to when tax laws are enacted.30 US GAAP vs. IFRS The basics
    • US GAAP IFRS IASB exposure draftClassification of deferred Current or non-current All amounts classified IFRS is expected totax assets and liabilities classification, based on as non-current in the converge with US GAAPin balance sheet the nature of the related balance sheet. requirements. asset or liability, is required.Recognition of Recognition not required Recognition required IFRS is expected todeferred tax liabilities for investment in foreign unless the reporting converge with US GAAPfrom investments in subsidiary or corporate entity has control requirements.subsidiaries or joint JV that is essentially over the timing of theventures (JVs) (often permanent in duration, reversal of the temporaryreferred to as outside unless it becomes difference and it isbasis differences) apparent that the probable (“more likely difference will reverse in than not”) that the the foreseeable future. difference will not reverse in the foreseeable future.Taxes on intercompany Requires taxes paid on Requires taxes paid on IFRS is not expected totransfers of assets intercompany profits to be intercompany profits change.that remain within a deferred and prohibits the to be recognized asconsolidated group recognition of deferred incurred and permits the taxes on differences recognition of deferred between the tax bases taxes on differences of assets transferred between the tax bases between entities/tax of assets transferred jurisdictions that remain between entities/tax within the consolidated jurisdictions that remain group. within the consolidated group.Other differences include: (i) the allocationof subsequent changes to deferred taxesto components of income or equity, (ii) thecalculation of deferred taxes on foreignnonmonetary assets and liabilities when thelocal currency of an entity is different thanits functional currency and (iii) the tax rateapplicable to distributed or undistributed profits. US GAAP vs. IFRS The basics 31
    • Provisions and contingenciesSimilarities and Measurement in Financial Statements of Business Enterprises and CON 6 Elements ofWhile the sources of guidance under US GAAP Financial Statements) is similar to the specificand IFRS differ significantly, the general recognition criteria provided in IAS 37. Bothrecognition criteria for provisions are similar. GAAPs require recognition of a loss basedFor example, IAS 37 Provisions, Contingent on the probability of occurrence, althoughLiabilities and Contingent Assets provides the definition of probability is different underthe overall guidance for recognition and US GAAP (where probable is interpreted asmeasurement criteria of provisions and “likely”) and IFRS (where probable is interpretedcontingencies. While there is no equivalent as “more likely than not”). Both US GAAP andsingle standard under US GAAP, FAS 5 IFRS prohibit the recognition of provisions forAccounting for Contingencies and a number costs associated with future operating activities.of other statements deal with specific types Further, both GAAPs require information aboutof provisions and contingencies (for example, a contingent liability, whose occurrence is moreFAS 143 for asset retirement obligations than remote but did not meet the recognitionand FAS 146 for exit and disposal activities). criteria, to be disclosed in the notes to theFurther, the guidance provided in two Concept financial statements.Statements in US GAAP (CON 5 RecognitionSignificant differences US GAAP IFRSDiscounting provisions Provisions may be discounted only when Provisions should be recorded at the amount of the liability and the timing the estimated amount to settle or of the payments are fixed or reliably transfer the obligation taking into determinable, or when the obligation consideration the time value of money. is a fair value obligation (for example, Discount rate to be used should be an asset retirement obligation under “a pre-tax rate that reflects current FAS 143). Discount rate to be used market assessments of the time value is dependent upon the nature of the of money and the risks specific to the provision, and may vary from that used liability.” under IFRS. However, when a provision is measured at fair value, the time value of money and the risks specific to the liability should be considered.Measurement of Most likely outcome within range Best estimate of obligation should beprovisions — range of should be accrued. When no one accrued. For a large population of itemspossible outcomes outcome is more likely than the others, being measured, such as warranty the minimum amount in the range of costs, best estimate is typically outcomes should be accrued. expected value, although mid-point in the range may also be used when any point in a continuous range is as likely as another. Best estimate for a single obligation may be the most likely outcome, although other possible outcomes should still be considered.32 US GAAP vs. IFRS The basics
    • US GAAP IFRSRestructuring costs Under FAS 146, once management has Once management has “demonstrably committed to a detailed exit plan, each committed” (that is a legal or type of cost is examined to determine constructive obligation has been when recognized. Involuntary employee incurred) to a detailed exit plan, the termination costs are recognized over general provisions of IAS 37 apply. Costs future service period, or immediately typically are recognized earlier than if there is none. Other exit costs are under US GAAP because IAS 37 focuses expensed when incurred. on exit plan as a whole, rather than individual cost components of the plan.Disclosure of contingent No similar provision to that allowed Reduced disclosure permitted if itliability under IFRS for reduced disclosure would be severely prejudicial to an requirements. entity’s position in a dispute with other party to a contingent liability.ConvergenceBoth the FASB and the IASB have currentagenda items dealing with this topic. Anexposure draft proposing amendments toIAS 37 was issued in 2005, with a final standardexpected no earlier than 2010. The IASB hasindicated its intent to converge with US GAAPin the accounting for restructuring costs aspart of this project. In June 2008, the FASBissued proposed amendments to the disclosurerequirements in FAS 5. Many of the proposedchanges are consistent with current disclosuresunder IAS 37. A final standard is expected in thesecond quarter of 2009. US GAAP vs. IFRS The basics 33
    • Revenue recognitionSimilarities Significant differencesRevenue recognition under both US GAAP and Despite the similarities, differences in revenueIFRS is tied to the completion of the earnings recognition may exist as a result of differingprocess and the realization of assets from such levels of specificity between the two GAAPs.completion. Under IAS 18 Revenue, revenue There is extensive guidance under US GAAP,is defined as “the gross inflow of economic which can be very prescriptive and oftenbenefits during the period arising in the course applies only to specific industries. For example,of the ordinary activities of an entity when under US GAAP there are specific rules for thethose inflows result in increases in equity other recognition of software revenue and sales of realthan increases relating to contributions from estate, while comparable guidance does not existequity participants.” Under US GAAP, revenues under IFRS. In addition, the detailed US rulesrepresent actual or expected cash inflows that often contain exceptions for particular types ofhave occurred or will result from the entity’s transactions. Further, public companies in the USongoing major operations. Under both GAAPs, must follow additional guidance provided by therevenue is not recognized until it is both SEC staff. Conversely, a single standard (IAS 18)realized (or realizable) and earned. Ultimately, exists under IFRS, which contains generalboth GAAPs base revenue recognition on the principles and illustrative examples of specifictransfer of risks and both attempt to determine transactions. Exclusive of the industry-specificwhen the earnings process is complete. Both differences between the two GAAPs, followingGAAPs contain revenue recognition criteria are the major differences in revenue recognition.that, while not identical, are similar. Forexample, under IFRS, one recognition criteriais that the amount of revenue can be measuredreliably, while US GAAP requires that theconsideration to be received from the buyer isfixed or determinable. US GAAP IFRSSale of goods Public companies must follow SAB 104 Revenue is recognized only when risks Revenue Recognition, which requires and rewards of ownership have been that delivery has occurred (the risks transferred, the buyer has control of and rewards of ownership have been the goods, revenues can be measured transferred), there is persuasive reliably, and it is probable that the evidence of the sale, the fee is fixed economic benefits will flow to the or determinable, and collectibility is company. reasonably assured.34 US GAAP vs. IFRS The basics
    • US GAAP IFRSRendering of services Certain types of service revenue, Revenue may be recognized in primarily relating to services sold with accordance with long-term contract software, have been addressed separately accounting, including considering the in US GAAP literature. All other service stage of completion, whenever revenues revenue should follow SAB 104. and costs can be measured reliably, and Application of long-term contract it is probable that economic benefits will accounting (SOP 81-1 Accounting for flow to the company. Performance of Construction-Type and Certain Production-Type Contracts) is not permitted for non-construction services.Multiple elements Specific criteria are required in order IAS 18 requires recognition of revenue for each element to be a separate unit on an element of a transaction if that of accounting, including delivered element has commercial substance elements that must have standalone on its own; otherwise the separate value, and undelivered elements elements must be linked and accounted that must have reliable and objective for as a single transaction. IAS 18 does evidence of fair value. If those criteria not provide specific criteria for making are met, revenue for each element that determination. of the transaction can be recognized when the element is complete.Deferred receipt of Discounting to present value is required Considered to be a financing agreement.receivables only in limited situations. Value of revenue to be recognized is determined by discounting all future receipts using an imputed rate of interest.Construction contracts Construction contracts are accounted Construction contracts are accounted for using the percentage-of-completion for using the percentage-of-completion method if certain criteria are met. method if certain criteria are met. Otherwise completed contract method Otherwise, revenue recognition is is used. limited to recoverable costs incurred. The completed contract method is not permitted. Construction contracts may be, but Construction contracts are combined or are not required to be, combined or segmented if certain criteria are met. segmented if certain criteria are met. Criteria under IFRS differ from those in US GAAP.Convergence model. This model focuses on the asset or liability that arises from an enforceableThe FASB and the IASB are currently arrangement with a customer. The customerconducting a joint project to develop concepts consideration model allocates the customerfor revenue recognition and a standard consideration to the contractual performancebased on those concepts. The Boards issued obligations on a pro rata basis, and revenue isa discussion paper in December 2008 that not recognized until a performance obligationdescribes a contract-based revenue recognition is satisfied.approach using the customer consideration US GAAP vs. IFRS The basics 35
    • Share-based paymentsSimilarities amount at which the asset or liability could be bought or sold in a current transaction betweenThe guidance for share-based payments, willing parties. Further, both GAAPs require,FAS 123 (Revised) and IFRS 2 (both entitled if applicable, the fair value of the shares to beShare-Based Payment), is largely convergent. measured based on market price (if available)Both GAAPs require a fair value-based approach or estimated using an option-pricing model.in accounting for share-based payment In the rare cases where fair value cannot bearrangements whereby an entity (1) acquires determined, both standards allow the use ofgoods or services in exchange for issuing share intrinsic value. Additionally, the treatment ofoptions or other equity instruments (collectively modifications and settlement of share-basedreferred to as “shares” in this guide) or (2) incurs payments is similar in many respects underliabilities that are based, at least in part, on the both GAAPs. Finally, both GAAPs require similarprice of its shares or that may require settlement disclosures in the financial statements to providein its shares. Under both GAAPs, this guidance investors sufficient information to understandapplies to transactions with both employees the types and extent to which the entity isand non-employees, and is applicable to all entering into share-based payment transactions.companies. Both FAS 123 (Revised) and IFRS 2define the fair value of the transaction to be theSignificant differences US GAAP IFRS Transactions with non- Either the fair value of (1) the goods Fair value of transaction should be employees or services received, or (2) the equity based on the value of the goods or instruments is used to value the services received, and only on the fair transaction, whichever is more reliable. value of the equity instruments if the fair value of the goods and services cannot be reliably determined. If using the fair value of the equity Measurement date is the date the instruments, EITF 96-18 Accounting entity obtains the goods or the for Equity Instruments That are Issued counterparty renders the services. No to Other Than Employees for Acquiring, performance commitment concept. or in Conjunction with Selling, Goods or Services requires measurement at the earlier of (1) the date at which a “commitment for performance” by the counterparty is reached, or (2) the date at which the counterparty’s performance is complete.36 US GAAP vs. IFRS The basics
    • US GAAP IFRSMeasurement and Entities make an accounting policy Must recognize compensation cost onrecognition of expense — election to recognize compensation an accelerated basis — each individualawards with graded cost for awards containing only service tranche must be separately measured.vesting features conditions either on a straight-line basis or on an accelerated basis, regardless of whether the fair value of the award is measured based on the award as a whole or for each individual tranche.Equity repurchase Does not require liability classification Liability classification is required (nofeatures at employee’s if employee bears risks and rewards of six-month consideration exists).election equity ownership for at least six months from date equity is issued or vests.Deferred taxes Calculated based on the cumulative Calculated based on the estimated tax GAAP expense recognized and trued deduction determined at each reporting up or down upon realization of the date (for example, intrinsic value). tax benefit. If the tax deduction exceeds cumulative If the tax benefit exceeds the deferred compensation expense, deferred tax tax asset, the excess (“windfall based on the excess is credited to benefit”) is credited directly to shareholder equity. If the tax deduction shareholder equity. Shortfall of tax is less than or equal to cumulative benefit below deferred tax asset is compensation expense, deferred taxes charged to shareholder equity to extent are recorded in income. of prior windfall benefits, and to tax expense thereafter.Modification of If an award is modified such that the Probability of achieving vesting termsvesting terms that service or performance condition, before and after modification is notare improbable of which was previously improbable considered. Compensation expense isachievement of achievement, is probable of the grant-date fair value of the award, achievement as a result of the together with any incremental fair modification, the compensation value at the modification date. expense is based on the fair value of the modified award at the modification date. Grant date fair value of the original award is not recognized.ConvergenceNo significant convergence activities areunderway or planned for share-based payments. US GAAP vs. IFRS The basics 37
    • Employee benefits other thanshare-based paymentsSimilarities source of guidance for employee benefits other than share-based payments. Under bothMultiple standards apply under US GAAP, GAAPs, the periodic postretirement benefitincluding FAS 87 Employers’ Accounting for cost under defined contribution plans is basedPensions, FAS 88 Employers’ Accounting on the contribution due from the employerfor Settlements and Curtailments of Defined in each period. The accounting for definedBenefit Pension Plans and for Termination benefit plans has many similarities as well. TheBenefits, FAS 106 Employers’ Accounting defined benefit obligation is the present valuefor Postretirement Benefits Other than of benefits that have accrued to employeesPensions, FAS 112 Employers’ Accounting for through services rendered to that date,Postemployment Benefits, FAS 132 (Revised) based on actuarial methods of calculation.Employers’ Disclosures about Pensions and Additionally, both US GAAP and IFRS provideOther Postretirement Benefits, and FAS 158 for certain smoothing mechanisms inEmployers’ Accounting for Defined Benefit calculating the period pension cost.Pension and Other Postretirement Plans. UnderIFRS, IAS 19 Employee Benefits is the principalSignificant differences US GAAP IFRSActuarial method used Different methods are required Projected unit credit method is requiredfor defined benefit plans dependent on the characteristics of the in all cases. benefit calculation of the plan.Valuation of defined Valued at “market-related” value (which Valued at fair value as of the balancebenefit plan assets is either fair value or a calculated value sheet date. that smooths the effect of short-term market fluctuations over five years) within three months of the balance sheet date. (Note: for fiscal years ending after December 15, 2008, the valuation must be done as of the balance sheet date.)Treatment of actuarial May be recognized in income statement May be recognized in the incomegains and losses for as they occur or deferred through statement as they occur or deferredannual pension cost either a corridor approach or other through a corridor approach. If rational approach applied consistently immediately recognized, can elect to from period to period. present in either the income statement or other comprehensive income.Amortization of deferred Over the average remaining service Over the average remaining serviceactuarial gains and period of active employees or over the period (that is, immediately for inactivelosses remaining life expectancy of inactive employees). employees.38 US GAAP vs. IFRS The basics
    • US GAAP IFRSAmortization of prior Over the future service lives of Over the average remaining serviceservice costs employees or, for inactive employees, period; immediate recognition if over the remaining life expectancy of already vested. those participants.Recognition of plan Must recognize in balance sheet Must recognize a liability in the balanceasset or liability in the the over/under funded status as the sheet equal to the present value of thebalance sheet difference between the fair value of defined benefit obligation plus or minus plan assets and the benefit obligation. any actuarial gains and losses not yet Benefit obligation is the PBO for recognized, minus unrecognized prior pension plans, and APBO for any other service costs, minus the fair value of postretirement plans. any plan assets. (Note: If this amount is negative, the resulting asset is subject to a “ceiling test.”) No portion of a plan asset can be Balance sheet classification not classified as current; current portion addressed in IAS 19. of net postretirement liability is the amount expected to be paid in the next 12 months.Settlements and Settlement gain or loss recognized Gain or loss from settlement orcurtailments when obligation is settled. Curtailment curtailment recognized when it occurs. losses recognized when curtailment is probable of occurring, while curtailment gains are recognized when the curtailment occurs.Multi-employer pension Accounted for similar to a defined Plan is accounted for as either a definedplans contribution plan. contribution or defined benefit plan based on the terms (contractual and constructive) of the plan. If a defined benefit plan, must account for the proportionate share of the plan similar to any other defined benefit plan unless insufficient information is available.Convergence model such as the smoothing and deferral mechanisms in the current model. The IASBThe FASB and the IASB have agreed to a issued a discussion paper in March 2008, aslong-term convergence project that will the first step of the IASB project, addressingcomprehensively challenge the accounting a limited number of topics in this area, and isfor postretirement benefits. This project is expecting to issue an exposure draft in 2009.expected to address many of the commonconcerns with the current accounting US GAAP vs. IFRS The basics 39
    • Earnings per shareSimilarities and diluted EPS on the face of the income statement, and both use the treasury stockEntities whose ordinary shares are publicly method for determining the effects of stocktraded, or that are in the process of issuing options and warrants on the diluted EPSsuch shares in the public markets, must calculation. Both GAAPs use similar methodsdisclose earnings per share (EPS) information of calculating EPS, although there are a fewpursuant to FAS 128 and IAS 33 (both entitled detailed application differences.Earnings Per Share, which are substantiallythe same). Both require presentation of basicSignificant differences US GAAP IFRSContracts that may be Presumption that such contracts will Such contracts are always assumed tosettled in shares or cash be settled in shares unless evidence is be settled in shares. provided to the contrary.Calculation of year-to-date The number of incremental shares The number of incremental shares isdiluted EPS for options is computed using a year-to-date computed as if the entire year-to-dateand warrants using the weighted average of the number of period were “the period” (that is, dotreasury stock method incremental shares included in each not average the current period withand for contingently quarterly calculation. each of the prior periods).issuable sharesTreatment of contingently Potentially issuable shares are included Potentially issuable shares areconvertible debt in diluted EPS using the “if-converted” considered “contingently issuable” method if one or more contingencies and are included in diluted EPS using relate to the entity’s share price. the if-converted method only if the contingencies are satisfied at the end of the reporting period.Convergence earnings, would no longer be included in diluted EPS. Other issues to be converged include theBoth Boards are jointly working on a short-term effect of options and warrants with a nominalconvergence project to resolve the differences exercise price on basic EPS (including thein the standards, with both Boards issuing two-class method), and modifications of theexposure drafts in August 2008 and planning treasury stock method to (1) require the useto issue a final standard in the second half of of the end-of-period share price in calculating2009. The Boards have tentatively decided to the shares hypothetically repurchased ratheradopt the approaches used by IFRS to eliminate than the average share price for the periodthe significant differences noted above, with and (2) for liabilities that are not remeasuredthe exception of the treatment of contingently at fair value, including the carrying amount ofconvertible debt. Additionally, instruments that the liability within the assumed proceeds usedmay be settled in cash or shares are classified to hypothetically repurchase shares under theas an asset or liability, and are measured at fair treasury stock method.value with changes in fair value recognized in40 US GAAP vs. IFRS The basics
    • Segment reportingSimilarities entities with public reporting requirements and are based on a “management approach” inThe requirements for segment reporting identifying the reportable segments. These twounder FAS 131 Disclosures about Segments standards are largely converged, and only limitedof an Enterprise and Related Information and differences exist between the two GAAPs.IFRS 8 Operating Segments, are applicable toSignificant differences US GAAP IFRSDetermination of Entities with a “matrix” form of All entities determine segmentssegments organization (that is, business based on the management approach, components are managed in more regardless of form of organization. than one way and the CODM reviews all of the information provided) must determine segments based on products and services.Disclosure requirements Entities are not required to disclose If regularly reported to the CODM, segment liabilities even if reported to segment liabilities are a required the CODM. disclosure.ConvergenceNo further convergence is planned at this time. US GAAP vs. IFRS The basics 41
    • Subsequent eventsSimilarities existing at the balance sheet date usually results in an adjustment to the financialDespite differences in terminology, the statements. If the event occurring after theaccounting for subsequent events under balance sheet date but before the financialAU Section 560 Subsequent Events of the statements are issued relates to conditions thatAICPA Codification of Statements on Auditing arose subsequent to the balance sheet date,Standards and IAS 10 Events after the Balance the financial statements are not adjusted, butSheet Date is largely similar. An event that disclosure may be necessary in order to keepduring the subsequent events period that the financial statements from being misleading.provides additional evidence about conditionsSignificant differences US GAAP IFRSDate through which Subsequent events are evaluated Subsequent events are evaluatedsubsequent events must through the date that the financial through the date that the financialbe evaluated statements are issued. For public statements are “authorized for issue.” entities, this is the date that the financial Depending on an entity’s corporate statements are filed with the SEC. governance structure and statutory requirements, authorization may come from management or a board of directors. Most US entities do not have a similar requirement.Stock dividends declared Financial statements are adjusted for Financial statements are not adjustedafter balance sheet date a stock dividend declared after the for a stock dividend declared after the balance sheet date. balance sheet date.Short-term loans Short-term loans are classified as long- Short–term loans refinanced afterrefinanced with long- term if the entity intends to refinance the balance sheet date may not beterm loans after balance the loan on a long-term basis and, prior reclassified to long-term liabilities.sheet date to issuing the financial statements, the entity can demonstrate an ability to refinance the loan.ConvergenceNo convergence activities are planned at thistime, although the FASB recently issued anexposure draft with the objective of incorporatinginto FASB literature the current guidanceincluded in AU 560, with certain modifications.42 US GAAP vs. IFRS The basics
    • Related partiesSimilarities Significant Differences andBoth FAS 57 and IAS 24 (both entitled Related ConvergenceParty Disclosures) have a similar reporting There are no significant differences betweenobjective: to make financial statement users the two standards, nor are there anyaware of the effect of related party transactions convergence initiatives.on the financial statements. The relatedparty definitions are broadly similar, andboth standards require that the nature of therelationship, a description of the transaction,and the amounts involved (includingoutstanding balances) be disclosed for relatedparty transactions. Neither standard containsany measurement or recognition requirementsfor related party transactions. FAS 57 doesnot require disclosure of compensation of keymanagement personnel as IAS 24 does, but thefinancial statement disclosure requirements ofIAS 24 are similar to those required by the SECoutside the financial statements. US GAAP vs. IFRS The basics 43
    • Appendix — The evolution of IFRSThis appendix provides a high level overview of key milestones in the evolution of internationalaccounting standards.Phase I — 2001 and prior• 1973: International Accounting Standards • 1999: IASC Board approved a Committee (IASC) formed. The IASC restructuring that resulted in the current was founded to formulate and publish International Accounting Standards International Accounting Standards (IAS) that Board (IASB). The newly constituted would improve financial reporting and that IASB structure comprises: (1) the IASC could be accepted worldwide. In keeping with Foundation, an independent organization the original view that the IASC’s function was with 22 trustees who appoint the IASB to prohibit undesirable accounting practices, members, exercise oversight, and raise the the original IAS permitted several alternative funds needed, (2) the IASB (Board) which has accounting treatments. 12 full-time, independent board members and two part-time board members with• 1994: IOSCO (International Organization sole responsibility for setting accounting of Securities Commissions) completed its standards, (3) the Standards Advisory review of then current IASC standards and Council, and (4) the International Financial communicated its findings to the IASC. Reporting Interpretations Committee (IFRIC) The review identified areas that required (replacing the SIC) and is mandated with improvement before IOSCO could consider interpreting existing IAS and IFRS standards, recommending IAS for use in cross-border and providing timely guidance on matters not listings and offerings. addressed by current standards.• 1994: Formation of IASC Advisory Council • 2000: IOSCO recommended that approved to provide oversight to the IASC multinational issuers be allowed to use and manage its finances. IAS in cross-border offerings and listings.• 1995: IASC developed its Core Standards • April 2001: IASB assumed standard- Work Program. IOSCO’s Technical setting responsibility from the IASC. Committee agreed that the Work Program The IASB met with representatives from would result, upon successful completion, eight national standard-setting bodies to in IAS comprising a comprehensive begin coordinating agendas and discussing core set of standards. The European convergence, and adopted the existing IAS Commission (EC) supported this agreement standards and SIC Interpretations. between IASC and IOSCO and “associated itself” with the work of the IASC towards • February 2002: IFRIC assumed a broader international harmonization of responsibility for interpretation of IFRS. accounting standards.• 1997: Standing Interpretations Committee (SIC) established to provide interpretation of IAS.44 US GAAP vs. IFRS The basics
    • Phase II — 2002 to 2005• July 2002: EC required EU-listed • April 2005: SEC published the companies to prepare their consolidated “Roadmap.” An article published by then financial statements in accordance with SEC Chief Accountant discussed the possible IFRS as endorsed by the EC, generally elimination of the US GAAP reconciliation from 2005 onward. This was a critically for foreign private issuers that use IFRS. The important milestone that acted as a primary Roadmap laid out a series of milestones, driver behind the expanded use of IFRS. which if achieved, would result in the elimination of the US GAAP reconciliation by• September 2002: Norwalk Agreement 2009, if not sooner. executed between the FASB and the IASB. A “best efforts” convergence approach was documented in a Memorandum of Understanding in which the Boards agreed to use best efforts to make their existing financial reporting standards fully compatible as soon as practicable and to coordinate future work programs.• December 2004: EC issued its Transparency Directive. This directive would require non-EU companies with listings on an EU exchange to use IFRS unless the Committee of European Securities Regulators (CESR) determined that the national GAAP was “equivalent” to IFRS. Although CESR advised in 2005 that US GAAP was “equivalent” subject to certain additional disclosure requirements, the final decision as to US GAAP equivalency, and what additional disclosures, if any, will be required, has not been reached. US GAAP vs. IFRS The basics The basics 45
    • Phase III — 2006 to present• February 2006: FASB and IASB published the first time in 2005, the SEC determined a Memorandum of Understanding (MOU). that the milestones on its 2005 Roadmap The MOU reaffirmed the Boards’ shared had been sufficiently met to eliminate the objective to develop high quality, common reconciliation requirement. accounting standards for use in the world’s • Mid-2007, continuing into 2008: SEC capital markets, and further elaborated on explores the future use of IFRS by US the Norwalk Agreement. The Boards would companies. Also in August 2007, the SEC proceed along two tracks for convergence: issued a Concept Release asking the public to (1) a series of short-term standard setting comment on the possible use of IFRS by US projects designed to eliminate major domestic registrants. In December 2007 and differences in focused areas, and (2) the August 2008, the SEC held three additional development of new common standards roundtables on the topic of IFRS, with the when accounting practices under both roundtables focusing on the potential use GAAPs are regarded as candidates for of IFRS for US issuers. Further, in August improvement. 2008 the SEC approved for public issuance• August 2006: CESR/SEC published a an updated Roadmap which anticipates joint work plan. The regulators agreed that mandatory reporting under IFRS beginning in issuer-specific matters could be shared 2014, 2015 or 2016, depending on the size between the regulators, following set of the company. protocols, and that their regular reviews of • Looking ahead: The future remains uncertain, issuer filings would be used to identify IFRS but momentum continues to build for a and US GAAP areas that raise questions single set of high quality global standards. in terms of high-quality and consistent The possible use of IFRS by US domestic application. The plan also provides for the registrants is a topic that remains active on exchange of technological information to the SEC’s agenda. The updated proposed promote the modernization of financial Roadmap identifies certain milestones to be reporting and disclosure. Finally, the staff of considered in determining whether reporting both regulators agreed to dialogue on risk under IFRS should be mandated for US management practices. companies, and calls for future SEC action in• November 2007: the SEC eliminates 2011 to make that assessment. the US GAAP reconciliation for foreign private issuers. After hosting a roundtable discussion in March 2007 to discuss the effects the acceptance of IFRS would have on investors, issuers, and capital raising in the US capital markets and issuing a summary of its observations regarding foreign private issuers that adopted IFRS for4646 US GAAP vs. IFRS The basics The basics
    • US GAAP vs. IFRS The basics 47
    • US GAAP vs. IFRS The basics 48
    • IFRS resources Ernst & Young Online A private, global internet site for clients that providesErnst & Young offers a variety of online resources continuous access to important International GAAP®that provide more detail about IFRS as well as things information, including:to consider as you research the potential impact ofIFRS on your company. Global Accounting & Auditing Information Tool (GAAIT) A multinational GAAP research tool that includes theey.com/ifrs following subscription options:Ernst & Young’s global website contains a variety of free • International GAAP® online — includes Ernst &resources, including: Young’s International GAAP® book, illustrative• Our five-step approach to IFRS conversion — diagnosis, financial statements and disclosure checklists, all design and planning, solution development, of the official IASB standards, exposure drafts and implementation, and post-implementation review. discussion papers, and full sets of IFRS reporting entities’ annual reports and accounts.• A variety of tools and publications: • International GAAP and GAAS    ontains IFRS, —c • IFRS outlook — access the online version and International Auditing Standards issued by the IFAC archived issues of our monthly client newsletter. and Ernst & Young commentary, guidance and tools. • Technical publications — including a variety of • International GAAP® Disclosure Checklist    hows all —s publications focused on specific standards the disclosures and presentation requirements under and industries. IFRS, along with relevant guidance on the scope and • International GAAP® Illustrative Financial interpretation of certain disclosure requirements. Statements    hese publications include the —t Updated annually. consolidated financial statements for a fictitious • IFRS Web-based Learning — includes 24 modules manufacturing company, bank and insurance that address basic accounting concepts and company. The statements are updated annually. knowledge of IFRS. The modules represent 52 • Sector-specific guidance, including Industry 360: hours of baseline IFRS training. IFRS, an overview of our industry-related IFRS International GAAP® & GAAS Digest (Free) thought leadership • Continuous coverage of developments from the IASB• From here you can also link to several country-specific and IFAC. IFRS pages, including Canada and the United States, and locate information about free web-based IFRS • Ernst & Young Insights. training and our Thought Center Webcast series. International GAAP® This comprehensive book from Ernst & Young is updated annually and provides definitive and practical guidance for understanding and interpreting IFRS on a globally consistent basis.Please contact your local Ernst & Young representative for information about any of these resources.49 US GAAP vs. IFRS The basics
    • Ernst & Young LLPAssurance | Tax | Transactions | AdvisoryAbout Ernst & YoungErnst & Young is a global leader inassurance, tax, transaction and advisoryservices. Worldwide, our 135,000 peopleare united by our shared values and anunwavering commitment to quality. Wemake a difference by helping our people,our clients and our wider communitiesachieve their potential.For more information, please visitwww.ey.com.Ernst & Young refers to the globalorganization of member firms of Ernst &Young Global Limited, each of which is aseparate legal entity. Ernst & Young GlobalLimited, a UK company limited by guarantee,does not provide services to clients.About Ernst & Young’s InternationalFinancial Reporting Standards GroupThe move to International FinancialReporting Standards (IFRS) is the singlemost important initiative in the financialreporting world, the impact of whichstretches far beyond accounting to affectevery key decision you make, not just howyou report it. We have developed the globalresources — people and knowledge — tosupport our client teams. And we work togive you the benefit of our broad sectorexperience, our deep subject matterknowledge and the latest insights from ourwork worldwide. It’s how Ernst & Youngmakes a difference.© 2009 Ernst & Young LLP.All Rights Reserved.SCORE No. BB1692 Ernst & Young is committed to minimizing its impact on the environment. This document was printed on paper that contains from 10% to 100% post-consumer material.This publication contains information insummary form and is therefore intended forgeneral guidance only. It is not intended to be asubstitute for detailed research or the exercise ofprofessional judgment. Neither Ernst & Young LLPnor any other member of the global Ernst & Youngorganization can accept any responsibility forloss occasioned to any person acting or refrainingfrom action as a result of any material in thispublication. On any specific matter, referenceshould be made to the appropriate advisor.