EnterprizeERP - Finance Transformation - IfRS Series US GAAP and IFRS - Series-1

Differences between

US GAAP and IFRS – Series 1

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Need for International standards

• Growth of Capital markets

• Mobility of capital

• FTSE (London Index) – 55% foreign owned

• 10 years ago US owned more than 50% of the world’s equity today nearing 30%

• China – holding US Bonds

• Need to reduce costs of consolidation

• Level the playing field – “accounting arbitrage”


Bilingual Terminology

IFRS

1. Shares

2. Stock

3. Reserves

4. Associate

5. Provision

6. Scheme

7. True and fair

8. Probable=more likely than not

9. FV- willing buyer/willing seller

U.S. GAAP

1. Stock

2. Inventory

3. Equity

4. Investee

5. Accrual

6. Plan

7. Presents fairly

8. Probable= likely

9. FV- exit cost


Overview of Similarities and Differences


On a macro Basis- More Similarities than Differences

• Both accrual based

• Both assume “going concern”

• Materiality

• Basic F/S are comparable (although not identical)

• Definitions of assets, liabilities, owner’s equity, revenues, expenses comprehensive income, etc. are similar

• Both require impairment tests of assets under similar circumstances


On a macro Basis- More Similarities than Differences

• Similar Concepts for – Leases (capital/finance and operating)

– Deferred taxes (balance sheet approach)

– Subsequent events

– Error corrections and revisions of estimates

– Consolidations

– Business combinations • Determining acquirer

• Purchase price allocations

• Transaction costs

• Goodwill


Why do Accounting Rules Differ?

• US GAAP written primarily for US based companies and US investors

• IFRS written for companies and investors in all countries and cultures

• US GAAP significantly influenced by US: – Legal system

– Taxation system

– Economy/Inflation

– National Pride

– US Regulators (SEC)


Differences

• The differences tend to arise in the details with respect to:

– Scope and depth of coverage

– Philosophical differences in approach to standards (rules based versus principles based)

– Application and interpretation of how accounting theory should be applied


Differences

• Depending on how the number of differences are measured and interpreted, there are approximately 30 to 300+ differences between US GAAP and IFRS

• It is difficult to assess whether a difference is a “major” difference or a “minor” difference because a seemingly minor difference can have a significant impact on the F/S


Why is rules v. principles difference so critical?

• Example: Lease accounting • Concept of capital/finance lease and operating

lease is identical (does risks and rewards of ownership pass to the lessee?)

• US GAAP has 4 criteria to determine if the lease is a capital lease (meeting any one qualifies as capital lease) – Transfer of title at end of lease – Bargain purchase option – Lease term >= 75% of economic life of asset – Future minimum lease payments >= 90% of the fair

value of the lease

• The last 2 criteria creates Bright lines


Why is rules v. principles difference so critical?

• Example: Lease accounting

• IFRS has similar criteria to determine if the lease is a capital lease (meeting any one qualifies as capital lease)

– Transfer of title at end of lease

– Bargain purchase option

– Lease term >= 75% of economic life of asset

– Future minimum lease payments >= 90% of the fair value of the lease

Is for the major part

Are at least substantially all


Effects the depth of Coverage

• Rules based approach may require additional rules and interpretations for different facts and circumstances that were not contemplated in the original rule

• The original FAS 13 (prior to codification) has been amended or interpreted over 60 times by EITFs, FINs, FTBs and other FAS standards.

• A principles based framework will generally require less volume and still be comprehensive


IFRS addresses areas NOT specifically addressed by US GAAP

• IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

• IAS 29 Hyperinflationary Economics

• IAS 34 Interim financial reporting (addressed in SEC rules)

• IAS 41 Agriculture

• IAS 40 Investment Properties

•


Financial Statement Presentation


Complete set of IFRS Financial Statements (IAS 1.10)

• Statement of financial position • Statement of comprehensive income • Statement of changes in Equity • Statement of cash Flows • Notes – significant accounting policies and explanatory

notes • Statement of financial position as at the beginning of the

earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements

• Comparative year (at least 2 years required) • Cross reference line items to notes, where practical


Balance Sheet – Minimum Lines

• Plant, property and equipment

• Investment property

• Intangible assets

• Financial assets

• Investments (equity method)

• Biological assets

• Inventories

• Trade and other receivables

• Cash and equivalents

• Non-current assets held for sale

• Trade and other payables

• Provisions

• Financial liabilities

• Current tax liabilities/assets

• Deferred tax liabilities/assets

• Minority Interests (within equity)

• Issued capital and reserves attributable to equity of the parent

• Liabilities of disposal group


Statement of Comprehensive Income

• Includes: – Profit or loss for the period, plus/minus

– Other comprehensive income recognized in that period

• Components of other comprehensive income include: – Changes in revaluation surplus

– Actuarial gains and losses

– Gains and losses arising from translating the FS of a foreign operation

– Gains and losses on re-measuring available-for-sale financial assets

– Effective portion of gains and losses on hedging instruments in a cash flow hedge


Alternative Presentation

• Statement of Income: – Must be presented immediately before the Statement of

comprehensive income – Profit or loss for the period

• Statement of comprehensive income include: – Total profit/loss for the period plus/minus: – Changes in revaluation surplus – Actuarial gains and losses – Gains and losses arising from translating the FS of a foreign

operation – Gains and losses on remeasuring available-for-sale

financial assets – Effective portion of gains and losses on hedging

instruments in a cash flow hedge


IAS 7 Statement of Cash Flow Differences in Classification

Item IFRS US GAAP

Interest paid Op or Fin Operating

Interest received Op or Inv Operating

Dividends paid Op or Fin Financing

Dividends received Op or Inv Operating


Statement of Changes in Equity

• Transactions with equity holders, showing separately distributions to equity holders

• Reconciliation of retained earnings balances over the period

• Reconciliation of each class of contributed equity and each reserve, separately disclosing each change

• Include dividends and per share amounts either in the statement or in the notes


Notes to the Financial Statements

• Notes should:

– Present basis of preparation of the FS and specific accounting principles selected and applied

– Disclose information required by IFRS that is not presented elsewhere in the FS

– Provide additional information which is necessary for a fair presentation

Comment – Principle-based IFRS statements generally has more notes to explain the basis of accounting, policies etc.


Key Disclosure Requirements

• Qualitative information re objectives, policies and processes for managing capital

• Quantitative data about what the entity manages as capital

– Changes from period to period

• Whether the entity complies with externally imposed capital requirements

– If not in compliance, the consequences of non-compliance

EnterprizeERP - Finance Transformation - IfRS Series US GAAP and IFRS - Series-1

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