IFRS Financial Statements Position Paper

The purpose of this assignment is to increase your knowledge of IFRS. You will review a PowerPoint

presentation and type responses to the questions asked within one MS Word file. Use the

PowerPoint presentation to help you answer the questions below. You can also use the internet to do

further research if you choose.

This is an analytical skills level assignment. Be sure to provide a higher level answer. Use facts to

support your opinion and give examples to prove your point.

1. View the PowerPoint titled "Financial_statement_slides". (Read the entire PPT.)

2. Write position paper regarding financial statements under IFRS.

a. Which set of financial statements do you believe will be most informative to the public

investor? Why?

b. What concerns do you have about the proposed changes in presentation under IFRS?

Give specific examples.

c. Which set of standards do you agree with more? IFRS or US GAAP and why? Be

specific. (Do not simply choose US GAAP because that is what you are most familiar

with.)

Your position paper should be written following the Accounting Program formatting rules for a

professional memo and should be two pages in length.

Financial statements Executive summary In both frameworks, the components of a complete set of financial statements are the same except that IFRS (and the SEC) requires the statement of changes in equity while US GAAP permits it. In both frameworks, the financial statement presentation is very similar. Differences between the two tend to arise in the level of specific guidance. Significant differences are as follows: Balance sheet (statement of financial position): IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have more detailed requirements than IFRS. Income statement: IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have more detailed requirements than IFRS. IFRS prohibits extraordinary items unlike US GAAP. IFRS does not define certain key income statement measures. While US GAAP does not define all these measures either, SEC regulations provide requirements and limitations on the ability of public companies to disclose non-GAAP measures. Financial statements Academic Resource Center Page 2 Executive summary Financial statement presentation differences (continued): Statement of comprehensive income: Statement of cash flows: IFRS permits comprehensive income to be presented in one statement of comprehensive income or in two consecutive separate statements consisting of a separate income statement and a statement of comprehensive income similar to US GAAP. IFRS does not permit the components of comprehensive income to be presented in the statement of changes in equity as currently permitted by US GAAP. However, this alternative is being eliminated in an updated standard that is expected to be issued in the first quarter of 2011, with an effective date for fiscal years beginning after December 15, 2011 for US GAAP and for fiscal years beginning on or after January 1, 2012 for IFRS. IFRS permits a choice of alternatives for the classification of interest and dividends while US GAAP does not. Notes to the financial statements: Using IFRS, most companies will experience additional financial disclosure requirements compared to US GAAP. Financial statements Academic Resource Center Page 3 Primary pronouncements US GAAP ASC 205, Presentation of Financial Statements ASC 210, Balance Sheet ASC 215, Statement of Shareholder Equity ASC 220, Comprehensive Income ASC 225, Income Statement ASC 230, Statement of Cash Flows ASC 235, Notes to Financial Statements ASC 250, Accounting Changes and Error Corrections ASC 260, Earnings Per Share ASC 505, Equity Financial statements Academic Resource Center IFRS IAS 1, Presentation of Financial Statements IAS 7, Statement of Cash Flows IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 18, Revenue IAS 33, Earnings per Share IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations Page 4 Progress on convergence Phase A Addresses what constitutes a complete set of financial statements and the requirements for presenting comparative information. The FASB and IASB completed deliberations on Phase A in 2005. In 2007, the IASB published a revised IAS 1, Presentation of Financial Statements. The revised IAS 1 was effective January 1, 2009 and modified the requirements of the Statement of Recognized Income and Expense (SORIE) and brought it largely in line with ASC 220, Reporting Comprehensive Income. The FASB did not issue an exposure draft on Phase A and has decided to expose its Phase A decisions along with its Phase B decisions. Financial statements Academic Resource Center Page 5 Progress on convergence Phase B Addresses the more fundamental issues for presentation of information on the face of the financial statements, and may result in significant changes. Phase B topics include: Developing principles for the aggregation and disaggregation of information. Defining totals and subtotals to be reported in each financial statement. Organizing financial statements such that each separate statement integrates with one another to clearly show its relationship to the statement of cash flows. The Boards issued a Discussion Paper, Preliminary Views on Financial Statement Presentation, on October 16, 2008. The comment period ended April 14, 2009 and the Boards are developing an ED for a proposed standard on financial statement presentation. In October 2010, the Boards acknowledged that they do not currently have the capacity to issue an ED and expect to return to this project after June 2011. Financial statements Academic Resource Center Page 6 Progress on convergence Phase B (continued) and Phase C Phase B (continued) - The Boards decided to consider as a separate matter the presentation of other comprehensive income (OCI). An ED, Presentation of Items of Other Comprehensive Income-Proposed amendments to IAS 1, was issued in May 2010. Public comments were due by September 30, 2010. This is a joint project with FASB who issued an ED, Statement of Comprehensive Income Proposed Update ,in May 2010. The ED would have required companies to present one continuous statement of comprehensive income. However, respondents strongly opposed the use of one statement. As a result, at a joint meeting in November 2010, the Boards decided to allow companies the option to present net income and OCI either in one continuous statement of comprehensive income or in two separate consecutive statements. Final updates to the standards are expected to be issued in the first quarter of 2011, with an effective date for fiscal years beginning after December 15, 2011 for US GAAP and for fiscal years beginning on or after January 1, 2012 for IFRS. Phase C will address the presentation and display of interim financial statements for both US GAAP and IFRS using IAS 34. This phase of the Financial Statement Presentation project has not commenced, as the Boards plan to begin work on Phase C in the latter stages of Phase B. Financial statements Academic Resource Center Page 7 Financial statement presentation General US GAAP IFRS A complete set of financial statements includes the balance sheet, statement of comprehensive income, statement of cash flows and accompanying notes to the financial statements. A statement in changes in equity is not required but is almost always presented in practice. A complete set of financial statements includes the statement of financial position (balance sheet), statement of comprehensive income, statement of cash flows, statement of changes in equity and accompanying notes to the financial statements. Convergence The Boards have affirmed that the ED will require a statement of changes in equity, thereby conforming both frameworks. Financial statements Academic Resource Center Page 8 Financial statement presentation General US GAAP IFRS Does not require a third balance sheet (and related notes) as of the beginning of the earliest comparative period presented when an entity restates its financial statements. Does require a third balance sheet (and related notes) as of the beginning of the earliest comparative period presented when an entity restates its financial statements. Convergence The FASB decided in the ED to make a requirement for a third balance sheet similar to IFRS, thereby conforming both frameworks. Financial statements Academic Resource Center Page 9 Financial statement presentation General US GAAP IFRS Prepared on an accrual basis except for the statement of cash flows. Similar Includes concepts of materiality and consistency for the preparer to follow. Similar Financial statements Academic Resource Center Page 10 Financial statement presentation Comparative financial information Financial statements Academic Resource Center IFRS requires comparative information for all amounts reported in the financial statements. US GAAP allows a singleyear presentation in certain circumstances. SEC rules require a twoyear balance sheet presentation and three-year presentation for all other financial statements. Page 11 Statement of financial position presentation Classification and liquidity Financial statements Academic Resource Center IFRS requires a classified balance sheet, except when liquidity presentation provides more reliable and relevant information. US GAAP allows the use of either a classified or unclassified balance sheet. Page 12 Statement of financial position presentation Minimum accounts US GAAP IFRS No minimum account presentation requirements. Requires a minimum presentation of certain asset, liability and equity accounts. SEC rules have more rigorous presentation criteria. Financial statements Academic Resource Center Page 13 Statement of financial position presentation Minimum accounts The minimum accounts to be presented on the statement of financial position as defined by IAS 1.54 are: a) Property, plant and equipment b) Investment property c) Intangible assets d) Financial assets (excluding amounts shown under (e), (h) and (i)) Investments accounted for using the equity method e) f) Biological assets g) Inventories h) Trade and other receivables i) Cash and cash equivalents Total of assets classified as held for sale and assets included in disposal groups classified as held for sale per IFRS 5 j) Financial statements Academic Resource Center Page 14 Statement of financial position Typical IFRS order Although no particular format is required, IFRS generally presents accounts in the following order (representative of UK legacy requirements): Non-current assets Current assets Equity Non-current liabilities Current liabilities US GAAP presents current assets and liabilities before non-current. Financial statements Academic Resource Center Page 15 Statement of financial position presentation Cash and cash equivalents US GAAP IFRS ASC 210-20 does not address bank overdrafts and they are generally reported as a liability in the balance sheet. IAS 7 makes an explicit distinction between bank borrowings and bank overdrafts. Overdrafts may be classified as a component of cash and cash equivalents if considered to be an integral part of an enterprises' cash management. Convergence The Boards have affirmed that the ED will specify that overdrafts should be presented in the debt category of the financing section of the statement of financial position, thereby conforming both frameworks. Financial statements Academic Resource Center Page 16 Statement of financial position presentation Deferred tax assets and liabilities Financial statements Academic Resource Center IFRS prohibits deferred tax assets or liabilities to be classified as current. US GAAP requires classification as current or non-current based on the nature of the underlying asset or liability. Page 17 Statement of financial position presentation Debt classification under default for covenant violation US GAAP IFRS Allows debt to retain non-current classification as of the balance sheet date if a lender waives or modifies the related debt covenant violation on or after the balance sheet date but prior to the issuance of the financial statements. Requires that a lender must waive or modify a debt covenant violation prior to or at the balance sheet date in order for the related debt to be classified as non-current at the balance sheet date. Financial statements Academic Resource Center Page 18 Debt classification under default for covenant violation example Example 1: Riley's Roosters, Inc. (RRI) has a December 31 year end. As of June 30, 2010, RRI obtains a $100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In December 2010, RRI spends too much of its cash on its holiday party and incurs a debt covenant violation as of December 31, 2010. As a result of the violation, the loan becomes due within 30 days. At this time, RRI asks the bank to waive the violation. RRI tells the bank it will recoup some of its cash by selling its leftover holiday party favors on eBay. On January 5, 2011, the bank agrees to waive the violation. RRI issues its financial statements on January 25, 2011. How should this loan be classified (current or non-current) on RRI's balance sheet as of December 31, 2010 using IFRS and US GAAP? Financial statements Academic Resource Center Page 19 Debt classification under default for covenant violation example Example 1 (solution): Balance sheet date IFRS Fiscal year Post-fiscal year and prior to issuance of financials US GAAP Fiscal year Post-fiscal year and prior to issuance of financials Solution: As the bank modified the debt covenant violation subsequent to RRI's balance sheet date of December 31, 2010 but prior to the financial statement issuance date of January 25, 2011, the debt is classified as current as of the balance sheet date using IFRS but non-current for US GAAP. See the timeline noted above showing the allowable period (in yellow) for a lender to waive or modify a debt covenant violation to retain non-current classification under IFRS and US GAAP. Financial statements Academic Resource Center Page 20 Statement of income and statement of comprehensive income presentation US GAAP IFRS Permits comprehensive income to be presented one of the following ways: One statement of comprehensive income. Two statements of comprehensive income comprising a separate income statement and a statement of comprehensive income. In the statement of changes in equity. Permits comprehensive income to be presented in one of the following ways: One statement of comprehensive income. Two separate consecutive statements of comprehensive income comprising a separate income statement and a statement of comprehensive income. Convergence The US GAAP alternative for presentation in the statement of changes in equity is being eliminated in an updated standard that is expected to be issued in the first quarter of 2011, to be effective for fiscal years beginning after December 15, 2011. Financial statements Academic Resource Center Page 21 Statement of income and statement of comprehensive income presentation US GAAP IFRS No minimum information requirements. SEC rules have more rigorous presentation criteria. Requires certain minimum amount of information with order and description amended as necessary for nature and type of entity, industry, etc. Financial statements Academic Resource Center Page 22 Statement of income Minimum information required The minimum information to be presented on the income statement as defined by IAS 1.82: Revenue Finance costs Share of profit or loss of associates and joint ventures accounted for using the equity method A single amount comprising the total of: The post-tax profit or loss of discontinued operations The post-tax gain or loss recognized on the measurement of fair value less costs to sell or on the disposal of assets or disposal group(s) constituting the discontinued operations Tax expense Profit or loss Financial statements Academic Resource Center Page 23 Statement of comprehensive income - Minimum information required The minimum information to be presented on the statement of comprehensive income as defined by IAS 1.82: Each component of other comprehensive income classified by nature (excluding amounts presented in the next item) Share of the other comprehensive income of associates and joint ventures accounted for using the equity method Total comprehensive income Financial statements Academic Resource Center Page 24 Income statement presentation Key measures US GAAP IFRS Defines most key measures excluding operating profit: SEC regulations define certain measures and provide requirements and limitations on the ability of public companies to disclose non-GAAP measures. The traditional definition of operating profit is still used in practice. Does not define certain key measures: Using IFRS, management may use nonstandard measurements, creating diversity in practice regarding line items, headings and subtotals. Companies should expect a change in the pattern of earnings and financial position when comparisons to historical performance are made. This will require management to understand and explain business performance to shareholders and the marketplace. Financial statements Academic Resource Center Page 25 Income statement presentation Natural presentation IFRS allows either a natural expense classification presentation (by type such as salaries, depreciation, advertising, etc.) or functional classification expense presentation (by function as part of cost of sales, distribution, administration, etc.). Financial statements Academic Resource Center Page 26 Income statement presentation Functional presentation If functional presentation is used, specific disclosures in the notes are required about the nature of the expenses. US GAAP has no general requirement, but the SEC requires that expenses be based on the functional classification. Financial statements Academic Resource Center Page 27 Income statement presentation Extraordinary items US GAAP Extraordinary items are reported separately on the income statement. IFRS Prohibits extraordinary items, but major revenue and expense items are disclosed in the income statement or notes. Convergence Tentatively, the FASB has affirmed that an entity should not label a line item as extraordinary and that an entity should not show the effects of extraordinary events or transactions as a section or category in the statement of comprehensive income as currently required. The Boards have agreed that the ED will specify a requirement to present the effects of unusual or infrequently occurring events or transactions in the statement of comprehensive income and disclosure of related information in the notes to financial statements, thereby conforming both frameworks. Financial statements Academic Resource Center Page 28 Statement of changes in equity Using IFRS, components of comprehensive income are not permitted to be presented in a separate statement of changes in equity as allowed using US GAAP. However, this alternative is being eliminated in an updated standard that is expected to be issued in the first quarter of 2011, to be effective for fiscal years beginning after December 15, 2011 and for fiscal years beginning on or after January 1, 2012 for IFRS. IFRS uses the terminology \"other reserves\" and US GAAP uses \"accumulated other comprehensive income\" to identify items of income and expense that are required by other standards or interpretations to be recognized directly in equity. Financial statements Academic Resource Center Page 29 Statement of cash flows IFRS permits an entity to classify: Interest paid or received and dividends paid or received as operating cash flows or Interest and dividends received as investing cash flows and Interest and dividends paid as financing cash flows. Interest and dividends must be classified in a consistent manner from period to period. US GAAP requires that interest received and paid and dividends received be classified as operating cash flows and dividends paid are classified as financing cash flows. Financial statements Academic Resource Center Page 30 Summary chart of cash flow classification for interest and dividends Cash flow classification Transaction IFRS US GAAP Interest paid Operating or financing Operating Interest received Operating or investing Operating Dividends paid Operating or financing Financing Dividends received Operating or investing Operating Financial statements Academic Resource Center Page 31 Cash flow classification example Example 2: Carl Cash, CEO of Big Bucks, Inc. (BBI), goes to visit his accountant, Francis Flow, to discuss the classification of interest and dividends in BBI's statement of cash flows. BBI currently reports using US GAAP but is considering adopting IFRS. For its current fiscal year, BBI has interest received of $500, interest paid of $250, dividends received of $1,000 and dividends paid of $700. Carl asks Francis if BBI adopts IFRS, can BBI classify its interest and dividend amounts in the statement of cash flows consistent with their classification under US GAAP? Determine what Francis' response should be to Carl's question. Financial statements Academic Resource Center Page 32 Cash flow classification example Example 2 (solution): Cash flow classification Transaction IFRS US GAAP Interest paid Operating or financing Operating Interest received Operating or investing Operating Dividends paid Operating or financing Financing Dividends received Operating or investing Operating Yes, BBI can classify these amounts the same in the statement of cash flows using IFRS as US GAAP by classifying interest paid, interest received, and dividends received as \"operating\" and dividends paid as \"financing.\" Additionally, if BBI chooses to report using IFRS, interest and dividends must be classified in a consistent manner from period to period. Financial statements Academic Resource Center Page 33 Notes to the financial statements Using IFRS, most companies will experience additional financial disclosures. IFRS requires that an explicit statement be made in the notes that the financial statements comply with IFRS. Absence of such disclosure renders the entire financial statements non-compliant. Financial statements Academic Resource Center Page 34 Notes to the financial statements Cash and cash equivalents disclosures IFRS requires the disclosure of the components of cash and cash equivalents. US GAAP does not require this disclosure. Both US GAAP and IFRS requires policy disclosure of which items are treated as cash equivalents. US GAAP requires that cash and cash equivalents line item in the statement of cash flows equals the cash and cash equivalents in the statement of financial position. Under IFRS, the total of cash and cash equivalents presented in the statement of cash flows does not need to agree to a single line item in the balance sheet. Entities must disclose a reconciliation of the components of cash and cash equivalents to the amounts presented on the statement of financial position. Financial statements Academic Resource Center Page 35 Notes to the financial statements Departure from an accounting standard US GAAP Does not allow non-compliance with an accounting standard if, in the opinion of management, that compliance would be misleading. IFRS Allows non-compliance with an accounting standard if, in the opinion of management ,that compliance would be misleading. This is called \"The True and Fair Override\" and is extremely rare. If used, the rationale and effect on the financial statements must be disclosed. Financial statements Academic Resource Center Page 36 Ernst & Young LLP Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. 2011 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4081C. Financial statements Academic Resource Center Page 37 US GAAP versus IFRS The basics October 2016 Table of contents Introduction..................................................................... 2 Financial statement presentation ..................................... 4 Interim financial reporting................................................ 8 Consolidation, joint venture accounting and equity method investees/associates ........................................... 9 Business combinations................................................... 15 Inventory ....................................................................... 19 Long-lived assets ........................................................... 21 Intangible assets............................................................ 23 Impairment of long-lived assets, goodwill and intangible assets ............................................................ 25 Financial instruments..................................................... 28 Foreign currency matters .............................................. 35 Leases ........................................................................... 37 Income taxes ................................................................. 40 Provisions and contingencies ......................................... 43 Revenue recognition ...................................................... 45 Share-based payments................................................... 48 Employee benefits other than share-based payments ..... 51 Earnings per share ......................................................... 53 Segment reporting ......................................................... 55 Subsequent events ........................................................ 56 Related parties .............................................................. 58 Appendix The evolution of IFRS ................................... 59 Introduction Introduction Convergence in several important areas namely, revenue (mainly implementation of recently issued standards), leasing and financial instruments was a high priority on the agendas of both the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) at the beginning of 2016. However, in certain cases the Boards reached different conclusions during their deliberations. Therefore, even after those projects are complete, differences will continue to exist between US GAAP as promulgated by the FASB and International Financial Reporting Standards (IFRS) as promulgated by the IASB. In this guide, we provide an overview by accounting area of where the standards are similar and where differences exist. We believe that any discussion of this topic should not lose sight of the fact that the two sets of standards are generally more alike than different for most commonly encountered transactions, with IFRS being largely, but not entirely, grounded in the same basic principles as US GAAP. The general principles and conceptual framework are often the same or similar in both sets of standards, leading to similar accounting results. The existence of any differences and their materiality to an entity's financial statements depends on a variety of specific factors, including the nature of the entity, the details of the transactions, interpretation of the more general IFRS principles, industry practices and accounting policy elections where US GAAP and IFRS offer a choice. This guide focuses on differences most commonly found in present practice and, when applicable, provides an overview of how and when those differences are expected to converge. Key updates Our analysis generally reflects guidance effective in 2016 and finalized by the FASB and the IASB as of 31 May 2016; however, we have not included differences related to IFRS 9, Financial Instruments, Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, IFRS 15, Revenue from Contracts with customers, ASU 2014-09, Revenue from Contracts with Customers, IFRS 16, Leases, and ASU 2016-02, Leases, because of the delayed effective date of these standards. These standards will affect wide range of topics. For example, IFRS 15 and ASU 2014-09 will affect revenue from contracts with customers, sale of certain nonfinancial assets and capitalization of certain costs (e.g., advertisement costs), among other items. Our analysis does not include any guidance related to IFRS for Small and Medium-sized Entities (IFRS for SMEs) as well as Private Company Council (PCC) alternatives that are embedded within US GAAP. We will continue to update this publication periodically for new developments. * * * * * The EY \"US GAAP-IFRS Differences Identifier Tool\" provides a more in-depth review of differences between US GAAP and IFRS as of 31 May 2016. The Identifier Tool was developed as a resource for companies that need to analyze the numerous accounting decisions and changes inherent in a conversion to IFRS. Conversion is of course more than just an accounting exercise, and identifying accounting differences is only the first step in the process. Successfully converting to IFRS also entails ongoing project management, systems and process change analysis, tax US GAAP versus IFRS The basics | 2 Introduction considerations and a review of all company agreements that are based on financial data and measures. EY assurance, tax and advisory professionals are available to share their experiences and to assist companies in analyzing all aspects of the conversion process, from the earliest diagnostic stages through ultimate adoption of the international standards. To learn more about the Identifier Tool, please contact your local EY professional. October 2016 US GAAP versus IFRS The basics | 3 Financial statement presentation Financial statement presentation Similarities There are many similarities in US GAAP and IFRS guidance on financial statement presentation. Under both sets of standards, the components of a complete set of financial statements include: a statement of financial position, a statement of profit and loss (i.e., income statement) and a statement of comprehensive income (either a single continuous statement or two consecutive statements), a statement of cash flows and accompanying notes to the financial statements. Both standards also require the changes in shareholders' equity to be presented. However, US GAAP allows the changes in shareholders' equity to be presented in the notes to the financial statements while IFRS requires the changes in shareholders' equity to be presented as a separate statement. Further, both require that the financial statements be prepared on the accrual basis of accounting (with the exception of the cash flow statement) except for rare circumstances. IFRS and the Conceptual Framework in US GAAP have similar concepts regarding materiality and consistency that entities have to consider in preparing their financial statements. Differences between the two sets of standards tend to arise in the level of specific guidance provided. Significant differences US GAAP IFRS Financial periods required Generally, comparative financial statements are presented; however, a single year may be presented in certain circumstances. Public companies must 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. Comparative information must be disclosed with respect to the previous period for all amounts reported in the current period's financial statements. Layout of balance sheet and income statement No general requirement within US GAAP to prepare the balance sheet and income statement in accordance with a specific layout; however, public companies must follow the detailed requirements in Regulation S-X. IFRS does not prescribe a standard layout, but includes a list of minimum line items. These minimum line items are less prescriptive than the requirements in Regulation S-X. Balance sheet presentation of debt as current versus noncurrent Debt for which there has been a covenant violation may be presented as noncurrent if a lender agreement to waive the right to demand repayment for more than one year exists before the financial statements are issued or available to be issued. Debt associated with a covenant violation must be presented as current unless the lender agreement was reached prior to the balance sheet date. US GAAP versus IFRS The basics | 4 Financial statement presentation US GAAP IFRS Balance sheet Prior to the adoption of ASU 2015-17, All amounts classified as noncurrent in classification of deferred Balance Sheet Classification of the balance sheet. tax assets and liabilities Deferred Taxes, deferred taxes are classified as current or noncurrent, generally based on the nature of the related asset or liability. Following the adoption of ASU 2015-17, all deferred tax assets and liabilities will be classified as noncurrent. (ASU 2015-17 is effective for public business entities (PBEs) in annual periods beginning after 15 December 2016, and interim periods within those annual periods. For non-PBEs, it is effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018. Early adoption is permitted.) Income statement classification of expenses No general requirement within US GAAP to classify income statement items by function or nature. However, SEC registrants are generally required to present expenses based on function (e.g., cost of sales, administrative). Entities may present expenses based on either function or nature (e.g., salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes. Income statement extraordinary items criteria Prior to the adoption of ASU 2015-01, Prohibited. Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, the presentation of extraordinary items was restricted to items that are both unusual and infrequent. ASU 2015-01 which prohibits the presentation of extraordinary items, was issued in 2015. (ASU 2015-01 is effective in annual periods, and interim periods within those annual periods, beginning after 15 December 2015.) US GAAP versus IFRS The basics | 5 Financial statement presentation US GAAP IFRS Income statement discontinued operations criteria Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, discontinued operations classification is for components held for sale or disposed of, provided that there will not be significant continuing cash flows or involvement with the disposed component. Following the adoption of ASU 2014-08, discontinued operations classification is for components that are held for sale or disposed of and represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. Also, a newly acquired business or nonprofit activity that on acquisition is classified as held for sale qualifies for reporting as a discontinued operation. (ASU 2014-08 is applied prospectively and effective for annual periods beginning on or after 15 December 2014.) Discontinued operations classification is for components held for sale or disposed of and the component represents a separate major line of business or geographical area, is part of a single coordinated plan to dispose of a separate major line of business or geographical area of or a subsidiary acquired exclusively with an intention to resell. Disclosure of performance measures No general requirements within US GAAP that address the presentation of specific performance measures. SEC regulations define certain key measures and require the presentation of certain headings and subtotals. Additionally, public companies are prohibited from disclosing non-GAAP measures in the financial statements and accompanying notes. Certain traditional concepts such as \"operating profit\" are not defined; therefore, diversity in practice exists regarding line items, headings and subtotals presented on the income statement. IFRS permits the presentation of additional line items, headings and subtotals in the statement of comprehensive income when such presentation is relevant to an understanding of the entity's financial performance. IFRS has requirements on how the subtotals should be presented when they are provided, Third balance sheet Not required. A third balance sheet is required as of the beginning of the earliest comparative period when there is a retrospective application of a new accounting policy, or a retrospective restatement or reclassification, that have a material effect on the balances of the third balance sheet. Related notes to the third balance sheet are not required. A third balance sheet is also required in the year an entity first applies IFRS. US GAAP versus IFRS The basics | 6 Financial statement presentation Convergence No further convergence is planned at this time. US GAAP versus IFRS The basics | 7 Interim financial reporting Interim financial reporting Similarities ASC 270, Interim Reporting, and IAS 34, Interim Financial Reporting, are substantially similar except for the treatment of certain costs described below. Both require an entity to apply the accounting policies that were in effect in the prior annual period, subject to the adoption of new policies that are disclosed. Both standards allow for condensed interim financial statements and provide for similar disclosure requirements. Under both US GAAP and IFRS, income taxes are accounted for based on an estimated average annual effective tax rates. Neither standard requires entities to present interim financial information. That is the purview of securities regulators such as the SEC, which requires US public companies to comply with Regulation S-X. Significant differences Treatment of certain costs in interim periods US GAAP IFRS Each interim period is viewed as an integral part of an annual period. As a result, certain costs that benefit more than one interim period may be allocated among those periods, resulting in deferral or accrual of certain costs. Each interim period is viewed as a discrete reporting period. A cost that does not meet the definition of an asset at the end of an interim period is not deferred, and a liability recognized at an interim reporting date must represent an existing obligation. Convergence No further convergence is planned at this time. US GAAP versus IFRS The basics | 8 Consolidation, joint venture accounting and equity method investees/associates Consolidation, joint venture accounting and equity method investees/associates Similarities ASC 810, Consolidation, contains the main guidance for consolidation of financial statements, including variable interest entities (VIEs), under US GAAP. IFRS 10, Consolidated Financial Statements, contains the IFRS guidance. Under both US GAAP and IFRS, the determination of whether entities are consolidated by a reporting entity is based on control, although there are differences in how control is defined. Generally, all entities subject to the control of the reporting entity must be consolidated (although there are limited exceptions for a reporting entity that meets the definition of an investment company). An equity investment that gives an investor significant influence over an investee (referred to as \"an associate\" in IFRS) is considered an equity method investment under both US GAAP (ASC 323, Investments Equity Method and Joint Ventures) and IFRS (IAS 28, Investments in Associates and Joint Ventures). Further, the equity method of accounting for such investments generally is consistent under US GAAP and IFRS. The characteristics of a joint venture in US GAAP (ASC 323) and IFRS (IFRS 11, Joint Arrangements) are similar but certain differences exist. Both US GAAP and IFRS also generally require investors to apply the equity method when accounting for their interests in joint ventures. Significant differences Consolidation model US GAAP IFRS Provides for primarily two consolidation models (variable interest model and voting model). The variable interest model evaluates control based on determining which party has power and benefits. The voting model evaluates control based on existing voting rights. All entities are first evaluated as potential variable interest entities (VIEs). If an entity is not a VIE, it is evaluated for control pursuant to the voting model. Potential voting rights are generally not included in either evaluation. The notion of \"de facto control\" is not considered. Provides a single control model for all entities, including structured entities (the definition of a structured entity under IFRS 12, Disclosure of Interests in Other Entities, is similar to the definition of a VIE in US GAAP). An investor controls an investee when it is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Potential voting rights are considered. Notion of \"de facto control\" is also considered. US GAAP versus IFRS The basics | 9 Consolidation, joint venture accounting and equity method investees/associates US GAAP IFRS Preparation of consolidated financial statements general Required, although certain industryspecific exceptions exist (e.g., investment companies). Required, although certain industryspecific exceptions exist (e.g., investment entities), and there is a limited exemption from preparing consolidated financial statements for a parent company that is itself a wholly owned or partially owned subsidiary, if certain conditions are met. Preparation of consolidated financial statements Investment companies Investment companies do not consolidate entities that might otherwise require consolidation (e.g., majority-owned corporations). Instead, equity investments in these entities are reflected at fair value as a single line item in the financial statements. A parent of an investment company is required to retain the investment company subsidiary's fair value accounting in the parent's consolidated financial statements. Investment companies (\"investment entities\" in IFRS) do not consolidate entities that might otherwise require consolidation (e.g., majority-owned corporations). Instead, these investments are reflected at fair value as a single line item in the financial statements. However, a parent of an investment company consolidates all entities that it controls, including those controlled through an investment company subsidiary, unless the parent itself is an investment company. Preparation of consolidated financial statements different reporting dates of parent and subsidiaries The reporting entity and the consolidated entities are permitted to have differences in year-ends of up to three months. The effects of significant events occurring between the reporting dates of the reporting entity and the controlled entities are disclosed in the financial statements. The financial statements of a parent and its consolidated subsidiaries are prepared as of the same date. When the parent and the subsidiary have different reporting period end dates, the subsidiary prepares (for consolidation purposes) additional financial statements as of the same date as those of the parent, unless it is impracticable. If it is impracticable, when the difference in the reporting period end dates of the parent and subsidiary is three months or less, the financial statements of the subsidiary may be adjusted to reflect significant transactions and events, and it is not necessary to prepare additional financial statements as of the parent's reporting date. Uniform accounting policies Uniform accounting policies between Uniform accounting policies between parent and subsidiary are not required. parent and subsidiary are required. US GAAP versus IFRS The basics | 10 Consolidation, joint venture accounting and equity method investees/associates US GAAP IFRS Changes in ownership interest in a subsidiary without loss of control Transactions that result in decreases in the ownership interest of a subsidiary without a loss of control are accounted for as equity transactions in the consolidated entity (i.e., no gain or loss is recognized) when: (1) the subsidiary is a business or nonprofit activity (except in a sale of in substance real estate or a conveyance of oil and gas mineral rights) or (2) the subsidiary is not a business or nonprofit activity, but the substance of the transaction is not addressed directly by other ASC Topics. Consistent with US GAAP, except that this guidance applies to all subsidiaries, including those that are not businesses or nonprofit activities and those that involve sales of in substance real estate or the conveyance of oil and gas mineral rights. Loss of control of a subsidiary For certain transactions that result in a loss of control of a subsidiary, any retained noncontrolling investment in the former subsidiary is remeasured to fair value on the date the control is lost, with the gain or loss included in income along with any gain or loss on the ownership interest sold. This accounting is limited to the following transactions: (1) loss of control of a subsidiary that is a business or nonprofit activity (except for a sale of in substance real estate or a conveyance of oil and gas mineral rights); (2) loss of control of a subsidiary that is not a business or nonprofit activity if the substance of the transaction is not addressed directly by other ASC Topics. This guidance also does not apply if a parent ceases to control a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. 1 Consistent with US GAAP, except that this guidance applies to all subsidiaries, including those that are not businesses or nonprofit activities and those that involve sales of in substance real estate or conveyance of oil and gas mineral rights. In addition, the gain or loss resulting from the loss of control of a subsidiary that does not constitute a business in a transaction involving an associate or a joint venture that is accounted for using the equity method is recognized only to the extent of the unrelated investors' interests in that associate or joint venture. 2 1 ASU 2014-09 Revenue from Contracts with Customers, amended this guidance in part. The FASB has proposed further amendments. Readers should monitor developments in this area. 2 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, Amendments to IFRS 10 and IAS 28 was issued by the IASB in September 2014. In December 2015, the IASB indefinitely deferred the effective date of this amendment. However, early adoption of this amendment is still available. US GAAP versus IFRS The basics | 11 Consolidation, joint venture accounting and equity method investees/associates US GAAP IFRS Loss of control of a group of assets that meet the definition of a business For certain transactions that result in a loss of control of a group of assets that meet the definition of a business or nonprofit activity, any retained noncontrolling investment in the former group of assets is remeasured to fair value on the date control is lost, with the gain or loss included in income along with any gain or loss on the ownership interest sold. There are two exceptions: a sale of in substance real estate, or a conveyance of oil and gas mineral rights. 1 For transactions that result in a loss of control of a group of assets that meet the definition of a business, any retained noncontrolling investment in the former group of assets is remeasured to fair value on the date control is lost, with the gain or loss included in income with any gain or loss on the ownership interest sold.2 Equity method investments An investment of 20 % or more of the voting common stock of an investee leads to a presumption that an investor has the ability to exercise significant influence over an investee, unless this presumption can be overcome based on facts and circumstances. An investment of 20% or more of the equity of an investee (including potential rights) leads to a presumption that an investor has the ability to exercise significant influence over an investee, unless this presumption can be overcome based on facts and circumstances. When determining significant influence, potential voting rights are generally not considered. When determining significant influence, potential voting rights are considered if currently exercisable. When an investor in a limited partnership, LLC, trust or similar entity with specific ownership accounts has an interest greater than 3% to 5% in an investee, normally it accounts for its investment using the equity method. When an investor has an investment in a limited partnership, LLC, trust or similar entity, the determination of significant influence is made using the same general principle of significant influence that is used for all other investments. ASC 825-10, Financial Instruments, gives entities the option to account for certain equity method investments at fair value. If management does not elect to use the fair value option, the equity method of accounting is required. Conforming accounting policies between investor and investee is generally not permitted. Investments in associates held by venture capital organizations, mutual funds, unit trusts and similar entities are exempt from using the equity method, and the investor may elect to measure their investments in associates at fair value. Uniform accounting policies between investor and investee are required. US GAAP versus IFRS The basics | 12 Consolidation, joint venture accounting and equity method investees/associates Joint ventures US GAAP IFRS Joint ventures are generally defined as entities whose operations and activities are jointly controlled by their equity investors. Joint ventures are separate vehicles in which the parties that have joint control of the separate vehicle have rights to the net assets. These rights could be through equity investors, certain parties with decision-making rights through a contract. Joint control is defined as existing when two or more parties must unanimously consent to each of the significant decisions of the entity. Joint control is not defined, but it is commonly interpreted to exist when all of the equity investors unanimously consent to each of the significant decisions of the entity. An entity can be a joint venture, regardless of the rights and obligations the parties sharing joint control have with respect to the entity's underlying assets and liabilities. The investors generally account for their interests in joint ventures using the equity method of accounting. They also can elect to account for their interests at fair value. Proportionate consolidation may be permitted to account for interests in unincorporated entities in certain limited industries when it is an established practice (i.e., in the construction and extractive industries). In a joint venture, the parties cannot have direct rights and obligations with respect to the underlying assets and liabilities of the entity (In this case the arrangement would be classified as a joint operation). The investors generally account for their interests in joint ventures using the equity method of accounting. Investments in associates held by venture capital organizations, mutual funds, unit trusts and similar entities are exempt from using the equity method and the investor may elect to measure its investment at fair value Proportionate consolidation is not permitted, regardless of industry. However, when a joint arrangement meets the definition of a joint operation instead of a joint venture under IFRS, an investor would recognize its share of the entity's assets, liabilities, revenues and expenses and not apply the equity method. US GAAP versus IFRS The basics | 13 Consolidation, joint venture accounting and equity method investees/associates Convergence The FASB issued final guidance that eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. While the ASU is aimed at asset managers, all reporting entities will have to reevaluate limited partnerships and similar entities for consolidation and revise their documentation. It also may affect reporting entities that evaluate certain corporations or similar entities for consolidation. For PBEs, the guidance is effective for annual periods beginning after 15 December 2015 and interim periods therein. Certain differences between consolidation guidance between IFRS and US GAAP (e.g., effective control, potential voting rights) will continue to exist. In June 2016, the FASB proposed additional amendments to the primary beneficiary determination related to interests held through related parties that are under common control. A final ASU is expected in Q4 2016. In June 2016, the FASB issued an exposure draft that is intended to clarify the accounting for sales of in-substance nonfinancial assets after an entity has adopted ASC 606, Revenue from Contracts with Customers, which could affect the scope of ASC 810, the initial measurement of a joint venture or equity method investment and the elimination of profit in certain transactions. In June 2016, the IASB issued an exposure draft to eliminate diversity in practice in accounting for previously held interests in the assets and liabilities of a joint operation that meets the definition of a business for transactions in which an entity obtains control or maintaining joint control of the joint operation. In March 2016, the FASB issued ASU 2016-07, Investments Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 201607 eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. By eliminating retrospective application of the equity method, ASU 2016-07 converges US GAAP with IFRS. However, measurement differences may still exist. US GAAP versus IFRS The basics | 14 Business combinations Business combinations Similarities The principal guidance for business combinations in US GAAP (ASC 805, Business Combinations) and IFRS (IFRS 3, Business Combinations) represents the culmination of the first major convergence project between the IASB and the FASB. Pursuant to ASC 805 and IFRS 3, all business combinations are accounted for using the acquisition method. Upon obtaining control of another entity, the underlying transaction is measured at fair value, establishing the basis on which the assets, liabilities and noncontrolling interests of the acquired entity are measured. As described below, IFRS 3 provides an alternative to measuring noncontrolling interest at fair value with limited exceptions. Although the new standards are substantially converged, certain differences still exist. Significant differences US GAAP IFRS Measurement of noncontrolling interest Noncontrolling interest is measured at fair value, including goodwill. Noncontrolling interest components that are present ownership interests and entitle their holders to a proportionate share of the acquiree's net asset in the event of liquidation may be measured at: (1) fair value, including goodwill, or (2) the noncontrolling interest's proportionate share of the fair value of the acquiree's identifiable net assets, exclusive of goodwill. All other components of noncontrolling interest are measured at fair value unless another measurement basis is required by IFRS. The choice is available on a transaction-bytransaction basis. Acquiree's operating leases If the terms of an acquiree operating lease are favorable or unfavorable relative to market terms, the acquirer recognizes an intangible asset or liability, respectively, regardless of whether the acquiree is the lessor or the lessee. Separate recognition of an intangible asset or liability is required only if the acquiree is a lessee. If the acquiree is the lessor, the terms of the lease are taken into account in estimating the fair value of the asset subject to the lease. Separate recognition of an intangible asset or liability is not required. US GAAP versus IFRS The basics | 15 Business combinations Assets and liabilities arising from contingencies Combination of entities under common control US GAAP IFRS Initial recognition and measurement Assets and liabilities arising from contingencies are recognized at fair value (in accordance with ASC 820, Fair Value Measurement and Disclosures) if the fair value can be determined during the measurement period. Otherwise, those assets or liabilities are recognized at the acquisition date in accordance with ASC 450, Contingencies, if those criteria for recognition are met. Contingent assets and liabilities that do not meet either of these recognition criteria at the acquisition date are subsequently accounted for in accordance with other applicable literature, including ASC 450, Contingencies. (See Provisions and contingencies\" for differences between ASC 450 and IAS 37). Initial recognition and measurement Liabilities arising from contingencies are recognized as of the acquisition date if there is a present obligation that arises from past events and the fair value can be measured reliably. Contingent assets are not recognized. Subsequent measurement If contingent assets and liabilities are initially recognized at fair value, an acquirer should develop a systematic and rational basis for subsequently measuring and accounting for those assets and liabilities depending on their nature. If amounts are initially recognized and measured in accordance with ASC 450, Contingencies, the subsequent accounting and measurement should be based on that guidance. Subsequent measurement Liabilities subject to contingencies are subsequently measured at the higher of: (1) the amount that would be recognized in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets or (2) the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with IAS 18, Revenue. The receiving entity records the net assets at their carrying amounts in the accounts of the transferor (historical cost). Outside the scope of IFRS 3, Business Combinations. In practice, either follow an approach similar to US GAAP (historical cost) or apply the acquisition method (fair value) if there is substance to the transaction (policy election). US GAAP versus IFRS The basics | 16 Business combinations US GAAP IFRS Pushdown accounting An acquired entity can choose to apply pushdown accounting in its separate financial statements when an acquirer obtains control of it or later. However, an entity's election to apply pushdown accounting is irrevocable. No guidance exists, and it is unclear whether pushdown accounting is acceptable under IFRS. However, the general view is that entities may not use the hierarchy in IAS 8 to refer to US GAAP and apply pushdown accounting in the separate financial statements of an acquired subsidiary, because the application of pushdown accounting will result in the recognition and measurement of assets and liabilities in a manner that conflicts with certain IFRS standards and interpretations. For example, the application of pushdown accounting generally will result in the recognition of internally generated goodwill and other internally generated intangible assets at the subsidiary level, which conflicts with the guidance in IAS 38. Adjustments to provisional amounts within the measurement period An acquirer recognizes measurementperiod adjustments during the period in which it determines the amounts, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. An acquirer recognizes measurementperiod adjustments on a retrospective basis. The acquirer revises comparative information for any prior periods presented, including revisions for any effects on the prior-period income statement. Other differences may arise due to different accounting requirements of other existing US GAAP and IFRS literature (e.g., identifying the acquirer, definition of control, replacement of share-based payment awards, initial classification and subsequent measurement of contingent consideration, initial recognition and measurement of income taxes, initial recognition and measurement of employee benefits). US GAAP versus IFRS The basics | 17 Business combinations Convergence The FASB and IASB issued substantially converged standards in December 2007 and January 2008, respectively. Both boards have completed post-implementation reviews (PIRs) of their respective standards and separately discussed several narrow-scope projects. In November 2015, the FASB issued an exposure draft to clarify certain aspects of the definition of a business. While the definition of a business is currently converged, the application of the definition by US GAAP and IFRS reporters is often different. The FASB intends for the clarifications to more closely align the interpretations of what constitutes a business. In June 2016, the IASB also issued an exposure draft on the definition of a business as a result of concerns raised in its PIR about the complexity of its application. Although this is not a joint project, the FASB and IASB proposals are substantially converged. In addition, the IASB has a research project on business combinations of entities under common control. The accounting for leases (e.g., unfavorable or favorable components) will be affected by the implementation of ASU 2016-02 and IFRS 16. US GAAP versus IFRS The basics | 18 Inventory Inventory Similarities ASC 330, Inventory, and IAS 2, Inventories, are based on the principle that the primary basis of accounting for inventory is cost. Both define inventory as assets held for sale in the ordinary course of business, in the process of production for such sale or to be consumed in the production of goods or services. Permissible techniques for cost measurement, such as retail inventory method, are similar under both US GAAP and IFRS. Further, under both sets of standards, the cost of inventory includes all direct expenditures to ready inventory for sale, including allocable overhead, while selling costs are excluded from the cost of inventories, as are most storage costs and general administrative costs. Significant differences US GAAP IFRS Costing methods Last in, first out (LIFO) is an acceptable LIFO is prohibited. Same cost formula method. 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 Prior to the adoption of ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, inventory is carried at the lower of cost or market. Market is defined as current replacement cost, but not greater than net realizable value (estimated selling price less reasonable costs of completion, disposal and transportation) and not less than net realizable value reduced by a normal sales margin. Following the adoption of ASU 2015-11, inventory other than that accounted for under the LIFO or retail inventory method (RIM) is carried at the lower of cost and net realizable value. Inventory is carried at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. Reversal of inventory write-downs Any write-down of inventory to the lower of cost or market creates a new cost basis that subsequently cannot be reversed. Previously recognized impairment losses are reversed up to the amount of the original impairment loss when the reasons for the impairment no longer exist. Permanent inventory markdowns under the retail inventory method (RIM) Permanent markdowns do not affect the gross ma