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Presentation of Financial Statements: IFRS vs. US GAAP
Transcript of Presentation of Financial Statements: IFRS vs. US GAAP
Kyle Teel statement of financial position (cc) image by anemoneprojectors on Flickr Our Presentation History
Review of the Basic Financial Statements
Comparison of 2 Companies
Summary IFRS vs. GAAP Currently there are 2 ways of presenting financial statements
1. IFRS using IAS-1 IAS-1 is the product of the IASB. The first draft of the standard came out in 1974. There has been much discussion and many revisions since. 2. GAAP International companies Use IFRS and most U.S. companies use GAAP. The SEC was requiring foreign companies using IFRS to reconcile their report to GAAP in order to list on U.S. exchange. Joint IASB/FASB Project The IASB & FASB have been working on a joint project on financial statement presentation to establish a global standard that will guide the organization and presentation of information in the financial statements. The Boards' goal is to improve the usefulness of the financial information to the users of its financial statements and to help users in their decision making. If this works, ultimately the 2 standards will be 1 Statement of Comprehensive Income Statement of Equity Strict? IFRS > US GAAP How? What's the Same? The Basic Reconciliation Required Statement How It Works Equity Component (beg)
+Profit / -Loss
Other Comp. Income Items
Trxns with Owners
=Equity Component (end) Differences! IFRS Extras Total comprehensive Income separated by amounts attributable to owners of the parent and to non-controlling interests Effects of retrospective application/restatement on each component of equity Each equity component requires reconciliation (equation mentioned) Disclose dividends recognized as distributions to owners + amount per share Analysis of other comprehensive income by item for each component of equity Must be its own statement! What's the Same? Generally, a required statement Definition of Cash/Cash Equivalents Presentation Classifications Methods Allowed IFRSor
GAAP Statement of Profit & Loss and
Other Comprehensive Income-IFRS IAS-1 gives the option of presenting all items of income and expense in either a:
single statement of profit & loss including comprehensive income or in 2 separate statements:
1. A statement displaying components of profit or loss AND
2. A statement beginning with profit or loss and displaying components of other comprehensive income Statement of Profit & Loss and
Other Comprehensive Income-GAAP GAAP is more flexible, it says that all components of net income and other comprehensive income shall be reported in a financial statement for the period they are recognized. Comprehensive income may be displayed either:
1. As part of the income statement
2. On a stand-alone basis, or
3. As part of the statement of changes in stockholder equity. IFRS doesn't allow this Main Differences More Differences Profit & Loss
IFRS An entity shall recognize all items of income and expense in a period of profit or loss unless an IFRS requires or permits otherwise
Some IFRS specify circumstances when an entity recognizes particular items outside profit or loss in current period e.g. IAS-8, correction of errors and and effects of changes in accounting policies When items of income or expense are material, an entity shall disclose their nature and amount separately
Write-down of inventory
Restructuring of an entity's activities
Disposals of property, plant and equipment
Disposals of investments
Other reversals or provisions Expenses are sub-classified to highlight components of financial performance that may differ in terms of frequency, potential for gain or loss and predictability.
Expenses may be provided one of two ways:
1. Nature of Expense Method
Expenses are aggregated within profit or loss according to their nature (depreciation, purchases of materials, transport costs, employee benefits, advertising). Does not re-allocate them among other functions. SIMPLE
2. Function of Expense or Cost of Sales Method
Expenses classified according to their function as part of cost of sales or for example, the costs of distribution or administrative expenses Nature of Expense Method
Changes in inventories of finished goods & WIP
Raw materials and materials used
Employee benefit expense
Profit before Tax Function of Expense Method
Revenue Cost of sales
Profit before Tax
Additional info shall be disclosed on the nature of expenses (depr, amortization & employee benefits expense) According to the SEC Roadmap "As capital markets have become increasingly global, U.S. investors have a corresponding increase in international investment opportunities. In this environment, we believe that U.S. investors would benefit from an enhanced ability to compare financial information of U.S. companies with that of non-U.S. companies.
So . . . in theory, yes, a good thing, but it will come with much resistance and effort The Financials What is Other Comprehensive Income?
OCI comprises items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by other IFRS
Difficult question to answer. Better defined by example:
Foreign currency translation adjustments on foreign subsidiaries
Changes in fair value of available-for-sale financial assets
Actuarial gains or losses arising on defined benefit pension plans
Revaluations of property, plant & equipment
Changes in the fair value of a financial instrument in a cash flow hedge Other Comprehensive Income
No obvious principle that drives these gains out of earnings and into OCI
They reflect re-measurements as a result of movements in price or valuation
Ultimately these gains should make it to the income statement
This statement helps investors see the company's "true earnings" Summary of OCI
Under IFRS, Profit or Loss is the total of income less expense, excluding the components of Other Comprehensive Income.
Total Comprehensive Income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Differences/Specifics More Differences/Specifics IFRS U.S. GAAP Certain items are required to be presented on the Statement; there is additional information that needs to be included on the face or in notes (IAS 1.54-.59) Unlike IFRS, U.S. GAAP does not require a standard format. However, SEC Reg S-X (Rule 5.02) does require certain line items to appear on the face BOTH require additional items, headings and subtotals on Statement when such presentation is relevant to an understanding of the financial position IFRS U.S. GAAP Required to present current and non-current ASSETS and LIABILITIES as separate classifications on the Statement (IAS 1.66-.76) EXCEPT when a presentation based on liquidity provides information that is reliable and more relevant. When the exception applies, the entity shall present all assets and liabilities in the order of liquidity (IAS 1.60). Separate classifications of current assets and liabilities (ASC 210-10-05-4). However, in certain specialized industries an unclassified Balance Sheet is used when the distinction between current and non-current assets and liabilities is deemed to have little or no relevance. IFRS U.S. GAAP No subtotals are specified in IAS 1 Non-SEC reporting entities are required by ASC 210-10-45-5 to present a total of current liabilities if they present a classified Balance Sheet. A subtotal for current assets is presented as well. SEC rules explicitly require subtotals for current assets and current liabilities (S-X, Rule 5-02). IFRS U.S. GAAP When the current and non-current assets and liabilities are classified separately on the Statement, the deferred tax assets (liabilities) are not classified as current assets (liabilities) (IAS 1.56). Deferred tax assets and liabilities are separated into current and non-current amounts (ASC 740-10-45-4). See Section 5.3, "Taxation") IFRS U.S. GAAP An entity shall classify an asset as current when any of the following apply (IAS 1.66): Expects to realize the asset or intends to sell or consume it in its normal operating cycle. The normal operating cycle where not clearly identifiable is assumed to be 12 months (IAS 1.68). It holds the asset primarily for the purpose of trading It expects to realize the asset within 12 months after the reporting period The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period Current assets are cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business (ASC Master Glossary, "Current Assets"). In business where the period of the operating cycle is more than 12 months, the longer period should be used. Where a particular business has no clearly defined operating cycle, the one-year rule governs (ASC 210-10-45-3). Introduction Classification Classification Classification Classification Classification IFRS U.S. GAAP An entity shall classify a liability as current when any of the following apply (IAS 1.69): It expects to settle the liability in its normal operating cycle. The normal operating cycle where not clearly identifiable is assumed to be 12 months (IAS 1.70). It holds the liability primarily for the purpose of trading The liability is due to be settled within 12 months after the reporting period The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities (ASC Master Glossary, "Current Liabilities"). Classification IFRS U.S. GAAP An entity classifies its financial liabilities as current when they are due to be settled within 12 months after the reporting period, even if (IAS 1.72) The original term was for a period longer than 12 month and An agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue If an entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan agreement, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, if refinancing or rolling over the obligation is not at the discretion of the entity, the entity does not consider the potential to refinance the obligation and classifies the obligation as current (IAS 1.73). Short-term obligations, other than those arising from transactions in the normal course of business that are due in customary terms, are excluded from current liabilities only if the entity intends to refinance the obligation on a longer-term basis and (ASC 470-10-45-14): Before the Balance Sheet is issued or available to be issued there is a post-Balance Sheet issuance of a long-term obligation or equity securities for the purpose of refinancing the obligation on a long-term basis; or Before the Balance Sheet is issued or available to be issued the entity has entered into a financing agreement that permits it to refinance the short-term obligation on a long-term basis and certain conditions are met Classification IFRS U.S. GAAP An entity classifies a liability as current at the end of the reporting period, if it does not have an unconditional right to defer its settlement for at least 12 months after that date. Therefore, when an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender has agreed, after the reporting period and before authorization of the Financial Statements for issue, not to demand payment as a consequence of the breach. (IAS 1.74). An entity classifies as current a long-term obligation that is or will be callable by a creditor because of the entity's violation of a provision of the debt agreement at the Balance Sheet date or because the violation, if not cured within a specified grace period, will make the obligation callable unless (ASC 470-10-45-11):
The creditor has waived or subsequently lost the right to demand repayment for more than one year (or operating cycle, if longer) from the Balance Sheet date; or
For long-term obligations containing a grace period within which the entity may cure the violation, it is probable that the violation will be cured within that period
The debt would be classified as non-current if the lender has agreed, after the reporting period and before the Financial Statements are issued, not to demand payment as a consequence of the violation. Offsetting IFRS U.S. GAAP An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS (IAS 1.32). See Section 7, "Financial Instruments" for further information on offsetting. Offsetting is permitted only when a right of set-off exists. A right of set-off exists when (ASC 210-20-45-1):
The parties owe each other determinable amounts
There is a right and intention to set-off
The right of set-off is enforceable by law
See Section 7, " Financial instruments" for further information on offsetting. Disclosure IFRS U.S. GAAP An entity shall disclose, either in the statement of financial position or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the entity's operations (IAS 1.77). Similar to IFRS Disclosure IFRS U.S. GAAP An entity shall disclose the following information, either in the statement of financial position or the statement of changes in equity, or in the notes (IAS 1.79):
For each class of share capital:
- The number of shares authorized
- The number of shares issued and fully paid, and issued but not fully paid
- Par value per share, or that the shares have no par value
- A reconciliation of the number of shares outstanding at the beginning and at the end of the period
- The right, preferences and restrictions attaching to that class including restrictions on the distributions of dividends and the repayment of capital
- Share in the entity held by the entity or by its subsidiaries or associates
- Shares reserved for issue under options and contracts for the sale of shares, including terms and amounts
A description of the nature and purpose of each reserve within equity Disclosure of changes in the separate accounts comprising stockholders' equity (in addition to retained earnings) is required. These disclosures may be made in the notes to the Financial Statements or through a separate Financial Statement (ASC 505-10-50-2) General IFRS U.S. GAAP An entity shall apply IAS 1 in preparing and presenting general purpose Financial Statements in accordance with IFRS (IAS 1.2). The guidance on the presentation of the Financial Statements is primarily included in the FASB Accounting Standards Codification Presentation Topics (ASC 205 through 280). SEC registrants are also required to follow the guidance in SEC Regulations, such as Regulation S-X and S-K. General IFRS U.S. GAAP A complete set of Financial Statements comprises the following (IAS 1.10):
A Statement of Financial Position as of the end of the period
A Statement of Comprehensive Income for the period. As permitted by IAS 1.81 an entity may present the components of profit or loss either as part of a single Statement of Comprehensive Income or in a separate Income Statement. When an Income Statement is presented it is part of a complete set of Financial Statements and shall be displayed immediately before the Statement of Comprehensive Income (IAS 1.12).
A Statement of Changes in Equity for the period
A Statement of Cash Flows for the period
Notes, comprising a summary of significant accounting policies and other explanatory information
A Statement of Financial Position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospective restatement of items in the Financial Statements, or when it reclassifies items in its Financial Statements Financial Statements comprise:
A Statement of Financial Position/Balance Sheet
An Income Statement
A statement that displays total comprehensive income. This statement may be reported separately or combined with the Income Statement or the Statement of Changes in Stockholders' Equity (ASC 220-10-45-8)
A Statement of Changes in Stockholders' Equity. Alternatively, disclosure of changes in the separate accounts comprising stockholders' equity (in addition to retained earnings) could be made in the notes to Financial Statements (ASC 505-10-50-2)
A Statement of Cash Flows (limited exemptions; see Section 2.5, "Statement of Cash Flows")
Notes to the Financial Statements
Unlike IFRS, U.S. GAAP does not have a similar requirement for a third Balance Sheet General IFRS U.S. GAAP Except when IFRS permit or require otherwise, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period's Financial Statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period's Financial Statements (IAS 1.38). Unlike IFRS, under U.S. GAAP there is no specific requirement to provide comparative statements but it is desirable to do so (ASC 205-10-45-2).
SEC Rules require Balance Sheets for the two most recent fiscal years and three year Statements of Income and Cash Flows (SEC Reg S-X; Rule 3-01(a) and Rule 3-02(a)). General IFRS U.S. GAAP An entity whose Financial Statements comply with IFRS shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe Financial Statements as complying with IFRS unless they comply with all the requirements of IFRS (IAS 1.16). Unlike IFRS, U.S. GAAP does not have a similar requirement. General IFRS An entity cannot rectify inappropriate accounting policies by disclosure of the accounting policies used or by notes or explanatory material (IAS 1.18). U.S. GAAP Similar to IFRS General IFRS An entity shall clearly identify each Financial statement and the notes. In addition, an entity shall display the following information prominently and repeat it when necessary for the information presented to be understandable (IAS 1.51):
The name of the reporting entity or other means of identification, and any change in that information from the end of the preceding reporting period
Whether the Financial Statements are of an individual entity or a group or entities
The date of the end of the reporting period or the period covered by the set of Financial Statements or notes
The presentation currency; as defined in IAS 21
The level of rounding used in presenting amounts in the Financial Statements U.S. GAAP Similar to IFRS A GOOD THING? A Few Basics What's the Difference? INTRODUCTION BREAK Balance Sheet Income Statement Statement of Comprehensive Income Statement of Cash Flows Statement of Equity CONCLUSION References Grant Thornton LLP. (2012). Comparison between US GAAP and IFRS Edition 3.0.
Heineken 2011 10-K. (2012, 12 31). Retrieved 9 18, 2012, from http://www.sec.gov/Archives/edgar/data/1335258/000119312512075895/d277780d10k.htm
International Accounting Standards Board. (n.d.). Retrieved 9 10, 2012, from http://www.worldgaapinfo.com/pdf/IAS/IAS1.pdf
Molson Coors Brewing Company 2011 10-K. (2011, 12 31). Retrieved 09 13, 2012, from http://www.sec.gov/Archives/edgar/data/24545/000144530512000454/tap2011123110-k.htm
Regulation S-X. Washington, DC: United States Securities and Exchange Commission.
Other Comprehensive Income: The Earnings Statement Nobody on Wall St. Knows About (2009,10 04) Retrieved 09 24, 2012, from
What Exactly is Other Comprehensive Income? (2009, 09 11). Retrieved 9 24, 2012 from
http://pwc.blogs.com/ifrs/2009/09/what-exactly-is-other-comprehensive-income.html IFRS vs. U.S. GAAP Final Thoughts IFRS Statement of Profit & Loss IFRS Statement of Profit & Loss What's Cash? Cash on Hand and Demand Deposits Short-term
Readily Convertible to Known Amounts of Cash
Subject to Insignificant Risk of Changes in Value ....and Cash Equivalents? Presentation Activities Classified As: Operating
Financing Reported Using Either the: Direct Method (Preferred)
Indirect Method Differences! Bank Overdrafts IFRS US GAAP Due to Differing Cash Management Styles Included as component of cash & equivalents Bank balance often fluctuates from being positive to overdrawn Included in liabilities & excluded from cash & equivalents Changes in overdrafts are financing activities Net or Gross? IFRS The following may be reported net:
Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity
Cash receipts and payments for items in which the turnover is quick, amounts are large, and the maturities are short US GAAP Receipts and payments should generally be shown gross.
However if _____, then the following instances are available for exception:
Investments (other than cash equivalents)
Certain short-term debts Interest & Dividends IFRS US GAAP May be classified as operating, investing, or financing - as long as done so in a consistent manner
Interest paid & interest and dividends received usually are operating cash flows for financial institutions Interest and dividends received & interest paid are classified as operating activities
Dividends paid are financing activities Taxes IFRS US GAAP Same as US, unless they can be specifically identified with financing and investing activities Generally classified as operating activities Discontinued Operations IFRS US GAAP Required disclosure of the amount of net cash flows attributable to operating, investing, and financing activities of discontinued operations Separate disclosure not required
If presented, display operating, investing, and financing portions separately Tie It Out IFRS US GAAP Disclose the components of cash and equivalents and present a reconciliation of the amounts in the stmt of cash flows with the equivalent items in the statement of financial position Disclose policy for determining which items are treated as equivalents
Total cash and equivalents at beginning and end of period shown in stmt of cash flows must be same as similarly titled line items or subtotals in balance sheet Many Similarities U.S. holds the key to the future of international standards as the SEC considers its options on IFRS.
“The world is waiting,” Tweedie said. “And waiting. And waiting.” April, 2012