Introduction to Financial Statements Prepared
with IFRS
1
Vocabulary
US GAAP Terminology
Inventory
Common stock or paid-in
capital
Additional paid in capital
Minority interest
Accounts receivable
Accounts payable
Operating profit
Retained earnings
IFRS Terminology
Stocks
Share capital-ordinary
Share issue premium
Outside interest
Debtors
Creditors
Trading profit
Revenue Reserves
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Conceptual Framework
• Both FASBs and IFRSs are based on a theoretical
frameworks setting forth:
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Assumptions (e.g., materiality, going concern)
Qualitative characteristics (e.g., relevance, reliability)
Elements of financial statements (e.g., assets, liabilities)
These conceptual frameworks are intended to guide standard
setters in the formulation of standards and preparers if no
specific standards exist.
• There are some big differences in that while both call for
transactions to be recorded at historic cost IFRS allow
PP&E and some other long-lived assets be revalued to FV.
3
Fairness Exceptions
• IFRS calls for management to use a different application if
use of IFRS would be so misleading that it would conflict
with the objectives of financial statements set out in the
IASB Framework.
• Similar to Rule 203 under US Auditing Standards.
– However, if “the statements or data contain such a departure
and the member can demonstrate that due to unusual
circumstances the financial statements or data would otherwise
have been misleading, the member can comply with the rule by
describing the departure, its approximate effects, if practicable,
and the reasons why compliance with the principle would result
in a misleading statement.”
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Presentation of Financial Statements
IAS1
• General purpose financial statements used by
investors and others in making economic decisions.
– Statement of financial position, income statement, cash
flow statement, equity statement, and notes to financials.
Most financials have an additional column showing the
note number related to the item.
• IAS1 requires comparative statements (current and
prior year) whereas US GAAP does not. (SEC
however requires three years except for balance
sheet.)
• Statements prepared using IFRS are presented using
multiple formats.
5
Balance Sheet
• Under GAAP the balance sheet is in the format of
A=L+OE
• With IFRS
A-L=OE
is acceptable as is
Fixed assets + Current assets – S-T Liabilities = L-T Liabilities + Equity
Other formats are also used as well
6
Income Statement
• GAAP gains and losses are increases or decrease in
equity from peripheral or incidental transactions.
• IFRS does not recognize gains and losses as separate
elements of financial statements. However, in
practice most companies show them consistent with
GAAP.
• Extraordinary (unusual and infrequent in US GAAP)
treatment is prohibited under IFRS.
• Some differences for discontinued operations as
well.
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Discontinued Operations
US GAAP
• Components held for sale or
to be disposed of, provided
no continuing significant
cash flows or involvement
with discontinued
component
IFRS
• Components held for sale or
to be disposed of that are
either separate major line
of business or geographical
area or subsidiary acquired
exclusively with intention to
resell
8
Performance Measures
• US GAAP
– SEC regulations define key measures and require
presentation of certain headings and subtotals in
the income statement and
– SEC regulations prohibit disclosure of non-GAAP
measures in financial statements and
accompanying notes.
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Performance Measures continued
IFRS
• Companies are not required to disclose gross profit
or even provide CGS as a line item on the face of the
financials.
• Does not define concepts such as “operating profit”
therefore allowing diversity in practice.
• No prohibitions on presentation of additional metrics
that may prove misleading.
10
Classification of Expenses
US GAAP
IFRS
• SEC requires expenses
based on function (e.g. cost
of sales, administrative).
• Presentation of expenses
based on function or nature
of the item (e.g. salaries,
depreciation). If function is
utilized certain disclosures
regarding nature of
expenses must be included
in notes.
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Statement of Changes in Equity
• ISA1 requires
1. Profit or loss for period
2. Items of income or expense that are required to be
recognized directly in equity
3. Total income and expense for the period (sum of #1
and 2) showing separately the total amount
attributable to equity holders of the parent and to
minority interest.
4. For each component of equity, the cumulative
effect of change in accounting policy and error
correction.
12
Revisions in IAS1
• Objective of the revision was to present all owner
changes in the statement of changes in equity
separately from non-owner changes in equity.
– Dated Sept. 2007
• Components of comprehensive income are no longer
permitted to be presented in the statement of
changes in equity.
13
Statement of Cash Flow
• In U.S. GAAP interest paid and received and
dividends received are considered Operating
Activities
• With IFRS this is still the common treatment
however:
– Interest and dividends received can be classified as
Investing Activities (returns on investments)
– Interest paid can be classified as Financing Activities (cost
of obtaining financial resources)
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Statement of Cash Flow continued
• With U.S. GAAP non-cash financing and investing
activities are usually presented at the bottom of the
SCF.
• IFRS excludes this presentation on the cash flow
statement.
• Disclosure will be elsewhere in the financial
statements.
• IFRS requires cash flows from Discontinued
Operations to be disclosed separately as Operating,
Investing, or Financing activities.
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Other Financial Statement Differences
• Using IFRS there is no requirement that the currency
used in the financials be the predominate operating
currency of the entity.
– Actually any currency can be utilized.
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