GAAP and IFRS Convergence
Presented December 18, 2010
at Penn State University Abington by
Joel Wagoner, MBA, CPA, CMA, CFM
Assistant Professor of Business Administration
Arcadia University
GAAP and IFRS Convergence
How do GAAP and International Accounting
Standards differ?
GAAP and IFRS Convergence
How did our world of divergent Accounting
principles come to be?
GAAP and IFRS Convergence
Question: When is the SEC going to require
us to adopt International Financial Reporting
Standards (IFRS)?
GAAP and IFRS Convergence
On December 6, 2010, Alexandra DeFelice
reported in the Journal of Accountancy that
SEC Chair Mary Schapiro is not committed to
a July, 2011 date for deciding whether
American reporting entities will adopt IFRS.
GAAP and IFRS Convergence
Ms. Schapiro further stated that at least four
years will be allowed for American reporting
entities to accomplish the transition to IFRS.
GAAP and IFRS Convergence
At the earliest (if at all), American companies
will begin using IFRS in 2015.
GAAP and IFRS Convergence
Consider: If the FASB and IASB were to
converge American GAAP and IFRS, would it
be necessary for American companies to
adopt IFRS?
GAAP and IFRS Convergence
Even if full convergence were impractical, if
the differences between GAAP and IFRS were
significantly reduced, would the SEC find it
desirable for American corporations to incur
the expense of adopting IFRS?
GAAP and IFRS Convergence
For the past eight years, there has been such
an ongoing effort to converge GAAP and
IFRS.
Significant progress has slowly been made.
GAAP and IFRS Convergence
•Who is trying to converge American GAAP
and International Accounting Standards?
– Financial Accounting Standards Board
(FASB)
– International Accounting Standards
Board (IASB)
Financial Accounting Standards Board
• Established in 1973
• Headquartered in Norwalk, Connecticut
• Replaced Accounting Principles Board
International Accounting Standards Board
• Founded in 1973
• Based in London, UK
• Has representatives on standards setting
boards of United States, United Kingdom,
Japan, Australia, Canada, France, Germany
International Accounting Standards Board
• Working to achieve convergence of
accounting standards of all member countries
• Compliance with International Accounting
Standards is voluntary - IASB has no
enforcement authority.
• Process of establishing new IFRS’s is semidemocratic - similar to SFAS’s.
GAAP and IFRS Convergence
• Norwalk Agreement: 2002
• FASB and IASB “each acknowledged their
commitment to the development of highquality compatible accounting standards that
could be used for both domestic and crossborder financial reporting.”
Norwalk Agreement
• FASB and IASB agreed to “undertake a
short-term project aimed at removing a variety
of individual differences between” GAAP and
International Financial Reporting Standards
(IFRS’s).
Norwalk Agreement
• FASB and IASB agreed to “remove other
differences. . .through coordination of future
work programs. . .through the mutual
undertaking of discrete substantial projects
which both Boards [sic] would address
concurrently”
Short-term Convergence Project
• Originally included following items:
– Balance Sheet Classification;
– Inventory Costs;
– Asset Exchanges;
– Accounting Changes and Error Corrections;
– Earnings per Share.
Short-term Convergence Project
Balance Sheet Classification:
Was subsequently removed from the agenda.
Short-term Convergence Project
Inventory Costs:
FASB issued SFAS 151 in November, 2004.
Inventory Costs
• SFAS 151: Idle capacity and abnormal
spoilage costs should be expensed as incurred
and excluded from inventory.
• Previously, they would only have been
excluded from inventory values only if “so
abnormal as to require treatment as current
period charges.”
Short-term Convergence Project
Asset Exchanges:
FASB issued SFAS 153 in December, 2004.
Asset Exchanges
• SFAS 153: An exchange of similar
productive assets should be accounted for
based on the fair value of the assets
exchanged.
• Previously, GAAP had prohibited
recognizing a gain on an exchange of similar
assets.
Short-term Convergence Project
Accounting Changes and Error Corrections:
FASB issued SFAS 154 in May, 2005.
Short-term Convergence Project
SFAS 154: A voluntary change in accounting
principle should be accounted for
retrospectively. All prior periods should be
presented as though the newly adopted
accounting policy had always been used,
unless when impracticable to do so.
Short-term Convergence Project
Before SFAS 154, a change in accounting
principle would be effected by recognizing a
cumulative change in the period in which the
change occurred.
Short-term Convergence Project
SFAS 154 also states that “any change in
accounting principle made as a result of
adopting a new pronouncement would be
reported following the same guidance as that
for voluntary changes in accounting
principles” unless the new pronouncement
requires otherwise.
Short-term Convergence Project
Earnings per Share: This one wasn’t as “shortterm” as hoped. The project has been inactive
since May, 2009. The FASB can be expected
to codify EITF Issue No. 03-6 as it relates to
convertible participating securities. Doing so
will not be binding on the IASB.
GAAP and IFRS Convergence
Memorandum of Understanding between the
FASB and IASB on February 27, 2006
established “roadmap for the removal of the
need for the reconciliation requirement for
non-US companies that use IFRS’s and are
registered in the United States.”
2006 Memorandum of Understanding
Established guidelines:
“Convergence of accounting standards can
best be achieved through the development
of high quality, common standards over
time.”
2006 Memorandum of Understanding
• Established guidelines:
“Trying to eliminate differences between
two standards that are in need of significant
improvement is the not the best use of the
FASB’s and IASB’s resources - instead, a
new common standard should be developed
that improves the financial information
reported to investors.”
2006 Memorandum of Understanding
• Established guidelines:
“Serving the needs of investors means that
the boards should seek to converge by
replacing weaker standards with stronger
standards.”
2006 Memorandum of Understanding
• Reaffirmed short-term convergence project:
“(L)imited to those differences between
GAAP and IFRS’s in which convergence
around a high-quality solution appears
achievable in the short-term.”
Short-term Convergence Project
“Because of the nature of the differences,it is
expected that a high-quality solution can
usually be achieved by selecting between U S
GAAP and IFRS.”
Short-term Convergence Project
“In instances in which the FASB and IASB
agree that (American) GAAP offers the
preferred accounting principle, other countries
will adopt (American) GAAP to the extent
that they also converge their accounting
standards with IASB.
Short-term Convergence Project
Included following items:
– Fair Value Option (including investment properties);
– Research and Development;
– Income Taxes;
– Asset Impairment;
– Subsequent Events.
Short-term Convergence Project
Fair-Value Option: The FASB issued SFAS
157 in 2007 and SFAS 159 in 2008.
Short-term Convergence Project
Fair-Value Option: SFAS 157 prescribes how
to measure fair value.
Short-term Convergence Project
Fair-Value Option: SFAS 159 provides that
financial instruments can be presented at fair
value.
Short-term Convergence Project
Research and Development: In 2004, the
IASB and FASB “directed the staff to develop
an inventory of individual differences relating
to the accounting for research and
development that are candidates to be
eliminated in the short-term convergence
project.”
Short-term Convergence Project
Research and Development: The web page on
this project has not been updated on the
FASB’s website since 2006. According to the
most recent update, it’s still in the research
phase.
Short-term Convergence Project
• At this time, the effort to converge GAAP
and IFRS on Income Taxes is inactive.
•It is questionable if full convergence on
accounting for income taxes is possible,
considering that tax laws vary among
countries.
Short-term Convergence Project
Asset Impairment and Subsequent Events
were also included in the Short-term
Convergence Project in the 2006
Memorandum of Understanding, but have not
been placed on the active agenda.
GAAP and IFRS Convergence
The FASB and IASB have resolved, or are
currently working together on, numerous joint
projects. The projects include:
• Business Combinations;
• A New Conceptual Framework;
• Financial Statement Presentation;
• Revenue Recognition.
GAAP and IFRS Convergence
• Leases;
• Emissions Trading Schemes;
• Financial Instruments with Characteristics of
Equity.
Business Combinations Project
In December, 2007 the FASB:
– Revised SFAS 141, Business
Combinations;
– Issued SFAS 160, Noncontrolling
Interests in Consolidated Financial
Statements.
–
Business Combinations Project
SFAS 141 revised
– To define the “acquirer” in a business
combination;
Business Combinations Project
SFAS 141 revised
– To require the acquirer to recognize assets
acquired, liabilities assumed, and any
noncontrolling interest at fair value.
Business Combinations Project
SFAS 141 revised
– To require contingent consideration and
liabilities be measured at fair value at
acquisition date;
Business Combinations Project
SFAS 141 revised
– To allow a gain to be recognized on
bargain purchases as opposed to
recognizing ‘negative goodwill’ on assets
acquired.
Business Combinations Project
SFAS 160: Amends ARB 51 to “establish
accounting and reporting standards for
noncontrolling interest in a subsidiary and for
the deconsolidation of subsidiary.”
Business Combinations Project
SFAS 160: “Requires consolidated net income
to be reported at amounts that include the
amounts attributable to both the parent and the
noncontrolling interest.”
Business Combinations Project
SFAS 160: Requires disclosure of the amounts
of consolidated net income attributable to the
parent and to the noncontrolling interest.
Business Combinations Project
(Previously, the noncontrolling interest’s share
of net income was reported as an expense and
deducted to derive the consolidated net
income.)
Business Combinations Project
SFAS 160 requires that a parent recognize a
gain or loss in net income when a subsidiary
is deconsolidated.
Conceptual Framework Project
Purpose: “To develop an improved common
conceptual framework that provides a sound
foundation for developing future accounting
standards.”
Conceptual Framework Project
• “Such a framework is essential to. . .developing
standards that are principles-based, internally
consistent, and internationally converged.”
• “The new framework will build on the existing
IASB and FASB frameworks and consider
developments subsequent to the issuance of those
frameworks.”
Conceptual Framework Project
The FASB and IASB are, as a joint project:
– “Focussing on changes in the environment
since the original frameworks were issued, as
well as omissions in the original frameworks”
– “Giving priority to addressing and
deliberating those issues within each phase that
are likely to yield benefits. . .in the short term”
– “Initially considering concepts applicable to
private sector business entities.”
Conceptual Framework Project
“A common goal of the. . .(FASB and IASB). . . is
for their standards to be clearly based on
consistent principles. To be consistent, principles
must be rooted in fundamental concepts rather
than a collection of conventions. To consistently
achieve useful financial reporting, the body of
standards taken as a whole and the application of
those standards should be based on a framework
that is sound, comprehensive, and internally
consistent.”
Conceptual Framework Project
Eight Phases (four inactive):
– Objective and Qualitative Characteristics
– Elements and Recognition
– Measurement
– Reporting Entity
– Framework Purpose and Status in GAAP Hierarchy
(inactive)
– Applicability to Not-for-Profit Sector (inactive)
– Presentation and Disclosure (inactive)
– Remaining Issues (inactive)
Objective and Qualitative Characteristics
Purpose: To consider
– “The objective of financial reporting”;
– “The qualitative characteristics of financial
reporting information”;
– “The trade-offs among qualitative
characteristics and how they relate to the
concepts of materiality and cost-benefit
relationshps”.
Objective and Qualitative Characteristics
The FASB published SFAC 8 in September, 2010.
Objective and Qualitative Characteristics
SFAC 8: “The objective of general purpose
financial reporting is to provide financial
information about the reporting entity that is
useful to existing and potential investors, lenders,
and other creditors in making decisions about
providing resources to the entity.”
Objective and Qualitative Characteristics
SFAC 8: “If financial information is to be useful,
it must be relevant and faithfully represents [sic]
what it purports to represent. The usefulness of
financial information is enhanced if it is
comparable, verifiable, timely, and
understandable.”
Elements and Recognition
Purpose: “To refine and converge the Boards’
frameworks”:
– “Revise and clarify the definitions of asset
and liability”;
– “Resolve differences regarding other
elements and their definitions”;
Elements and Recognition
(continued from previous slide)
– “Revise the recognition criteria concepts to
eliminate differences and provide a basis for
resolving issues such as derecognition and unit
of account.”
Elements and Recognition
Current GAAP definition of an asset: “Probable
future economic benefits obtained or controlled
by a particular entity as a result of past
transactions or events.”
Elements and Recognition
Concerns with the current definition of asset:
– “Some users misinterpret. . .‘probable’ to
mean that there must be a high likelihood of
future economic benefits for the definition to
be met; this excludes asset items with a low
likelihood of future economic benefits.”
Elements and Recognition
Concerns with the current definition of asset:
– Emphasizes “the future flow of economic
benefits, instead of focusing on the item that
presently exists, an economic resource.”
Elements and Recognition
Concerns with the current definition of asset:
– “Some users misinterpret. . .‘control’ and use
it in the same sense as that used for. . .
consolidation accounting. The term should
focus on whether the entity has some rights or
privileged access to the economic resource.”
Elements and Recognition
Concerns with the current definition of asset:
– ‘Places undue emphasis on identifying the
past transactions or events that gave rise to the
asset, instead of focusing on whether the entity
had access to the economic resource at the
balance sheet date.”
Elements and Recognition
The following definition of an “asset” has been
suggested:
– An asset of an entity is a present economic
resource to which the entity has access or can
limit the access of others.”
Elements and Recognition
The current definition of a liability is “Probable
future sacrifices of economic benefits arising
from present obligations of a particular entity to
transfer assets or provide services to other entities
in the future as a result of past transactions or
events.”
Elements and Recognition
Concerns about the definition of “liability” are
comparable to those with the definition of “asset”:
Misinterpretation of the term “probable”;
Emphasis on future outflow of benefits
instead of focus on the item that presently
exists;
and undue emphasis on past events instead
of the economic obligation that exists at the
balance sheet date.
Elements and Recognition
There is the additional concern that it is unclear
how the current definition of ‘liability’ applies to
contractual obligations.
Elements and Recognition
The suggested new definition of a ‘liability’ is:
– “A liability of an entity is a present economic
obligation for which the entity is the obligor .”
Elements and Recognition
• Neither the current framework of the FASB nor
of the IASB includes criteria to when an item
should be derecognized.
• The FASB and IASB “plan to revise their
recognition criteria concepts to. . .provide a
framework for resolving derecognition issues.”
Elements and Recognition
The FASB has not updated the status of this phase
since March, 2010. The Current Technical Plan
on the FASB’s website does not present an
anticipated date for further action.
Measurement
Purpose: “[L]ist and describe possible
measurements, arrange or classify the
measurements in a manner that facilitates
standard-setting decisions, describe the
advantages and disadvantages of each
measurement in terms of the qualitative
characteristics of useful financial information, and
discuss at a conceptual level how the qualitative
characteristics and cost constraint should be
considered together in identifying an appropriate
measurement.”
Reporting Entity
Purpose: “To determine what constitutes a
reporting entity for the purposes of financial
reporting.”
Reporting Entity
• The FASB and IASB jointly issued an exposure
draft on March 11, 2010.
•Comments were accepted through July 16.
Reporting Entity
At their meeting on November 19, “[T]he Boards
discussed some of the issues raised in comment
letters on the Exposure Draft. . .and concluded
that significant time will be required to
satisfactorily address those issues. Because of the
priority placed on other projects, the Boards
concluded that they cannot devote the time
necessary to properly address those issues in the
near future.
GAAP and IFRS Convergence
Revenue Recognition Project: The FASB and
IASB formally agreed to embark on the joint
project in 2002.
Revenue Recognition Project
Before the Norwalk Agreement, the FASB
had begun a project that “would lead to a new
comprehensive accounting standard on
revenue recognition and also would amend the
related guidance on revenues and liabilities in
certain of the FASB concepts statements.”
Revenue Recognition Project
“Comprehensive guidance on revenue
recognition has not been previously developed
in the United States. . .There currently are
more than 140 pieces of authoritative
literature that relate to revenue recognition.”
– The
FASB Report, December 24, 2002
Revenue Recognition Project
Although the Codification Database does
away with the multiplicity of authoritative
sources of GAAP regarding revenue
recognition, it remains both internally
inconsistent and inadequate as guidance for
many situations that businesses find
themselves in.
Revenue Recognition Project
The Exposure Draft proposes that an entity
would “recognize revenue to depict the
transfer of goods or services to customers in
an amount that reflects the consideration that
it receives, or expects to receive, in exchange
for those goods or services.”
Revenue Recognition Project
An entity accomplishes this in five steps:
1. Identifies its contract(s) with a customer;
2. Identifies the separate performance
obligations in its contract(s);
3. Determines the transaction price;
Revenue Recognition Project
4. Allocates the transaction price to the
separate performance obligations;
5. Recognize revenue when the entity
satisfies each performance obligation.
Revenue Recognition Project
As the entity satisfies the obligations of the
contract, it recognizes the proportionate
revenue that has been allocated to the
performance obligation.
GAAP and IFRS Convergence
Financial Statement Presentation
– A joint project between the FASB, the
IASB, and the Accounting Standards Board
of Japan (ASBJ).
Financial Statement Presentation
Purpose: To “establish a common, highquality standard for presentation of
information in the individual financial
statements (and among the financial
statements) that will improve the ability of. .
.financial statement users to:
(continued on next slide)
Financial Statement Presentation
1. “Understand an entity’s present and past
financial position.”
2. “Understand the past operating, financing,
and other activities that caused an entity’s
financial position to change and the
components of those changes.”
Financial Statement Presentation
3. “Use (the) financial statement information
(along with information from other sources) to
assess the amounts, timing, and uncertainty of
an entity’s future cash flows.”
Financial Statement Presentation
The project is being completed in three
phases:
– In the first phase, the FASB and IASB
“addressed what constitutes a complete set
of financial statements and the
requirements for presenting comparative
financial information.”
Financial Statement Presentation
• The FASB and IASB completed deliberations
on Phase 1 in December, 2005.
•The IASB revised International Accounting
Standard 1, “which brings IAS1 largely into
line with SFAS 130, Reporting Comprehensive
Income”.
Financial Statement Presentation
• The FASB decided to wait until the end of
Phase 2 before publishing an exposure draft
on Phase 1.
Financial Statement Presentation
The second phase “addresses the more
fundamental issues for presentation of
information on the faces of financial
statements.”
Financial Statement Presentation
Second Phase topics include:
– “Developing principles for aggregating and
disaggregating information in each financial
statement.”
– “Defining the totals and subtotals to be
reported in each financial statement. . .”
– “Reconsidering SFAS 95, Statement of Cash
Flows,. . . including whether to require the use
of the direct or indirect method.”
Financial Statement Presentation
The FASB and IASB jointly issued a
discussion paper on financial statement
presentation in October, 2008. The discussion
paper covers both Phase 1 and Phase 2.
Financial Statement Presentation
The FASB and IASB solicited comments
specifically on whether the following
objectives will improve the usefulness of
information provided in financial statements
for capital providers, and whether we believe
that the proposed means of fulfilling the
objectives will be effective.
Financial Statement Presentation
Objective 1: Cohesiveness (“An entity should
present information in its financial statements
in a manner that portrays a cohesive financial
picture of its activities.”)
Financial Statement Presentation
To the extent feasible, cohesiveness should be
attained at the line item level. In many cases
(e.g., research and development) this is not
practical.
Financial Statement Presentation
Objective 2: Disaggregation (“An entity
should disaggregate information in its
financial statements in a manner that makes it
useful in assessing the amount, timing, and
uncertainty of its future cash flows.”)
Financial Statement Presentation
Objective 3: Liquidity and Financial
Flexibility (“An entity should present
information in its financial statements in a
manner that helps users to assess the entity’s
ability to meet its financial commitments as
they become due and to invest in business
opportunities.”)
Financial Statement Presentation
The FASB and IASB posted the comments
that they received to their respective websites.
Financial Statement Presentation
•Originally, the two boards had intended to
release an exposure draft by the end of 2010.
•The date was later moved to the first quarter
of 2011.
Financial Statement Presentation
• On July 1, the FASB and IASB jointly
released a staff draft of an exposure draft on
the new financial statement presentation.
•(This is literally a draft of a draft.)
Financial Statement Presentation
On November 1, the boards announced that
“[A]t their October 2010 joint meeting, the
Boards acknowledged that they do not have
the capacity currently to devote the time
necessary to consider the information learned
during outreach activities and modify their
tentative decisions.”
Financial Statement Presentation
“Consequently, the Boards decided to not
issue an Exposure Draft in the first quarter
2011 as originally planned.”
Financial Statement Presentation
"The Boards will return to this project when
they have the requisite capacity. This is
expected to be after June 2011.”
Financial Statement Presentation
What follows are the major aspects and
features of the financial statements that are
proposed in the staff draft of July 1, 2010.
Financial Statement Presentation
These are an indication of the future of
financial reporting, as currently envisioned by
the FASB and IASB.
Financial Statement Presentation
An entity’s financial statements shall include
the following sections, categories, and
subcategories, as appropriate:
a. A business section, containing:
1. An operating category
i. An operating finance
subcategory
2. An investing category. [62]
.
Financial Statement Presentation
An entity’s financial statements shall include:
b. A financing section, containing:
1. A debt category
2. An equity category.
[62]
Financial Statement Presentation
An entity’s financial statements shall include:
c. An income tax section.
d. A discontinued operation section.
e. A multicategory transaction section. [62]
The Operating Category
The operating category of the business section
will include:
–Assets used in the entity’s day-to-day
business and all changes in those assets;
– Liabilities that arise from the entity’s
day-to-day business and all changes in
those liabilities. [72]
The Operating Finance Subcategory
The operating finance subcategory includes
liabilities that “are directly related to an
entity’s operating activities; however, they
also provide a source of long-term financing
for the entity.” [74]
The Operating Finance Subcategory
Liabilities are included in the operating
finance subcategory if they meet (all) three
conditions:
The Operating Finance Subcategory
Condition 1: “The liability is incurred in
exchange for a service, a right of use, or a
good, or is incurred directly as a result of an
operating activity (rather than a capital-raising
activity that funds general business activities,
capital expenditures, or acquisition
activities); [75]
The Operating Finance Subcategory
Condition 2: “The liability is initially long
term”; [75]
The Operating Finance Subcategory
Condition 3: “The liability has a time value of
money component that is evidenced by either
interest or an accretion of the liability
attributable to the passage of time (that is, the
accounting for the liability requires the
calculation of an interest component).” [75]
The Operating Finance Subcategory
The staff draft offers the following examples
of liabilities that would be presented in the
operating finance subcategory:
a. A net postemployment benefit
obligation;
b. A lease obligation;
c. Vendor financing; [76]
The Operating Finance Subcategory
“If an entity enters into a borrowing
arrangement with its own suppliers primarily
to acquire a specific good used in production
or to procure a specific service, that
borrowing arrangement, if initially long term,
is classified in the operating finance
subcategory of the operating category. If such
a borrowing arrangement is not initially long
term it is classified in the operating category.”
[89]
The Operating Finance Subcategory
Assets restricted for the purpose of satisfying
liabilities reported in the operating finance
subcategory will also be presented in the
operating finance subcategory. [77]
The Investing Category
The investing category of the business section
will include “an asset or a liability that an
entity uses to generate a return and any
change in that asset or liability”. [81]
The Investing Category
“No significant synergies are created for the
entity by combining an asset or a liability
classified in the investing category with other
resources of the entity.” [81]
The Investing Category
“An asset or a liability classified in the
investing category may yield a return for the
entity in the form of, for example, interest,
dividends, royalties, equity income, gains, or
losses.” [81]
The Investing Category
“Examples of investing activities and related
items include:
a.The purchase and sale of investments,
unless the transaction is part of the business in
which the entity is engaged (for example,
financial services entities)”
b. Dividends received on equity investments”
[82]
The Investing Category
“Examples of investing activities and related
items include:
c. Interest earned on debt investments
d. The purchase and sale of nonfinancial
assets, such as a real estate investment
e. Distributions of nonfinancial investments
such as rents, royalties, fees, and commissions
f. Equity method investments and investments
in fixed-income securities and equity
securities.” [82]
The Financing Section
The financing section shall include items that
are part of an entity’s activities to obtain (or
repay) capital. [83]
Two categories in the financing section:
Debt
Equity
The Financing Section
Although the statement of comprehensive
income and statement of financial position
will present debt-related and equity-related
activities separately, “The statement of cash
flows shall not include separate categories for
debt or equity.” [85]
The Financing Section
“Assets and liabilities and the related income
effects that arise from transactions involving
an entity’s own equity shall be classified in
the debt category and presented separately
from borrowing arrangements within the debt
category.” [93]
The Financing Section
“Examples of assets and liabilities that arise
from transactions involving an entity’s own
equity include:
a. A dividend payable
b. A written put option on the entity’s own
shares
c. A prepaid forward purchase contract for the
entity’s own shares.” [94]
The Financing Section
“Examples of activities or items that may be
classified in the equity category in the
statement of financial position or the
financing section in the statement of cash
flows include:
a. Issuing shares or other equity instruments
b. Common, preferred, and treasury shares
c. Cash payments to owners to acquire or
redeem the entity’s shares
d. Distributions to owners.” [96]
The Financing Section
Assets and liabilities will be presented in
seven separate categories of the statement of
financial position.
1.Business Operating
2.Business Operating Finance
3.Business Investing
4.Financing – Debt related
The Financing Section
Assets and liabilities will be presented in
seven separate categories of the statement of
financial position.
5. Financing – Equity related
6. Income Tax-related
7. Discontinued Operations
The Income Tax Section
“The income tax section of the statement of
financial position shall include all current and
deferred income tax assets and liabilities. . .
and any other assets or liabilities related to
income taxes. An entity shall present cash
flows related to those assets and liabilities in
the income tax section of the statement of
cash flows.” [97]
The Income Tax Section
“In the statement of comprehensive income,
an entity shall allocate income tax expense or
benefit in accordance with Topic 740”. [98]
The Income Tax Section
“Consequently, an entity may be required to
present amounts of income tax expense or
benefit in the discontinued operation section
and in the other comprehensive income part of
the statement of comprehensive income rather
than in the income tax section of the statement
of comprehensive income.” [98]
The Discontinued Operations Section
“All assets and liabilities related to a
discontinued operation shall be classified in
the discontinued operation section of the
statement of financial position.” [99]
The Discontinued Operations Section
“All changes in the assets and liabilities of a
discontinued operation shall be presented in
the discontinued operation section of the
statements of comprehensive income and cash
flows.” [99]
Multicategory Transactions
“The net effects on comprehensive income
and cash flows of an acquisition (or disposal)
that results in the recognition of assets and
liabilities in more than one section or category
in the statement of financial position shall be
classified in the multicategory transaction
section of the statements of comprehensive
income and cash flows.” [100]
Financial Statement Presentation
“An entity shall classify an asset or a liability
used for more than one function in the
section or category of predominant use.”
[106]
Financial Statement Presentation
“Interest expense and cash paid for interest
shall be presented in the same section,
category, or subcategory as the liability giving
rise to the interest.” [107]
Classification of Assets and Liabilities
“An entity shall present short-term assets,
long-term assets, short-term liabilities, and
long-term liabilities separately in each
category within its statement of financial
position unless a presentation based on
liquidity provides information that is more
relevant.” [115]
Classification of Assets and Liabilities
Note: No more “current” and “non-current”
assets and liabilities. “Short-term” if within
one year, “long-term” if more than one year.
[124]
Classification of Assets and Liabilities
If a presentation based on liquidity is more
relevant, “an entity shall present all assets and
liabilities within each category in order of
liquidity.” [115]
Classification of Assets and Liabilities
“[A]n entity may present some of its assets
and liabilities using a short-term/long-term
classification and others in order of liquidity
if that presentation provides information that
is relevant. The need for a mixed basis of
presentation may arise when an entity has
diverse operations.” [116]
Disaggregation
Disaggregation: “[D]isaggregate assets and
liabilities and present them separately in the
statement of financial position when the
function, nature, or measurement basis of an
item or aggregation of similar items is such
that separate presentation is relevant to an
understanding of the entity’s financial
position.” [119]
Disaggregation
“Assets or liabilities that do not respond
similarly to similar economic events shall
be presented separately in the statement of
financial position.” [120]
Cohesion
“An entity shall classify items of income and
expense that comprise net income into the
section, category, and subcategory that are
consistent with the classification of the related
asset or liability in the statement of financial
position and consistent with the related cash
flows in the statement of cash flows.” [137]
Financial Statement Presentation
“An item of income or expense that is not
related to an asset or a liability in the
statement of financial position shall be
classified consistent with the activity
generating the income, expense, or cash
flow.” [137]
Disaggregation
“Disaggregation of income and expense items
by function is useful in understanding the
various activities required to convert an
entity’s resources into cash.” [149]
Disaggregation
“An entity shall disaggregate and present its
income and expense items by function within
each section and category in the statement of
comprehensive income so that the information
is useful in understanding the activities of the
entity and in assessing the amount, timing,
and uncertainty of future cash flows.” [140]
Disaggregation
“An entity shall disaggregate its income and
expense items by their nature within the
related functional grouping to the extent that
the information is useful in assessing the
amount, timing, and uncertainty of future cash
flows.” [142]
Disaggregation
“Disaggregation by nature within a functional
grouping may include, for example,
disaggregating total cost of sales into
materials, labor, transportation, and energy
costs. Disaggregation by nature within a
functional grouping may also include, for
example, disaggregating revenue from selling
goods into wholesale and retail components.”
[143]
Disaggregation
“An entity may choose not to disaggregate. .
.by function if (doing so) is not useful to users
of financial statements in understanding the
entity’s activities and the amount, timing, and
uncertainty of future cash flows. (In that
case), an entity shall disaggregate its income
and expense items by nature and present that
information in the statement of
comprehensive income.” [148]
Statement of Cash Flows
• The statement of cash flows will be prepared
on the direct basis.
• To the extent practical, the activities will
align with the sections in the Statement of
Financial Position and the Statement of
Comprehensive Income.
Statement of Cash Flows
“[D]isaggregate cash flows in the statement of
cash flows by classes of cash receipts and
payments so that the statement of cash flows
provides a meaningful depiction of how the
entity generates and uses cash.” [177]
Financial Statement Presentation
“Cash Equivalents” will no longer be
presented on the same line of the balance
sheet as “Cash”.
Statement of Comprehensive Income
“In the statement of comprehensive income,
an entity shall indicate for each item of other
comprehensive income, except for a foreign
currency translation adjustment of a
consolidated subsidiary, whether the item
relates to an operating activity, investing
activity, financing activity, or a discontinued
operation.” [139]
Statement of Comprehensive Income
Separate from the project dealing with overall
financial statement presentation, the FASB
and IASB have been working on a project to
redesign the statement of comprehensive
income (income statement).
Statement of Comprehensive Income
The two boards expect to release a
pronouncement on the statement of
comprehensive income in early 2011.
Statement of Comprehensive Income
The boards have tentatively decided “[T]o
require entities to present net income and
other comprehensive income either in a single
continuous statement or in two separate, but
consecutive, statements.”
Statement of Comprehensive Income
The boards have also decided “[T]o affirm the
FASB’s tentative decision to require
reclassification adjustments to be presented in
both other comprehensive income and net
income.”
Balance Sheet
The FASB and IASB are also working on a
separate project related to the balance sheet.
Balance Sheet
The two boards expect to release a
pronouncement in the first quarter of 2011.
Balance Sheet
In November, the two boards decided that
assets and liabilities related to financial
instruments may be offset “only if the entity
has the unconditional right of offset and
intends to settle net or intends to settle
simultaneously.”
Balance Sheet
Simultaneous settlement refers to transactions
that settle at the same moment.
Balance Sheet
“[A]n entity cannot offset a recognized
financial asset and financial liability if the
entity has a conditional right of offset.”
Financial Instruments
The two boards also expect to jointly publish
a pronouncement on accounting for financial
instruments in the second quarter of 2011.
Financial Instruments
Current discussions revolve around alternative
methods of accounting for credit impairment.
Leases
The FASB and IASB are currently holding
roundtable discussions before they issue a
final pronouncement in 2011.
The FASB and IASB accepted comments on
an Exposure Draft (which had been released
on August 17) through December 15.
Leases
The Exposure Draft proposes removing the
distinction between operating and capital
leases.
Leases
All leases provide both the lessee and the
lessor with an economic benefit consistent
with the suggested definition of an asset and
with an obligation consistent with the
suggested definition of a liability.
Insurance Contracts
IFRS does not currently provide guidance to
the extent that American GAAP does
concerning insurance contracts.
Insurance Contracts
The IASB released an exposure draft on July
30, 2010 to provide further guidance. The
draft’s provisions differ greatly from
American GAAP.
Insurance Contracts
The FASB published a discussion paper on
Insurance Accounting on September 17.
Comments were invited through December
15. The FASB is currently holding roundtable
discussions to gain further feedback on the
discussion paper.
Fair Value Measurement
The FASB and IASB expect to publish a
pronouncement on fair value measurement
during the first quarter of 2011.
Fair Value Measurement
The FASB published an exposure draft on
June 29, 2010. Comments were accepted
through September 7.
Fair Value Measurement
The boards have tentatively decided “that an
entity may apply the guidance on measuring
the fair value of liabilities when measuring the
fair value of its own equity instruments.”
Fair Value Measurement
“[T]he objective of measuring the fair value
of a liability or an entity's own equity
instrument is to estimate an exit price from the
perspective of a market participant who holds
the corresponding asset at the measurement
date, regardless of whether that asset is traded
(for example, on an exchange).”
Fair Value Measurement
The boards also tentatively decided that “An
entity may measure the fair value of financial
instruments that are managed on the basis of
the entity's net exposure to a particular market
risk, or to the credit risk of a particular
counterparty, on a net basis if there is
evidence that the entity manages its financial
instruments in this way.”
Discontinued Operations
The boards expect to publish and exposure
draft and a final pronouncement on
discontinued operations during 2011.
Discontinued Operations
The boards do not expect significant changes
in how discontinued operations are presented
in the statement of comprehensive income.
However, there may be additional disclosures
required.
Voting Interest Entities
The FASB and IASB are jointly meeting to
develop guidance on how to consolidate
entities that are “controlled by voting or
similar interests.”
Voting Interest Entities
No timetable has been developed for issuing a
discussion paper or exposure draft on this
subject.
Investment Companies
The FASB and IASB are also discussing “a
number of issues raised by constituents
related to the definition of an investment
company.”
Investment Companies
The issues concern how to account for a noninvestment company that has an investment
company as a consolidated subsidiary.
Investment Companies
No timetable has been developed for issuing a
discussion paper or exposure draft on this
subject.
Emission Trading Schemes
The FASB and IASB have begun a project to
determine the appropriate accounting for
emission trading schemes.
Emission Trading Schemes
The boards expect to release an exposure draft
by the end of 2011.
Research Projects
The FASB and IASB currently have joint
research projects underway on
•Effective Dates and Transition Methods, for
which a discussion paper was released on
October 31, 2010;
•Derecognition of Financial Instruments, for
which the FASB’s website has not been
updated since May 1, 2009.
Research Projects
The discussion paper on effective dates and
transition methods solicits the opinions of all
interested parties on how best to implement
new and revised principles resulting from the
convergence of GAAP and IFRS.
Research Projects
Comments will be accepted through January
31, 2011.
GAAP and IFRS Convergence
In 2008 and 2009, and again on November 29,
2010, the FASB and IASB have reaffirmed
the 2006 Memorandum of Understanding.
GAAP and IFRS Convergence
The FASB and IASB “again affirmed their
commitment to developing a common set of
high-quality standards.”
GAAP and IFRS Convergence
“The boards are aware that that continued
progress toward convergence [sic] is a factor
that the Securities and Exchange Commission
will consider in evaluating its recent proposal
to permit or require use of IFRS’s in the U.S.”
What will come of convergence?
• The obvious result: More consistency
between American GAAP and International
Accounting Standards.
• A more subtle, but nonetheless important,
result: A rethinking of American GAAP.
More Information
• http://www.fasb.org
• http://www.iasb.org