IFRS vs US GAAP – Key differences and
convergence process
Bob Dohrer, RSM McGladrey
Marco Marcellan, Executive Office
RSM International Conference, Singapore 2007
Differences between US GAAP and IAS/IFRS
• This presentation does not cover all the topics. For
instance it does not cover:
– Share based payments, Discontinuing operations, Post balance
sheet events, Hyperinflation, Earning per shares, First time
adoption, investment property, Disclosures, Banks/Insurances
and other specific industry issues, etc.
• With regard to the topics covered, not all the differences
between the two frameworks have been identified
• It is intended just to give a “flavour” on major differences
RSM International Conference, Singapore 2007
IFRS vs US GAAP: topics covered
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IFRS and US GAAP Hierarchy
Convergence Project
Conceptual framework
Financial statements
Consolidation
Business combinations
Goodwill
Impairment
Revenue recognition
Employee benefits
RSM International Conference, Singapore 2007
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Intangible assets
Tangible assets
Leases
Financial assets
Derivatives and hedging
Deferred tax
Inventories
Segment reporting
Interim reporting
US GAAP Hierarchy*
•
Category (a), officially established
accounting principles, consists of:
– FASB Statements and
Interpretations
– APB Opinions
– AICPA Accounting Research
Bulletins
•
Category (b) consists of:
– FASB Technical Bulletins
– AICPA Industry Audit and Accounting
Guides
– AICPA Statements of Position
•
Category (c) consists of:
– AICPA Accounting Standards
Executive Committee (AcSEC)
Practice Bulletins
– Consensus positions of the FASB
Emerging Issues Task Force
•
Category (d) includes:
– AICPA accounting interpretations
and implementation guides ("Qs and
As") published by the FASB staff
– Practices that are widely recognized
and prevalent either generally or in
the industry
– FASB Staff Positions (FSPs)
*: Source: AU 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
RSM International Conference, Singapore 2007
The US GAAP literature
•
•
•
•
Over 2,000 pronouncements
Over 6,500 pages – FASB material alone
Some 25,000 pages of standards and guidance in total
495 EITF issued until December 2006
Example: GAAP on leasing
• 9 FAS (FAS 13 + 8 other FAS)
• 6 FIN
• 36 EITF
RSM International Conference, Singapore 2007
IFRS Hierarchy
• Standards and interpretations approved by the IASC/IASB
• SIC/IFRIC interpretations
IFRS is at an “infancy
stage”compared to US GAAP
RSM International Conference, Singapore 2007
The IFRS literature
• 55 pronouncements
• Some 2,500 pages (all pronouncements)
Example: GAAP on leasing
• IAS 17
• 1 IFRIC
• 2 SIC
RSM International Conference, Singapore 2007
The quest for the Global GAAP
US GAAP: highly detailed
rules-based system
IFRS: set of principles
?
Global GAAP
RSM International Conference, Singapore 2007
"By 2011–12, U.S. and international accounting
should be pretty much the same—with 150
countries using IFRS and several others using
U.S. GAAP. That adds up to about 170 countries
accounting in much the same way."
"The idea of one single set of standards for use
around the world is gathering momentum. And
that’s why it’s important, I think, for the U.S.
profession to look at what’s happening
internationally, because it’s coming your way,
just as the rest of us are watching the U.S.
because we’re moving together."
RSM International Conference, Singapore 2007
Sir David Tweedie
Chairman of IASB
(source: Journal of Accountancy,
"Simplifying Global Accounting“, July 2007)
“Eventually, he [Bob Herz] told me after the panel,
he thinks the one set of global set of standards will
be IFRS. But not until the MOU projects (including
leasing, pensions) are completed, and the joint
conceptual framework is completed”
“We need a national plan, with timetables and
milestones”
“«I don’t believe in a two-GAAP system» he [Bob
Herz] said, adding that he is looking for an “orderly
way” to get to a single accounting system and that
a national plan involving timetables and education
efforts would be required to achieve it”
RSM International Conference, Singapore 2007
Bob Herz
Chairman of FASB
(source: Financial Executives
International's Global Financial
Reporting Conference, New York, 28
September 2007 )
Convergence project:
“The Norwalk Agreement”
(29 October 2002)
High priority issues identified:
• Undertake a short-term project aimed at removing a variety of
individual differences between US GAAP and IFRS/IAS
• Remove other differences between IFRSs and US GAAP that will
remain at January 1, 2005 through the mutual undertaking of
discrete, substantial projects which both Boards would address
concurrently
• Encourage their respective interpretative bodies to coordinate their
activities
RSM International Conference, Singapore 2007
Roadmap for convergence 2006-2008
Memorandum of Understanding (MoU)
(27 February 2006)
• Commitment to the development of high quality,
compatible accounting standards that could be used for
both domestic and cross-border financial reporting
• Make their existing financial reporting standards fully
compatible as soon as is practicable
• Co-ordinate their future work programmes to ensure that
once achieved, compatibility is maintained
• A common set of high quality global standards remains the
long-term strategic priority of both the FASB and the IASB
RSM International Conference, Singapore 2007
Roadmap for convergence 2006-2008
Memorandum of Understanding
(27 February 2006)
• Trying to eliminate differences between two standards that
are in need of significant improvement is not the best use
of the FASB’s and the IASB’s resources—instead, a new
common standard should be developed that improves the
financial information reported to investors
• Serving the needs of investors means that the boards
should seek to converge by replacing weaker standards
with stronger standards
RSM International Conference, Singapore 2007
SEC Announces next steps relating to IFRS
(24 April 2007)
• The Commission anticipates issuing a Proposing Release
in summer that would include the following major points:
• Give foreign private issuers a full choice between IFRS
and U.S. GAAP (drop reconciliation)
• In addition, the Commission plans a Concept Release
relating to issues surrounding the possibility of treating
U.S. and foreign issuers similarly in this respect by also
providing U.S. issuers the alternative to use IFRS
RSM International Conference, Singapore 2007
Framework for Advancing Transatlantic
Economic Integration between the USA and EU
(30 April 2007)
• Promote conditions for the U.S. GAAP and IFRS
to be recognised in both jurisdictions without the
need for reconciliation by 2009 or possibly sooner
• Work on greater regulatory convergence towards
highest quality and most effective regulation and,
where appropriate, mutual recognition in the
fields of securities regulation
• Increase cooperation between EU and U.S.
financial regulators
RSM International Conference, Singapore 2007
Proposed rule n. 33-8818
IFRS vs US GAAP reconciliation for FPI
(2 July 2007)
• The Commission is proposing to accept from foreign private issuers:
• Their financial statements prepared in accordance with IFRS as
published by the IASB without reconciliation to US GAAP
• Financial statements prepared in accordance with the English
language version of IFRS as published by the IASB
• Comments should be received on or before September 24, 2007
RSM International Conference, Singapore 2007
Concept release n. 33-8831
US issuers and use of IFRS
(7 August 2007)
• Purpose of the release:
– obtain information about the extent and nature of the public’s
interest in allowing U.S. issuers, including investment
companies subject to the Investment Company Act of 1940, to
prepare financial statements in accordance with IFRS as
published by the IASB for purposes of complying with the rules
and regulations of the Commission
– Comments should be submitted on or before November 13,
2007
RSM International Conference, Singapore 2007
Short-term convergence (MoU)
To be examined by the FASB
To be examined by the IASB
Fair value option
Borrowing cost (done)
Impairment (jointly with the IASB)
Impairment (jointly with the FASB)
Income taxes (jointly with the IASB)
Income taxes (jointly with the FASB)
Investment properties
Government grants
Research and development
Joint ventures
Subsequent events
Segment reporting (done)
RSM International Conference, Singapore 2007
Other major convergence projects (MoU)
Conceptual framework
Revenue Recognition
Business combinations
Leases
Financial statement presentation
Insurance contracts
Revenue recognition
Liabilities (IAS 37)
Fair value measurement
Derecognition
Intangible assets
Liability and Equity
Financial statement presentation
Financial instruments
RSM International Conference, Singapore 2007
Conceptual frameworks
and convergence project
• On May 2005 begun a new joint agenda project. “The goal
is to build on the two existing frameworks by refining,
updating, completing and converging them into a common
framework” (*)
• “There is no real need to change many aspects of the
existing frameworks, other than to converge different ways
of expressing what are in essence the same concepts” (*)
*: Source: “Revisiting the Concepts”. Article published on FASB and IASB web sites on May 2005
RSM International Conference, Singapore 2007
Conceptual frameworks
and convergence project
• Asset and liability view for both IFRS and US GAAP
• Qualitative characteristics are arrayed in a different manner:
– US GAAP: 1) understandability 2) relevance & reliability 3) comparability
– IFRS: same level
• Difficulties and differences with the current definitions
– Assets, liabilities, equity, probable, control, etc.
• Difficulties and differences about how many elements
– Physical capital maintenance concept
– IFRS: income, expenses
– US GAAP: revenue, expenses, gains, losses (comprehensive income)
RSM International Conference, Singapore 2007
Conceptual frameworks
and convergence project
• Differences in the recognition criteria in financial statements
– Probability criterion for IFRS, not for US GAAP
– Relevance criterion for US GAAP, not for IFRS
• Differences in measurement
– Both framework are underdeveloped
• Difficulties and inconsistencies about the concepts of “reporting
entity” and “control over entities”
– Example: special-purpose entity issue
• Display and Disclosures
– Discussed in general terms in both frameworks
RSM International Conference, Singapore 2007
Conceptual frameworks
and convergence project
• In addition, both frameworks have little or no guidance on:
– Definition, level of detail and appropriateness of subtotals in income
statements
– Derecognition: not discussed in either the IASB’s or the FASB’s conceptual
framework
FASB
IASB
• Measurement attribute (*):
No fair value
definition!!!
Historical cost
Historical cost
Current cost
Current cost
Current market value
Net realizable value
Realisable value
Present value
Present value
*: Source: speech given by FASB Chairman Robert Herz at 2005 Annual
Meeting of the American Accounting Association (August 2005)
RSM International Conference, Singapore 2007
Financial statements: balance sheet
Topic
IFRS
US GAAP
Balance Sheet format
•IAS 1 does not prescribe a
particular format, but minimum
lines to be presented
•Similar to IFRS, but items are
normally presented in
decreasing order of liquidity
Current/Non-current
distinction
•Required except for when a
liquidity presentation is used. In
general, 12 months represents
the border
•An entity is elected to choose
whether to present
Current/Non-current distinction
Offsetting
•Permitted only if allowed by
specific Standards/
Interpretations. Offset involving
different parties is allowed
Permitted where there is:
• intention of offset
• offset is enforceable by law
• offset permitted only where
the parties owe to each other
RSM International Conference, Singapore 2007
Financial statements: income statement
Topic
IFRS
US GAAP
Income statement
format
•IAS 1 does not prescribe a
particular format, but minimum
lines to be presented. Both
classification “by function” and
“by nature” are allowed
Entities are elected to choose:
• Full “by function” format
• Gross profit computed as
Sales less COGS. Than other
costs
Extraordinary items
•Expressly prohibited
•Virtually not allowed
RSM International Conference, Singapore 2007
Financial statements: cash flow statement
Topic
IFRS
US GAAP
Cash flow format
•Both direct and indirect
methods are allowed. Indirect
method is more common
•Similar to IFRS
Definition of cash and
cash equivalents
•Includes overdraft that
fluctuates from being positive to
overdrawn. Investment qualifies
as a cash equivalent only when
maturity of three months or less
from the date of acquisition
•Similar to IFRS except for
overdrafts, which are always
excluded from cash and cash
equivalents
Presentation of
specific items
•Interests paid/received and
dividends paid received can be
both financing or operating
•Interests paid/received and
dividends received are
operating. Dividend paid are
financing
RSM International Conference, Singapore 2007
Financial statements:
equity and recognised gains and losses
Topic
IFRS
US GAAP
Statement of changes
in Shareholders’
Equity
•Represents a primary
statement
•Its information can be included
in the notes
Statement of
recognised gains and
losses
•Can be presented in the notes
or within the Statement of
changes in Shareholders’
Equity.
•Includes net income and
gains/losses recognised directly
in equity
•In addition to the two IFRS
options, a single primary
statement of income and other
comprehensive income can be
used.
•It is known as ”Other
comprehensive income” and a
grand total is required
RSM International Conference, Singapore 2007
Financial statements: comparatives
Topic
Comparatives
presentation
IFRS
US GAAP
•One year of comparative for all
numerical information reported
in the financial statement
•Based on SEC rules two years
of comparatives are required
except for the balance sheet as
for which one year of
comparative is required
RSM International Conference, Singapore 2007
Consolidation, Associates and JV
Topic
Definition of Control
IFRS
US GAAP
• Definition of subsidiary based
on power to control
• Control is the power to govern
the financial and operating
policies of an entity
• List of indicators to assess
control
• Used the concept of de facto
control
• Controlling interest usually
through majority of ownership
or voting shares or by contract
(similar to IFRS but more
detailed pronouncements)
• “Effective” control rarely used
(concept similar to de facto
control under IFRS)
RSM International Conference, Singapore 2007
Consolidation, Associates and JV
Topic
IFRS
US GAAP
Special Purpose
entities (SPEs)
•SPEs should be consolidated
where the substance of the
relationship indicates control
(SIC 12)
•Introduced the concept of
Variable Interest Entity (VIE).
•VIE are consolidated by its
primary beneficiary (FIN 46R)
QSPEs
•Such concept does not exist
•Qualified SPEs that meet
certain strict criteria are not
consolidated
Different reporting
dates of parent and
subsidiary and
associates
•Reporting difference no more
than three months. Significant
intervening differences must be
adjusted
•Reporting difference no more
than three months. Significant
intervening differences must be
disclosed
RSM International Conference, Singapore 2007
Consolidation, Associates and JV
Topic
IFRS
US GAAP
Accounting for
•Either Cost method or Fair
investments in
value method are allowed.
subsidiaries in parent- Equity method is not allowed
company financial
statements
•No promulgated rules, but
Cost method, Fair value
method and Equity method are
generally accepted
Presentation of
minority interests
•In equity
•Outside equity, between
liabilities and equity
Joint ventures
•Three types: Jointly controlled
entities, Jointly controlled
operations, jointly controlled
assets
•APB 18 provides the definition
of corporate joint ventures as a
separate specific business
/project for mutual benefit
RSM International Conference, Singapore 2007
Consolidation, Associates and JV
Topic
IFRS
US GAAP
Jointly controlled
entities
•Either proportionate
consolidation (benchmark) or
equity method are allowed
•Proportionate consolidation is
generally not allowed. Equity
method is predominantly used
Jointly controlled
operations
•Venturer recognises its interest
in assets controlled,liabilities
assumed, expensed incurred
and income earned
•See above
Jointly controlled
assets
•Similar to Jointly controlled
operations
•See above
RSM International Conference, Singapore 2007
Business Combinations
Topic
IFRS
US GAAP
Method of accounting
•The purchase method is always
applied.
•No guidance for transaction
under common control
•The purchase method is
always applied.
•Transaction under common
control are accounted for at
predecessor book basis
Acquisition date
•Date on which the acquirer
obtain control
•The date on which the
transaction closes
Consideration
contingent on a future
event
•Included as part of the cost at
acquisition date if can be
reliably measured. Subsequent
revision adjusted against
goodwill
•Generally excluded for the
initial cost. Subsequent
adjustment recorded against
goodwill
RSM International Conference, Singapore 2007
Business Combinations
Topic
IFRS
US GAAP
Post-acquisition
planned restructuring
•Restructuring provision must be •A provision can be recorded
recognised provided they meet only if a restructuring plan is in
the IAS 37 criteria
place at acquisition date.Plan
to be completed within one
year
Development costs
•Recognised as a separate item
if the definition of intangible
asset is met
•Expensed
Contingent liabilities
•Included if can be measured
reliably. Otherwise disclosures
•Similar to IFRS
Minorities
•Are stated at minority’s
proportion of the fair value of
acquired/recognised net assets
•Are stated at minority’s
proportion of acquiree historical
book value
RSM International Conference, Singapore 2007
Goodwill
Topic
IFRS
US GAAP
Negative goodwill
•After reassessment any
residual excess is recognised
immediately in profit or loss (not
as extraordinary gain)
•Any excess is allocated on a
pro-rata basis to some nonfinancial assets. Residual
excess recognised as
extraordinary gain
Provisional
accounting
•Adjustments of provisional fair
values can be booked against
goodwill within 12 months from
acquisition date. After, adjusted
to income statement
•Similar to IFRS but favourable
adjustments to restructuring
are always booked against
goodwill
Goodwill
•Not amortised and tested for
impairment at least annually at
CGU level
•Not amortised and tested for
impairment at lease annually at
Reporting unit level
RSM International Conference, Singapore 2007
Impairment
Topic
IFRS
US GAAP
Indication of
impairment
•Includes a list of indicators to
be analysed at least annually
•Impairment is considered if the
asset’s carrying amount
exceeds the expected future
undiscounted cash flows
Impairment amount
calculation
methodology
•One-step approach: impairment
results from the difference
between the carrying amount
and the higher between the
asset’s VIU and its fair value
less cost to sell
Two-step approach:
1) If the carrying amount of the
reporting unit including goodwill
is higher than its fair value,
than step 2
2) Determine the implied fair
value of goodwill and compare
with goodwill carrying amount
RSM International Conference, Singapore 2007
Impairment
Topic
IFRS
US GAAP
Impairment of
indefinite life
intangible assets
•Tested at CGU level
•Are tested separately from the
reporting unit
Reversal of
impairment
•Allowed if certain criteria are
met, but no reversal of
impairment of Goodwill
•Prohibited
RSM International Conference, Singapore 2007
Revenue recognition
Topic
IFRS
US GAAP
Revenue recognition
framework
•“Risk and rewards” approach
and the seller retains neither
management involvement nor
control over goods (IAS 18)
•No dedicated standard to
revenue recognition. Extensive
and detailed guidance included
in various statements, in
particular SAB 101
Multiple-element
arrangements
•Some guidance available in
IAS 18
•Revenue arrangements are
separated into units of
accounting and accounted for
separately if conditions of EITF
00-21 are met
Construction
contracts
•Completed contract method
always prohibited
•Completed contract method is
allowed when the percentage
of completion method cannot
be applied reliably
RSM International Conference, Singapore 2007
Employee benefits
Topic
IFRS
US GAAP
Method of accounting
•Project unit credit method
Discount rate for
obligations
•Based on high quality corporate •Use of corporate bonds not
bonds
required
Recognition of
Actuarial gains /
losses
• Amortise portion outside 10%
corridor over the expected
remaining working live of
employees, or
• Use faster methods, or
• Recognised directly in equity
(UK method)
Frequency of actuarial •The frequency of actuarial
valuations
valuations is not mandated
RSM International Conference, Singapore 2007
•Similar to IFRS
•UK method not allowed
•Actuarial valuations are
required annually
Employee benefits
Topic
IFRS
US GAAP
Expected return on
plan assets
•Based on market expectations •Based on market conditions
at the beginning of the period for and the nature of the assets
returns over the entire life of the
obligation
Measurement of plan
assets
•At fair value
•Based on market-related
values that can result in a
smoothing mechanism
Recognition of
minimum pension
liability
•Not required
•Additional minimum liability is
recognised when the
accumulated benefit obligation
exceeds plan assets
RSM International Conference, Singapore 2007
Employee benefits
Topic
IFRS
US GAAP
Asset ceiling
•Lower of 1) assets resulting
from applying IAS 19 and 2) net
total unrecognised actuarial
losses and past service cost +
PV of available refund or
reduction in future contributions
•Does not exist
Multi-employer plan
•Should be accounted for as a
defined benefit plan. Defined
contribution used only if no info
•Use of defined contribution
method
RSM International Conference, Singapore 2007
Intangible assets
Topic
IFRS
US GAAP
Development costs
•Capitalised since certain
criteria are met. Cost previously
expensed cannot be capitalised
in subsequent period
•Strict criteria results in very
rare development costs
capitalised. Different guidance
for computer software to be
sold which must be capitalised
if certain criteria are met
Revaluation
•Permitted only if an active
market exist
•Prohibited
RSM International Conference, Singapore 2007
Tangible assets
Topic
IFRS
US GAAP
Change in
depreciation method
•Regarded as a change in
accounting estimate and
reflected in current and
prospective periods
•Regarded as a change in
accounting policy and reflected
entirely in the current year’s
income statement
Subsequent
measurement
•Revaluation model is allowed
•Revaluation model is
prohibited
Investment property
•IAS 40 includes specific
guidance for investment
property. Entities are elected to
choose between fair value
model or depreciated cost
model
•There is not a specific
definition of investment
properties. Depreciated cost
model must be applied
RSM International Conference, Singapore 2007
Leases
Conceptually similar: a finance lease is one where substantially all risks and rewards associated
with the asset are transferred to the lessee. US GAAP includes more form-driven and is more
quantitative tests oriented
US GAAP indicators
Classify as finance lease if any
one of the following criteria is
met:
• Transfer of ownership at the
end of lease term
• Bargain purchase option
• PV of minimum lease is
payments greater than 90% of
the fair value
• Lease term higher than 75% of
estimated economic life
RSM International Conference, Singapore 2007
IFRS
Qualitative
Quantitative
US GAAP
IFRS indicators
Similar to US GAAP
indicators + others
However these are
genuine indicators and not
triggering events
Leases
Topic
IFRS
US GAAP
Present value of MLPs •The interest rate implicit is
normally used
•Lessee’s incremental
borrowing rate is used
Profit or loss on sale
and lease-back
transaction
•Gain/loss on disposal released
to income statement in
proportion to the amortisation
of the leased asset
•Gain/loss on disposal released
to income statement over the
lease term (controversial – clash
with SIC 27 – genuine leaseback)
RSM International Conference, Singapore 2007
Financial assets
Topic
IFRS
US GAAP
Categories of financial •Four categories: FVTPL
assets
(including trading), HTM, L&R
and AFS
•L&R category does not exist
HTM: tainting period
•Two full annual periods
•Not specified, but SEC
believes to be two years
Fair value option
•Allowed the designation at
FVTPL for certain financial
assets/liabilities in certain
circumstances
•FVTPL designation only for
hybrid instruments containing
embedded derivatives that
would otherwise require
separation
RSM International Conference, Singapore 2007
Financial assets
Topic
IFRS
US GAAP
AFS
•Changes in FV are recognised
directly in equity and “recycled”
to income statement when
instruments are sold, impaired
or collected
•Similar to IFRS: unrealised
changes in FV are recognised
in “Other comprehensive”
income and recycled to income
statement when realised
Forex for AFS debt
securities
•Forex gains/losses on debt
securities are recognised in
income statement
•Forex gains/losses on debt
securities are recognised in
equity
RSM International Conference, Singapore 2007
Financial assets
Topic
IFRS
US GAAP
Impairment
•Recognised as a result of
objective evidence of
impairment (“loss event”)
•Impairment always recognised
to income statement
•Recognised when a decline in
FV is considered “other than
temporary”
•Impairment for HTM is
recognised to income statement
Reversal of
impairment
•For L&R, HTM and AFS, the
impairment can be reversed if
relates objectively to an event
occurring after the impairment
was recognised
•For AFS equity securities
reversals of impairment is
recognised to equity
•Prohibited
RSM International Conference, Singapore 2007
Financial assets
Topic
IFRS
US GAAP
Reclassifications
between categories
•Not allowed in or out from the
category FVTPL. In general very
rare for other categories except
for HTM tainting rules
•Prohibited from trading to AFS.
•Required from HTM to trading
or AFS in case of short-term
profit taking
Investments in
unlisted entities
•Measured at fair value
•Cost method applied
(valuation technique). If the fair
value is not reliably measurable,
cost method only as last resort
RSM International Conference, Singapore 2007
Derecognition
Topic
Derecognition model
IFRS
US GAAP
Mixed approach model
embedded in a flow chart
model to be applied strictly
in sequence.
Two tests:
1. First “risk and rewards”
test
2. “Control” test
Mixed model approach.
Three tests:
1. Isolation in bankruptcy
required
2. Ability of the transferee to
pledge or sell the asset
3. Transferor does not retain
right to repurchase
RSM International Conference, Singapore 2007
Derivatives and Hedging
Topic
IFRS
US GAAP
Types of hedging
relationships
•Fair value hedge, Cash flow
hedge and Hedge of a net
investment in a foreign entity
•Similar to IFRS
Assuming perfect
effectiveness
•Effectiveness must always be
measured but The critical terms
method allowed
•“Short-cut” method is allowed
in certain hedging relationships
Partial-term hedges
•IAS 39 allows and entity to
designated as hedged item a
portion of fair value or a partial
term of the hedged item itself
•Hedge a portion of fair value
or a partial-term of an hedged
item is prohibited
RSM International Conference, Singapore 2007
Derivatives and Hedging
Topic
IFRS
US GAAP
Hedging foreign
currency risk
•Non-derivatives instruments
can be used as hedging
instrument for foreign currency
risk
•Non-derivatives instruments
can hedge currency risk only
for a net investment in a foreign
entity or a firm commitment
Written options
•Can be designated only as a
hedge of a purchased option
•Can be a hedging item as long
as the change in FV of the
combined instrument (written
option + hedge item) result in
at least as much gain as would
be the loss incurred
Hedging forecast
transactions
•Forecast transactions need to
be highly probable
•Forecast transactions need to
be probable
RSM International Conference, Singapore 2007
Derivatives and Hedging
Topic
IFRS
US GAAP
Cash flow hedge:
basis adjustment
approach
•Permitted for non-financial
items only
Macro hedging
•Fair value hedge for a portfolio •Prohibited
hedge of interest rate risk is
allowed if certain criteria are met
Hedging the currency
risk of HTM
investments
•The foreign currency can be
hedged in a HTM asset
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•Not permitted. Gains/losses
deferred in equity are released
to income statement over the
same period of the hedged
item
•Prohibited
Deferred taxes
Topic
Initial recognition
exception
IFRS
•In general DT are not
recognised on temporary
differences arising from initial
recognition of assets/liabilities
not acquired in a business
combination
Unrealised intra-group •DT recognised at the buyer’s
profits
tax rate
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US GAAP
•No initial recognition
exemption (applied the
simultaneous equation method
– EITF 98-11)
•DT recognised at the seller’s
tax rate
Deferred taxes
Topic
IFRS
US GAAP
Undistributed earning
of subsidiaries
•Not recognised to the extent
that the parent control the profit
distribution of the subsidiary and
it is probable that the difference
will not reverse in the
foreseeable future
•Recognised on temporary
differences arising after 1992
unless such amounts will be
recovered tax free or indefinite
reversal criterion is met
Undistributed earning
of associates
•Same as subsidiaries
•Deferred taxes are always
recognised on temporary
differences relating to
associates
Tax rates
•Enacted or “substantially”
enacted tax rate
•Enacted tax rate
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Deferred taxes
Topic
IFRS
US GAAP
Deferred tax asset
recognition
•Must be recognised if it is
probable that a tax benefit will
be realised
•Recognised in full, but
reduced by a valuation
allowance if it is “more likely
than not” that DTA will not be
realised
Classification
•Always non-current
•Classified as current or noncurrent based on the
classification of the underlying
Reconciliation of
actual and expected
tax expense
•Calculated by applying the
applicable tax rates to
accounting profit
•Calculated by applying the
domestic federal statutory tax
rates to PBT from continuing
operations
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Inventories
Topic
IFRS
US GAAP
LIFO method
•Prohibited
•Permitted
Biological assets
•Measured at fair value less
estimated point-of-sale costs
•Not specified. Normally
historical cost is used
Reversal of inventory
write-downs
•Required if certain criteria are
met
•Prohibited
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Segment reporting
Topic
IFRS (*)
US GAAP
Format of reportable
segments
•Report primary and secondary
segment format. Segments
based on risks and returns and
internal reporting structure
•Only one type of segment
exists. Report based on
internal operating segments
Accounting basis for
reportable segments
•Based on IFRS accounting
policies adopted to drawn up
consolidated financial
statements
•Accounting basis adopted for
internal reporting purposes
Segment result
•Defined segment result
•No definition of segment result
(*) This slide is based on IAS 14 and does not take into consideration IFRS 8
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Interim reporting
Topic
IFRS
US GAAP
Requirement of
interim reporting for
public entities
•Not required but encouraged
•FASB does not mandate
interim reporting; however SEC
registrants must follow APB 28
and produce quarterly reporting
Preparation approach
•Discrete approach: interim
period is a complete distinct
accounting period, rather than
part of the annual cycle
•Allows allocation between
interim periods on the basis of
fiscal year expectations. (e.g.:
not required recognition in
interim periods of inventory
losses from market declines
expected to be recovered by
the end of the fiscal year)
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Conclusions
• Only in some cases it is possible to say that the IFRS requirements
are clearly different or equivalent to US GAAP
• In many cases the same concept is expressed using different
words. Therefore, the concept is similar but not identical. The evil is
in the detail
• Similar standards are not identical standards
• US GAAP literature is much more extensive compared to IFRS
• A convergence projects is started. It will go on for many years
• Will we have Global GAAP at the end of the project?
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Remember… the devil is in the detail!!!
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ANY QUESTIONS?
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Thank you for your kind attention
RSM International Conference, Singapore 2007