Transcript Slide 1
Financial statements
Executive summary
► ► In both frameworks, the components of a complete set of financial statements are the same except that IFRS (and the SEC) requires the statement of changes in equity while US GAAP permits it.
In both frameworks, the financial statement presentation is very similar. Differences between the two tend to arise in the level of specific guidance. Significant differences are as follows: ► ► Balance sheet (statement of financial position): ► IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have more detailed requirements than IFRS.
Income statement: ► IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have more detailed requirements than IFRS.
► IFRS does not define certain key income statement measures. While US GAAP does not define all these measures either, SEC regulations provide requirements and limitations on the ability of public companies to disclose non-GAAP measures.
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Executive summary
► Financial statement presentation differences (continued): ► ► ► Statement of comprehensive income: ► ► IFRS permits comprehensive income to be presented in one statement of comprehensive income or in two separate consecutive statements consisting of a separate income statement and a statement of comprehensive income.
There are some differences between the types of items reported in OCI and the requirements for grouping such items that may or may not be reclassified into net income.
Statement of cash flows: ► IFRS permits a choice of alternatives for the classification of interest and dividends while US GAAP does not.
Notes to the financial statements: ► Using IFRS, most companies will experience additional financial disclosure requirements compared to US GAAP. Financial statements Page 3 Academic Resource Center
Primary pronouncements
US GAAP
► ASC 205,
Presentation of Financial Statements
► ► ASC 210,
Balance Sheet
ASC 215,
Statement of Shareholder Equity
► ► ► ► ► ► ► ASC 220,
Comprehensive Income
ASC 225,
Income Statement
ASC 230,
Statement of Cash Flows
ASC 235,
Notes to Financial Statements
ASC 250,
Accounting Changes and Error Corrections
ASC 260,
Earnings Per Share
ASC 505,
Equity
Financial statements
IFRS
► ► IAS 1,
Presentation of Financial Statements
IAS 7
, Statement of Cash Flows
► ► ► ► IAS 8,
Accounting Policies, Changes in Accounting Estimates and Errors
IAS 18,
Revenue
IAS 33,
Earnings per Share
IFRS 5,
Non-Current Assets Held for Sale and Discontinued Operations
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Progress on convergence
Phase A ► In April 2004, the FASB and the IASB (the Boards) agreed to undertake a joint project on financial statement presentation. The project is being conducted in phases, as follows: ► Phase A addressed what constitutes a complete set of financial statements and the requirements for presenting comparative information. The FASB and IASB completed deliberations on Phase A in 2005. ► ► In 2007, the IASB published a revised IAS 1
Presentation of Financial Statements
. The revised IAS 1, which was effective January 1, 2009, modified the requirements of the SORIE and brought it largely in line with ASC 220,
Reporting Comprehensive Income
. The FASB did not issue an exposure draft on Phase A and has decided to expose its Phase A decisions along with its Phase B decisions.
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Progress on convergence
Phase B ► Addresses the more fundamental issues for presentation of information on the face of the financial statements, and may result in significant changes. Phase B topics include: ► ► ► Developing principles for the aggregation and disaggregation of information.
Defining totals and subtotals to be reported in each financial statement.
Organizing financial statements such that each separate statement integrates with one another to clearly show its relationship to the statement of cash flows. ► The Boards issued a Discussion Paper,
Preliminary Views on Financial Statement Presentation,
in 2008. In October 2010, the Boards acknowledged that they did not currently have the capacity to issue an ED. It is unclear when they will return to this project.
► The Boards considered as a separate matter the presentation of other comprehensive income (OCI) and decided to allow companies the option to present net income and OCI either in one continuous statement of comprehensive income or in two separate consecutive statements. Although consideration of this issue was initially a joint project, ultimately the Boards issued separate amendments and updates to their respective standards as noted on the following slide.
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Progress on convergence
Phase B (continued) ► ► ► The IASB issued an amendment to IAS 1 in June 2011. ► ► ► The amendment requires that entities report net income and OCI using one of the two formats noted on the previous slide.
The amendment requires that items be presented in OCI separately as to those that may be subsequently reclassified into net income and those that will not be reclassified and, therefore, will remain in accumulated OCI. The tax effect of each grouping must be shown separately.
The amendment was effective for fiscal periods beginning on or after July 1, 2012, with early adoption permitted.
The FASB issued ASU No. 2011-05 to Topic 220 in June 2011.
► ► The amendment requires that entities report net income and OCI using one of the two formats noted on the previous slide.
The amendment does not require separate presentation of OCI items subject to reclassification, since under US GAAP, all items recorded in OCI are subject to reclassification to net income.
The FASB issued ASU No. 2013-2 to Topic 220 in February 2013.
► ► The amendment requires enhanced disclosures to explain the effect of reclassification adjustments on OCI by component.
The update was effective for fiscal periods beginning on or after December 15, 2012 for public companies. The effective date for non-public companies is December 15, 2013.
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Progress on convergence
Phase C ► Phase C will address the presentation and display of interim financial statements for both US GAAP and IFRS using IAS 34. This phase of the Financial Statement Presentation project has not commenced, as the Boards plan to begin work on Phase C in the latter stages of Phase B.
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Progress on convergence
Other projects ► Simplification project: In January 2015, the FASB issued ASU No.2015-01
, Income Statement —Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
. This eliminates the concept of extraordinary items from US GAAP effective for periods beginning after December 15, 2015; therefore, no items would be presented or disclosed as an extraordinary item. This largely converges the income statement presentation with IFRS. ► The FASB issued ASU No. 2014-15, Prese
ntation of Financial Statements – Going Concern (Subtopic 205 40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
on August 27, 2014
.
This guidance is effective for periods ending after December 15, 2016. Early adoption is permitted. Similar to IAS 1, this guidance requires management to disclose when it has significant doubt about an entity’s ability to continue as a going concern.
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Financial statement presentation
General
US GAAP
► A complete set of financial statements includes the balance sheet, statement of comprehensive income, statement of cash flows and accompanying notes to the financial statements. A statement in changes in equity is not required but is almost always presented in practice.
IFRS
► A complete set of financial statements includes the statement of financial position (balance sheet), statement of comprehensive income, statement of cash flows, statement of changes in equity and accompanying notes to the financial statements.
Convergence
► The Boards have affirmed that the ED will require a statement of changes in equity, thereby conforming both frameworks.
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Financial statement presentation
General
US GAAP
► Does not require a third balance sheet (and related notes) as of the beginning of the earliest comparative period presented when an entity restates its financial statements.
IFRS
► Does require a third balance sheet (and related notes) as of the beginning of the earliest comparative period presented when an entity restates its financial statements.
Convergence
► The FASB decided in the ED to make a requirement for a third balance sheet similar to IFRS, thereby conforming both frameworks.
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Financial statement presentation
General
US GAAP
Prepared on an accrual basis except for the statement of cash flows.
Includes concepts of materiality and consistency for the preparer to follow.
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IFRS
Similar Similar Page 12
Financial statement presentation
Comparative financial information Financial statements ► IFRS requires comparative information for all amounts reported in the financial statements.
► US GAAP allows a single year presentation in certain circumstances. ► SEC rules require a two year balance sheet presentation and three year presentation for all other financial statements.
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Statement of financial position presentation
Classification and liquidity ► IFRS requires a classified balance sheet, except when liquidity presentation provides more reliable and relevant information. ► US GAAP allows the use of either a classified or unclassified balance sheet.
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Statement of financial position presentation
Minimum accounts
US GAAP
► No minimum account presentation requirements.
► SEC rules have more rigorous presentation criteria.
IFRS
► Requires a minimum presentation of certain asset, liability and equity accounts.
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Statement of financial position presentation
Minimum accounts The minimum accounts to be presented on the statement of financial position as defined by IAS 1.54 are: a) Property, plant and equipment b) Investment property c) Intangible assets d) Financial assets (excluding amounts shown under (e), (h) and (i)) e) Investments accounted for using the equity method f) Biological assets g) Inventories h) Trade and other receivables i) Cash and cash equivalents j) Total of assets classified as held for sale and assets included in disposal groups classified as held for sale per IFRS 5 Financial statements Academic Resource Center Page 16
Balance sheet presentation
Minimum account information The minimum accounts to be presented on the balance sheet as defined by IAS 1.54 (continued): a) Trade and other payables b) Provisions c) Financial liabilities (excluding amounts shown under (a) and (b)) d) Liabilities and assets for current tax per IAS 12 e) Deferred tax liabilities and deferred tax assets per IAS 12 f) Liabilities included in disposal groups classified as held for sale per IFRS 5 g) Minority interest, presented within equity h) Issued capital and reserves attributable to equity holders of the parent Financial statements Academic Resource Center Page 17
Statement of financial position
Typical IFRS order Although no particular format is required, IFRS generally presents accounts in the following order (representative of UK legacy requirements): ► Non-current assets ► Current assets ► Equity ► Non-current liabilities ► Current liabilities US GAAP presents current assets and liabilities before non-current.
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Statement of financial position presentation
Cash and cash equivalents
US GAAP
► ASC 210-20 does not address bank overdrafts and they are generally reported as a liability in the balance sheet.
IFRS
► IAS 7 makes an explicit distinction between bank borrowings and bank overdrafts. Overdrafts may be classified as a component of cash and cash equivalents if considered to be an integral part of an enterprises’ cash management.
Convergence
► The Boards have affirmed that the ED will specify that overdrafts should be presented in the debt category of the financing section of the statement of financial position, thereby conforming both frameworks.
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Statement of financial position presentation
Deferred tax assets and liabilities Financial statements ► IFRS prohibits deferred tax assets or liabilities to be classified as current. ► US GAAP requires classification as current or non-current based on the nature of the underlying asset or liability.
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Statement of financial position presentation
Debt classification under default for covenant violation
US GAAP
► Allows debt to retain non-current classification as of the balance sheet date if a lender waives or modifies the related debt covenant violation on or after the balance sheet date but prior to the issuance of the financial statements.
IFRS
► Requires that a lender must waive or modify a debt covenant violation prior to or at the balance sheet date in order for the related debt to be classified as non-current at the balance sheet date.
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Debt classification under default for covenant violation example
Example 1: Riley’s Roosters, Inc. (RRI) has a December 31 year-end. As of June 30, 2014, RRI obtains a $100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In December 2014, RRI spends too much of its cash on its holiday party and incurs a debt covenant violation as of December 31, 2014. As a result of the violation, the loan becomes due within 30 days. At this time, RRI asks the bank to waive the violation. RRI tells the bank it will recoup some of the cash by selling the leftover holiday party favors on eBay. On January 5, 2015, the bank agrees to waive the violation. RRI issues its financial statements on January 25, 2015.
► How should this loan be classified (current or non-current) on RRI’s balance sheet as of December 31, 2014 using IFRS and US GAAP?
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Debt classification under default for covenant violation example
Example 1 (solution): Balance sheet date IFRS US GAAP Fiscal year Fiscal year Post-fiscal year and prior to issuance of financials Post-fiscal year and prior to issuance of financials Solution: As the bank modified the debt covenant violation subsequent to RRI’s balance sheet date of December 31, 2014 but prior to the financial statement issuance date of January 25, 2015, the debt is classified as current as of the balance sheet date using IFRS but non-current for US GAAP. See the timeline noted above showing the allowable period (in yellow) for a lender to waive or modify a debt covenant violation to retain non-current classification under IFRS and US GAAP.
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Statement of income and statement of comprehensive income presentation
IFRS and US GAAP require comprehensive income to be presented in one statement of comprehensive income or in two separate consecutive statements comprising of a separate statement of income and a statement of comprehensive income.
US GAAP
► Generally, US GAAP considers all items recorded in OCI as subject to reclassification into net income and, therefore, no separate presentation groupings are required.
IFRS
► For fiscal years beginning July 1, 2012 (with early adoption permitted), IFRS requires the presentation of items in OCI that ultimately may be reclassified into net income to be presented separately from those that will not be reclassified into net income. The tax effect must be shown separately, either by individual item or in aggregate. ► Reclassification adjustments do not arise on changes in revaluation surplus recognized in accordance with IAS 16 (
Property, Plant and Equipment
) or on actuarial gains and losses on defined benefit plans recognized in accordance with paragraph 93A of IAS 19 (
Employee Benefits
).
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Classification of other comprehensive income items
Example 2: Treadstone International’s controller, Hans Burke, called you yesterday inquiring about the differences for classification of various items in OCI that might be encountered when his company changes from US GAAP to IFRS next year. Hans emailed you a list of potential transactions. Hans would like you to prepare a draft statement of other comprehensive income based on IFRS. The tax rate for all items in OCI is 30%.
Cash flow hedges Foreign currency exchange differences Available for sale gains Defined benefit plan actuarial (losses) / gains Revaluation of property
2014
$ 40 670 170 (60) 300
2013
$ (90) 550 64 80 – Financial statements Page 25 Academic Resource Center
Classification of other comprehensive income items
Example 2 solution (IFRS):
Other comprehensive income:
Items that will not be subsequently reclassified to profit or loss: Revaluation of property Defined benefit plan actuarial (losses)/gains Income tax Items that may be reclassified subsequently to profit or loss: Cash flow hedges Foreign currency exchange differences Available for sale gains Income tax Other comprehensive income, net of tax Financial statements Academic Resource Center
2014
$300 (60) (72) 168 40 670 170 (264) 616 $784
2013
$ 80 (24) 56 (90) 550 64 (157) 367 $423 Page 26
Statement of income and statement of comprehensive income presentation
► ► ► IFRS allows reclassification adjustments to be disclosed in the notes to the financial statements and US GAAP prohibits this option based on ASU 2011-05. However, the FASB deferred these requirements in ASU 2011-12 and began redeliberating their position during the first half of 2012 to determine if reclassifications could be disclosed in the notes to the financial statements. At the end of June 2012, the Board decided that the presentation requirements deferred in ASU 2011 12 would not be reinstated and directed the staff to draft a proposed ASU that would require an entity to provide enhanced disclosures to explain the effect of reclassification adjustments on OCI by component. In addition, an entity would be required to provide a tabular disclosure showing the effect of items reclassified from accumulated OCI on the line items of net income with references to other disclosures required under US GAAP. The Board decided that the comment period on the proposed ASU will be 60 days. Until this issue is resolved, US GAAP will allow reclassifications to be disclosed either on the face of the financial statements or in the related notes.
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Statement of income and statement of comprehensive income presentation
US GAAP
► No minimum information requirements.
► SEC rules have more rigorous presentation criteria.
IFRS
► Requires certain minimum amount of information with order and description amended as necessary for nature and type of entity, industry, etc.
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Statement of income
Minimum information required The minimum information to be presented on the income statement as defined by IAS 1.82: ► Revenue ► Finance costs ► Share of profit or loss of associates and joint ventures accounted for using the equity method ► A single amount comprising the total of: ► The post-tax profit or loss of discontinued operations ► The post-tax gain or loss recognized on the measurement of fair value less costs to sell or on the disposal of assets or disposal group(s) constituting the discontinued operations ► Tax expense ► Profit or loss Financial statements Academic Resource Center Page 29
Statement of comprehensive income –
Minimum information required The minimum information to be presented on the statement of comprehensive income as defined by IAS 1.82A: ► Each component of other comprehensive income classified by nature (including amounts presented in the next item) grouped by those that will and will not be subsequently reclassified to profit or loss.
► Share of the other comprehensive income of associates and joint ventures accounted for using the equity method ► Total comprehensive income Financial statements Academic Resource Center Page 30
Income statement presentation
Key measures
US GAAP
► Defines most key measures excluding operating profit: ► SEC regulations define certain measures and provide requirements and limitations on the ability of public companies to disclose non-GAAP measures.
► The traditional definition of operating profit is still used in practice.
IFRS
► Does not define certain key measures: ► Using IFRS, management may use non standard measurements, creating diversity in practice regarding line items, headings and subtotals.
► Companies should expect a change in the pattern of earnings and financial position when comparisons to historical performance are made.
► This will require management to understand and explain business performance to shareholders and the marketplace.
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Income statement presentation
Natural presentation IFRS allows either a natural expense classification presentation (by type such as salaries, depreciation, advertising, etc.) or functional classification expense presentation (by function as part of cost of sales, distribution, administration, etc.).
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Income statement presentation
Functional presentation If functional presentation is used, specific disclosures in the notes are required about the nature of the expenses. US GAAP has no general requirement, but the SEC requires that expenses be based on the functional classification.
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Income statement presentation
Extraordinary items Prohibits extraordinary items but major revenue and expense items are disclosed in the income statement or notes.
Similar
Convergence
► In January 2015, the FASB issued ASU No.2015-01
, Income Statement —Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
. This eliminates the concept of extraordinary items from GAAP effective for periods beginning after December 15, 2015; therefore, no items would be presented or disclosed as an extraordinary item. This largely converges the income statement presentation with IFRS. Financial statements Page 34 Academic Resource Center
Statement of changes in equity
IFRS uses the terminology “other reserves” and US GAAP uses “accumulated other comprehensive income” to identify items of income and expense that are required by other standards or interpretations to be recognized directly in equity. Financial statements Academic Resource Center Page 35
Statement of cash flows
IFRS permits an entity to classify: ► Interest paid or received and dividends paid or received as operating cash flows or ► Interest and dividends received as investing cash flows and ► Interest and dividends paid as financing cash flows. Interest and dividends must be classified in a consistent manner from period to period.
US GAAP requires that interest received and paid and dividends received be classified as operating cash flows and dividends paid are classified as financing cash flows.
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Summary chart of cash flow classification for interest and dividends
Transaction
Interest paid Interest received Dividends paid Dividends received Cash flow classification
IFRS US GAAP
Operating or financing Operating Operating or investing Operating or financing Operating or investing Operating Financing Operating Financial statements Page 37 Academic Resource Center
Cash flow classification example
Example 3: Carl Cash, CEO of Big Bucks, Inc. (BBI), goes to visit his accountant, Francis Flow, to discuss the classification of interest and dividends in BBI’s statement of cash flows. BBI currently reports using US GAAP but is considering adopting IFRS. For its current fiscal year, BBI has interest received of $500, interest paid of $250, dividends received of $1,000 and dividends paid of $700.
Carl asks Francis if BBI adopts IFRS, can BBI classify its interest and dividend amounts in the statement of cash flows consistent with their classification under US GAAP? ► Determine what Francis’ response should be to Carl’s question.
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Cash flow classification example
Example 3 (solution):
Transaction
Interest paid Interest received Dividends paid Dividends received Cash flow classification
IFRS US GAAP
Operating or financing Operating or investing Operating or financing Operating or investing Operating Operating Financing Operating Yes, BBI can classify these amounts the same in the statement of cash flows using IFRS as US GAAP by classifying interest paid, interest received, and dividends received as “operating” and dividends paid as “financing.” Additionally, if BBI chooses to report using IFRS, interest and dividends must be classified in a consistent manner from period to period.
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Notes to the financial statements
Using IFRS, most companies will experience additional financial disclosures. IFRS requires that an explicit statement be made in the notes that the financial statements comply with IFRS. Absence of such disclosure renders the entire financial statements non-compliant.
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Notes to the financial statements
Cash and cash equivalents disclosures Financial statements IFRS requires the disclosure of the components of cash and cash equivalents. US GAAP does not require this disclosure. Both US GAAP and IFRS requires policy disclosure of which items are treated as cash equivalents.
US GAAP requires that cash and cash equivalents line item in the statement of cash flows equals the cash and cash equivalents in the statement of financial position. Under IFRS, the total of cash and cash equivalents presented in the statement of cash flows does not need to agree to a single line item in the balance sheet. Entities must disclose a reconciliation of the components of cash and cash equivalents to the amounts presented on the statement of financial position.
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Notes to the financial statements
Departure from an accounting standard
US GAAP
► Does not allow non-compliance with an accounting standard if, in the opinion of management, that compliance would be misleading.
IFRS
► Allows non-compliance with an accounting standard if, in the opinion of management ,that compliance would be misleading. This is called “The True and Fair Override” and is extremely rare. If used, the rationale and effect on the financial statements must be disclosed.
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