rsm international conference, singapore 2007 ifrs vs us gaap – key differences and convergence...

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International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive Office

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Page 1: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

IFRS vs US GAAP – Key differences and convergence processBob Dohrer, RSM McGladreyMarco Marcellan, Executive Office

Page 2: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Differences between US GAAP and IAS/IFRSDifferences 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

Page 3: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

IFRS vs US GAAP: topics coveredIFRS vs US GAAP: topics covered

• IFRS and US GAAP Hierarchy• Convergence Project• Conceptual framework• Financial statements• Consolidation• Business combinations• Goodwill• Impairment• Revenue recognition• Employee benefits

• Intangible assets• Tangible assets• Leases• Financial assets• Derivatives and hedging• Deferred tax• Inventories• Segment reporting• Interim reporting

Page 4: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

US GAAP Hierarchy*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

Page 5: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

The US GAAP literatureThe 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

Approximately

Page 6: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

IFRS HierarchyIFRS Hierarchy

• Standards and interpretations approved by the IASC/IASB• SIC/IFRIC interpretations

IFRS is at an “infancy stage”compared to US GAAP

Page 7: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

The IFRS literatureThe IFRS literature

• 55 pronouncements• Some 2,500 pages (all pronouncements)

Example: GAAP on leasing• IAS 17• 1 IFRIC• 2 SIC

Page 8: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

The quest for the Global GAAPThe quest for the Global GAAP

Global GAAPGlobal GAAP

US GAAP: highly detailed US GAAP: highly detailed rules-based systemrules-based systemIFRS: set of principlesIFRS: set of principles

??

Page 9: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

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."

Sir David TweedieChairman of IASB

(source: Journal of Accountancy, "Simplifying Global Accounting“, July 2007)

Page 10: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 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”

Bob Herz Chairman of FASB

(source: Financial Executives International's Global Financial

Reporting Conference, New York, 28 September 2007 )

Page 11: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Convergence project: Convergence project: “The Norwalk Agreement”“The Norwalk Agreement”

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

(29 October 2002)(29 October 2002)

Page 12: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Roadmap for convergence 2006-2008 Roadmap for convergence 2006-2008 Memorandum of Understanding (MoU)Memorandum of Understanding (MoU)

• 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

(27 February 2006)(27 February 2006)

Page 13: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Roadmap for convergence 2006-2008 Roadmap for convergence 2006-2008 Memorandum of UnderstandingMemorandum of Understanding

• 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

(27 February 2006)(27 February 2006)

Page 14: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

SEC Announces next steps relating to IFRSSEC Announces next steps relating to IFRS

• 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

(24 April 2007)(24 April 2007)

Page 15: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Framework for Advancing Transatlantic Framework for Advancing Transatlantic Economic Integration between the USA and EUEconomic Integration between the USA and EU

• 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

(30 April 2007)(30 April 2007)

Page 16: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Proposed rule n. 33-8818 Proposed rule n. 33-8818 IFRS vs US GAAP reconciliation for FPIIFRS vs US GAAP reconciliation for FPI

• 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

(2 July 2007)(2 July 2007)

Page 17: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Concept release n. 33-8831 Concept release n. 33-8831 US issuers and use of IFRSUS issuers and use of IFRS

• 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

(7 August 2007)(7 August 2007)

Page 18: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Short-term convergence (MoU)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)

Page 19: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Other major convergence projects (MoU)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

Page 20: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Conceptual frameworks Conceptual frameworks and convergence projectand 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

Page 21: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Conceptual frameworks Conceptual frameworks and convergence projectand 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)

Page 22: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Conceptual frameworks Conceptual frameworks and convergence projectand 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

Page 23: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Conceptual frameworks Conceptual frameworks and convergence projectand 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

• Measurement attribute (*): FASB IASB

Historical cost Historical cost

Current cost Current cost

Current market value

Net realizable value Realisable value

Present value Present value

No fair value definition!!!

*: Source: speech given by FASB Chairman Robert Herz at 2005 Annual Meeting of the American Accounting Association (August 2005)

Page 24: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial statements: balance sheetFinancial statements: balance sheet

Topic IFRS US GAAPBalance 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

Page 25: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial statements: income statementFinancial statements: income statement

Topic IFRS US GAAPIncome 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

Page 26: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial statements: cash flow statementFinancial statements: cash flow statement

Topic IFRS US GAAPCash 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

Page 27: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial statements: Financial statements: equity and recognised gains and lossesequity and recognised gains and losses

Topic IFRS US GAAPStatement 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

Page 28: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial statements: comparativesFinancial statements: comparatives

Topic IFRS US GAAPComparatives presentation

•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

Page 29: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Consolidation, Associates and JVConsolidation, Associates and JV

Topic IFRS US GAAPDefinition of Control • 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)

Page 30: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Consolidation, Associates and JVConsolidation, Associates and JV

Topic IFRS US GAAPSpecial 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

Page 31: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Consolidation, Associates and JVConsolidation, Associates and JV

Topic IFRS US GAAPAccounting for investments in subsidiaries in parent-company financial statements

•Either Cost method or Fair value method are allowed. Equity method is not allowed

•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

Page 32: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Consolidation, Associates and JVConsolidation, Associates and JV

Topic IFRS US GAAPJointly 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

Page 33: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Business CombinationsBusiness Combinations

Topic IFRS US GAAPMethod 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

Page 34: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Business CombinationsBusiness CombinationsTopic IFRS US GAAPPost-acquisition planned restructuring

•Restructuring provision must be recognised provided they meet the IAS 37 criteria

•A provision can be recorded only if a restructuring plan is in 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

Page 35: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

GoodwillGoodwillTopic IFRS US GAAPNegative 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 non-financial 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

Page 36: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

ImpairmentImpairment

Topic IFRS US GAAPIndication 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 22) Determine the implied fair value of goodwill and compare with goodwill carrying amount

Page 37: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

ImpairmentImpairment

Topic IFRS US GAAPImpairment 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

Page 38: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Revenue recognitionRevenue recognitionTopic IFRS US GAAPRevenue 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

Page 39: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Employee benefitsEmployee benefits

Topic IFRS US GAAPMethod of accounting •Project unit credit method •Similar to IFRS

Discount rate for obligations

•Based on high quality corporate bonds

•Use of corporate bonds not 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)

•UK method not allowed

Frequency of actuarial valuations

•The frequency of actuarial valuations is not mandated

•Actuarial valuations are required annually

Page 40: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Employee benefitsEmployee benefits

Topic IFRS US GAAPExpected return on plan assets

•Based on market expectations at the beginning of the period for returns over the entire life of the obligation

•Based on market conditions and the nature of the assets

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

Page 41: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Employee benefitsEmployee benefits

Topic IFRS US GAAPAsset 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

Page 42: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Intangible assetsIntangible assets

Topic IFRS US GAAPDevelopment 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

Page 43: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Tangible assetsTangible assets

Topic IFRS US GAAPChange 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

Page 44: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

LeasesLeases

Qualitative

Quantitative

IFRS

US GAAP

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

IFRS indicators Similar to US GAAP indicators + othersHowever these are genuine indicators and not triggering events

Page 45: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

LeasesLeases

Topic IFRS US GAAPPresent 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 over the lease term (controversial – clash with SIC 27 – genuine lease-back)

•Gain/loss on disposal released to income statement in proportion to the amortisation of the leased asset

Page 46: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial assetsFinancial assets

Topic IFRS US GAAPCategories of financial assets

•Four categories: FVTPL (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

Page 47: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial assetsFinancial assets

Topic IFRS US GAAPAFS •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

Page 48: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

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Financial assetsFinancial assetsTopic IFRS US GAAPImpairment •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

Page 49: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Financial assetsFinancial 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 (valuation technique). If the fair value is not reliably measurable, cost method only as last resort

•Cost method applied

Page 50: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

DerecognitionDerecognition

Topic IFRS US GAAPDerecognition model Mixed approach model

embedded in a flow chart model to be applied strictly in sequence.

Two tests:1. First “risk and rewards”

test2. “Control” test

Mixed model approach. Three tests:1. Isolation in bankruptcy

required2. Ability of the transferee to

pledge or sell the asset3. Transferor does not retain

right to repurchase

Page 51: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Derivatives and HedgingDerivatives and Hedging

Topic IFRS US GAAPTypes 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

Page 52: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Derivatives and HedgingDerivatives and Hedging

Topic IFRS US GAAPHedging 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

Page 53: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Derivatives and HedgingDerivatives and Hedging

Topic IFRS US GAAPCash flow hedge: basis adjustment approach

•Permitted for non-financial items only

•Not permitted. Gains/losses deferred in equity are released to income statement over the same period of the hedged item

Macro hedging •Fair value hedge for a portfolio hedge of interest rate risk is allowed if certain criteria are met

•Prohibited

Hedging the currency risk of HTM investments

•The foreign currency can be hedged in a HTM asset

•Prohibited

Page 54: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Deferred taxesDeferred taxes

Topic IFRS US GAAPInitial recognition exception

•In general DT are not recognised on temporary differences arising from initial recognition of assets/liabilities not acquired in a business combination

•No initial recognition exemption (applied the simultaneous equation method – EITF 98-11)

Unrealised intra-group profits

•DT recognised at the buyer’s tax rate

•DT recognised at the seller’s tax rate

Page 55: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Deferred taxesDeferred taxes

Topic IFRS US GAAPUndistributed 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

Page 56: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Deferred taxesDeferred taxes

Topic IFRS US GAAPDeferred 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 non-current 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

Page 57: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

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InventoriesInventories

Topic IFRS US GAAPLIFO 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

Page 58: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Segment reportingSegment reporting

(*) This slide is based on IAS 14 and does not take into consideration IFRS 8

Topic IFRS (*) US GAAPFormat 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

Page 59: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

Interim reportingInterim reporting

Topic IFRS US GAAPRequirement 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)

Page 60: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

ConclusionsConclusions

• 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?

Page 61: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

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Remember… the devil is in the detail!!!Remember… the devil is in the detail!!!

Page 62: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

RSM International Conference, Singapore 2007

ANY QUESTIONS?ANY QUESTIONS?

Page 63: RSM International Conference, Singapore 2007 IFRS vs US GAAP – Key differences and convergence process Bob Dohrer, RSM McGladrey Marco Marcellan, Executive

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Thank you for your kind attention