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Differences between US GAAP and IFRS Series 1

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Need for International standards

Growth of Capital markets Mobility of capital FTSE (London Index) 55% foreign owned 10 years ago US owned more than 50% of the worlds equity today nearing 30% China holding US Bonds Need to reduce costs of consolidation Level the playing field accounting arbitrage
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Bilingual Terminology
IFRS
1. 2. 3. 4. 5. 6. 7. 8. Shares Stock Reserves Associate Provision Scheme True and fair Probable=more likely than not 9. FV- willing buyer/willing seller

U.S. GAAP
1. 2. 3. 4. 5. 6. 7. 8. 9. Stock Inventory Equity Investee Accrual Plan Presents fairly Probable= likely FV- exit cost

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Overview of Similarities and Differences

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On a macro Basis- More Similarities than Differences

Both accrual based Both assume going concern Materiality Basic F/S are comparable (although not identical) Definitions of assets, liabilities, owners equity, revenues, expenses comprehensive income, etc. are similar Both require impairment tests of assets under similar circumstances
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On a macro Basis- More Similarities than Differences

Similar Concepts for


Leases (capital/finance and operating) Deferred taxes (balance sheet approach) Subsequent events Error corrections and revisions of estimates Consolidations Business combinations
Determining acquirer Purchase price allocations Transaction costs Goodwill
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Why do Accounting Rules Differ?

US GAAP written primarily for US based companies and US investors IFRS written for companies and investors in all countries and cultures US GAAP significantly influenced by US:
Legal system Taxation system Economy/Inflation National Pride US Regulators (SEC)
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Differences

The differences tend to arise in the details with respect to:


Scope and depth of coverage Philosophical differences in approach to standards (rules based versus principles based) Application and interpretation of how accounting theory should be applied

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Differences

Depending on how the number of differences are measured and interpreted, there are approximately 30 to 300+ differences between US GAAP and IFRS It is difficult to assess whether a difference is a major difference or a minor difference because a seemingly minor difference can have a significant impact on the F/S

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Why is rules v. principles difference so critical?

Example: Lease accounting Concept of capital/finance lease and operating lease is identical (does risks and rewards of ownership pass to the lessee?) US GAAP has 4 criteria to determine if the lease is a capital lease (meeting any one qualifies as capital lease)
Transfer of title at end of lease Bargain purchase option Lease term >= 75% of economic life of asset Future minimum lease payments >= 90% of the fair value of the lease
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The last 2 criteria creates Bright lines

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Why is rules v. principles difference so critical?

Example: Lease accounting IFRS has similar criteria to determine if the lease is a capital lease (meeting any one qualifies as capital lease) Is for the major part
Transfer of title at end of lease Bargain purchase option Lease term >= 75% of economic life of asset Future minimum lease payments >= 90% of the fair value of the lease
Are at least substantially all

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Effects the depth of Coverage

Rules based approach may require additional rules and interpretations for different facts and circumstances that were not contemplated in the original rule The original FAS 13 (prior to codification) has been amended or interpreted over 60 times by EITFs, FINs, FTBs and other FAS standards. A principles based framework will generally require less volume and still be comprehensive
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IFRS addresses areas NOT specifically addressed by US GAAP

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 29 Hyperinflationary Economics IAS 34 Interim financial reporting (addressed in SEC rules) IAS 41 Agriculture IAS 40 Investment Properties

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Financial Statement Presentation

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Complete set of IFRS Financial Statements (IAS 1.10)

Statement of financial position Statement of comprehensive income Statement of changes in Equity Statement of cash Flows Notes significant accounting policies and explanatory notes Statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements Comparative year (at least 2 years required) Cross reference line items to notes, where practical

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Balance Sheet Minimum Lines

Plant, property and equipment Investment property Intangible assets Financial assets Investments (equity method) Biological assets Inventories Trade and other receivables Cash and equivalents Non-current assets held for sale

Trade and other payables Provisions Financial liabilities Current tax liabilities/assets Deferred tax liabilities/assets Minority Interests (within equity) Issued capital and reserves attributable to equity of the parent Liabilities of disposal group

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Statement of Comprehensive Income


Includes:
Profit or loss for the period, plus/minus Other comprehensive income recognized in that period

Components of other comprehensive income include:


Changes in revaluation surplus Actuarial gains and losses Gains and losses arising from translating the FS of a foreign operation Gains and losses on re-measuring available-for-sale financial assets Effective portion of gains and losses on hedging instruments in a cash flow hedge

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Alternative Presentation
Statement of Income:
Must be presented immediately before the Statement of comprehensive income Profit or loss for the period

Statement of comprehensive income include:


Total profit/loss for the period plus/minus: Changes in revaluation surplus Actuarial gains and losses Gains and losses arising from translating the FS of a foreign operation Gains and losses on remeasuring available-for-sale financial assets Effective portion of gains and losses on hedging instruments in a cash flow hedge
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IAS 7 Statement of Cash Flow Differences in Classification


Item IFRS US GAAP

Interest paid

Op or Fin

Operating

Interest received

Op or Inv

Operating

Dividends paid

Op or Fin

Financing

Dividends received

Op or Inv

Operating

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Statement of Changes in Equity

Transactions with equity holders, showing separately distributions to equity holders Reconciliation of retained earnings balances over the period Reconciliation of each class of contributed equity and each reserve, separately disclosing each change Include dividends and per share amounts either in the statement or in the notes
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Notes to the Financial Statements

Notes should:
Present basis of preparation of the FS and specific accounting principles selected and applied Disclose information required by IFRS that is not presented elsewhere in the FS Provide additional information which is necessary for a fair presentation

Comment Principle-based IFRS statements generally has more notes to explain the basis of accounting, policies etc.
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Key Disclosure Requirements

Qualitative information re objectives, policies and processes for managing capital Quantitative data about what the entity manages as capital
Changes from period to period

Whether the entity complies with externally imposed capital requirements


If not in compliance, the consequences of noncompliance
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