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Towards Convergence
A Survey of IFRS to US GAAP Differences

OVERVIEW

Overview

One of our key tasks at Ernst & Young is to support our clients with their IFRS to US GAAP
accounting and reporting.
This is a survey of publicly available IFRS to US GAAP reconciliation information filed by SEC foreign private
issuers, timed to coincide with the first-time adoption of IFRS across the globe. The 130 companies included in
our survey are some of the largest companies in the world markets; 42% of the companies surveyed are in the
2006 Financial Times Global 500.
It will, in our view, be of great interest and we believe of significant value to preparers of IFRS and US GAAP
financial information and also those interested in a one-time snap shot of the current state of convergence in
the year of adoption.
We also hope that users will look to this as a useful aide memoir of reported IFRS to US GAAP differences in terms
of generally accepted disclosure and reporting practice.
Whilst both the IASB and the FASB are committed to convergence and much progress has been made, currently we
have identified almost 200 reported IFRS to US GAAP differences in this survey with companies reported results
still significantly impacted by differences between the two frameworks.
The SEC has made consistency of application and presentation of IFRS financial information one of the key issues
surrounding the possible elimination of the IFRS to US GAAP reconciliation requirement and we are already seeing
both a vigorous and robust cross-border and industry comparison in the comment letter process.

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OVERVIEW

This survey provides an analysis of IFRS to US GAAP differences reported by companies which prepare financial
statements under IFRS with reconciliations to US GAAP. It is based on Form 20-F annual report filings for fiscal
years ended between 31 December 2005 and 31 March 2006 and filed with the SEC before 15 July 2006.
We have prepared the survey in four parts:

an analysis of the IFRS to US GAAP differences reported;


a compendium of extracts from Form 20-F filings illustrating reported differences between IFRS and US GAAP;
a discussion of the IFRS first-time adoption rules; and
an analysis of the IFRS to US GAAP differences reported for seven industry sectors.
The SEC expected the implementation of IFRS throughout the European Union (EU) in 2005 to result in a very
significant proportion of non-US companies registered with the SEC (foreign private issuers or FPIs) preparing
local financial statements in accordance with IFRS with reconciliations to US GAAP. Of approximately 1,200 FPIs,
about 500 are Canadian and, prior to 2005, about 40 of the remaining 700 FPIs prepared financial statements
under IFRS locally. This number was expected to reach 300 by the end of 2005 and closer to 400 by 2007.
At the end of 2005, over 240 FPIs were incorporated in the EU. There are 112 companies from EU countries in
our sample. The remaining EU FPIs are not included in our survey as they either did not file a Form 20-F before
15 July 2006 for a fiscal year ended between 31 December 2005 and 31 March 2006 or the Form 20-F that was
filed did not include IFRS financial statements reconciled to US GAAP. The other 18 companies are incorporated
in non-EU countries but file with the SEC financial statements under IFRS, reconciled to US GAAP.
The survey includes only companies that filed financial statements under IFRS or IFRS as endorsed by the EU.
We did not include filings by companies filing local financial statements prepared in accordance with a local body
of accounting principles which incorporates IFRS, for example, companies in Australia.

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Companies in the EU must comply with accounting standards adopted by the European Commission and it is
therefore possible that financial statements prepared by EU companies comply with IFRS as adopted by the
European Commission but will not comply with IFRS. However, the differences between IFRS and IFRS as
adopted by the EU concern only a carve-out for certain provisions on hedge accounting on the adoption of
IAS 39 Financial Instruments: Recognition and Measurement.
We did not include reconciliations for earlier years presented as, in accordance with IFRS 1 First-time Adoption
of International Financial Reporting Standards, many companies have taken advantage of a number of exemptions
and exceptions from full retrospective application of IFRS and, accordingly, the financial statements for comparative
periods may not be prepared on an entirely consistent basis.
The compendium of extracts from Form 20-F filings illustrating reported differences between IFRS and US GAAP
does not include those areas of difference that are specific to financial services (banking and insurance)
companies, as many of the transactions and accounting issues for banking and insurance companies are unique
to those industries. However, the more significant sector differences between IFRS and US GAAP as identified by
the financial services companies included in the survey are discussed in the Financial Services sector analysis.
We have not verified the propriety of the reported differences nor performed any audit procedures for the
purpose of expressing an opinion on the extracts included in this survey and, accordingly, we do not express
an opinion thereon.
Although the implementation of IFRS has brought about greater consistency in accounting, recognition,
measurement and disclosure, it is evident that IFRS financial statements have retained elements of national
legacy accounting, particularly in areas where there is an absence of specific IFRS standards. For the companies
in our survey, all of which have dual IFRS and US GAAP reporting requirements, we found that in areas where
there is a lack of specific IFRS guidance, many have applied US GAAP accounting for their IFRS financial
statements. However, in some cases, companies have continued to use their previous local GAAP or industry
practice under IFRS and report an IFRS to US GAAP difference.

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For example, accounting for sales incentives, including loyalty programmes and long-term contract incentives,
is not specifically addressed under IFRS (although IFRIC has issued a draft Interpretation on customer loyalty
programmes). Under US GAAP, there is specific guidance for accounting for sales incentives. Our survey
identified three companies, from different industry sectors and incorporated in different countries, which apply
different accounting treatments for sales incentives and consequently report IFRS to US GAAP differences.
Extracts from the Form 20-F filings for the three companies, France Telecom, Skyepharma and TNT, describing
these differences are included below.
Extract 1: France Telecom
NOTE 38.1 SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
Description of US GAAP adjustments [extract]
Revenue recognition (S) [extract]

As described in Note 2.1.8 to these consolidated financial statements, France Telecom accounts for certain sales
incentives, both with and without renewal obligations, in accordance with the interpretation made by the French
standard setter (CNC). Under US GAAP, France Telecom accounts for certain sales incentives given to customers
with renewal obligations in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a
Customer (EITF 01-9), and thereby recognizes such sales incentives upon the renewal of the customer.

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Extract 2: Skyepharma
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Summary of Material Differences between IFRS and U.S. GAAP [extract]

Description of U.S. GAAP Adjustments [extract]

(8) Revenue recognition [extract]

Under U.S. GAAP, the Company has accounted for contingent marketing contributions as a reduction of up-front
consideration received in determining the revenue to be recognized. If the contingent marketing contributions do not
reach the contractually agreed reimbursements, the difference would be recognized as revenue at the time further
marketing contributions are no longer required. Under IFRS, marketing contributions are expensed as incurred, in line
with the timing of the resulting expected product sales.

Extract 3: TNT

O 34 DIFFERENCES BETWEEN IFRS AND US GAAP [extract]


Other differences [extract]

LONG TERM CONTRACT INCENTIVES

Under IFRS, expenses related to long term contract incentive payments made to induce customers to enter or renew
long term service contracts may be deferred and accounted for over the contract period. Under US GAAP such
payments may not qualify for deferral, and must be recognised fully in income in the initial period that the cost is
incurred. We have paid certain long term contract incentives totalling 6 million that did not qualify for deferral under
US GAAP. As a result, under US GAAP, such payments were recognised immediately in the income statement,
while under IFRS they have been deferred and will be recognised over the term of the contract. This difference resulted
in an adjustment to the US GAAP net income and shareholders equity in the current year to reflect the reversal of the
related annual charge to the income statement recorded under IFRS.

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Another common source of difference is the propensity for IFRS to allow alternative accounting treatments where
only one of the allowed treatments is consistent with US GAAP. Some of the areas where alternative accounting
treatments have resulted in IFRS to US GAAP differences are as follows:

Under IAS 23 Borrowing Costs, entities have a choice of applying the benchmark treatment, which is to
expense all borrowing costs as incurred, or the allowed alternative treatment, which is to capitalise borrowing
costs arising on qualifying assets. Generally, there is no such choice under US GAAP, since FAS 34
Capitalization of Interest Cost requires capitalisation of interest costs for qualifying assets that require a
period of time to get them ready for their intended use.
33% of the companies in our survey reported differences as a result of expensing borrowing costs under the
benchmark treatment in IAS 23.

Under IAS 19 Employee Benefits, if actuarial gains and losses are recognised in the period in which they occur,
a company may choose to recognise them outside of profit or loss in a statement of recognised income and
expense. Recognition of actuarial gains and losses other than through the income statement generally is not
permitted under US GAAP.
32% of the companies recognised actuarial gains and losses in a statement of recognised income and expense
and reported a difference.
Under IAS 31 Interests in Joint Ventures, companies are allowed to account for investments in jointly controlled
entities using either the equity method or proportionate consolidation. US GAAP generally does not permit
proportionate consolidation except for an investment in an unincorporated entity in either the construction
industry or an extractive industry where there is a longstanding practice of its use. This was intended to be a
narrow exception. To illustrate for practical purposes, an entity is in an extractive industry only if its activities are
limited to the extraction of mineral resources (eg, oil and gas exploration and production) and do not involve
related activities.
15% of the companies in our survey applied proportionate consolidation for interests in joint ventures, including
companies in each of the industry sectors we analysed, except Air Transport. However, none of the oil and gas
companies reported a difference in this respect.

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Under IAS 16 Property, Plant and Equipment, companies may choose either the cost model or the revaluation
model as an accounting policy and apply the chosen policy to an entire class of property, plant and equipment.
US GAAP generally requires tangible fixed assets to be recorded at depreciated historical cost.
10% of the companies report a difference as a result of applying the revaluation model under IFRS.
Differences can also relate to local fiscal or other regulatory requirements. For example, in certain countries
payroll taxes are charged on share-based payment arrangements. IFRS 2 Share-based Payment does not
specifically address the accounting for payroll taxes relating to share-based payments, such as UK National
Insurance. Generally, under IFRS, payroll taxes relating to share-based payments are accrued systematically
over the option vesting period based on the intrinsic value at each reporting date. Under US GAAP, a liability for
payroll taxes relating to a share-based payment generally is not recognised until the option is exercised.
Our survey identified twelve companies that reported a reconciling difference in respect of payroll taxes on share
options. The twelve companies are incorporated in the United Kingdom (six), Sweden (two), Finland (two),
Norway (one) and Switzerland (one). The following extract from Inmarsat provides a description of this difference.
Extract 4: Inmarsat
34.

Summary of differences between International Financial Reporting Standards and United States
Generally Accepted Accounting Principles [extract]

(g) Stock option costs [extract]

Under IFRS, the liability for National Insurance on stock options is accrued based on the fair value of the options on the
date of grant and adjusted for subsequent changes in the market value of the underlying shares. Under US GAAP, this
expense is recorded upon exercise of stock options.

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Differences can arise even where the accounting guidance would suggest otherwise. This may be due to the
application of different transitional arrangements on adoption of directly equivalent IFRS and US GAAP standards
or different dates on which the standards are adopted. For example, 11% of the companies in the survey have
adopted IFRS 2 Share-based Payment and FAS 123(R) Share-Based Payment and have reported differences
relating to the transition provisions rather than to differences in the accounting guidance.
This difference is illustrated by the following extract from Nokia.
Extract 5: Nokia
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Differences between International Financial Reporting Standards and US Generally Accepted Accounting
Principles [extract]

Share-based compensation [extract]

The Group maintains several share-based employee compensation plans, which are described more fully in Note 24. As
of January 1, 2005 the Group adopted IFRS 2. Prior to the adoption of IFRS 2, the Group did not recognize the financial
effect of share-based payments until such payments were settled. In accordance with the transitional provisions of IFRS
2, the Standard has been applied retrospectively to all grants of shares, share options or other equity instruments that
were granted after November 7, 2002 and that were not yet vested at the effective date of the standard.

Effective January 1, 2005, the Group adopted the Statement of Financial Accounting Standards No. 123 (R), Share
Based Payment (FAS 123R), using the modified prospective method. Under the modified prospective method, all new
equity-based compensation awards granted to employees and existing awards modified on or after January 1, 2005,
are measured based on the fair value of the award and are recognized in the statement of income over the required
service period. Prior periods have not been revised.
The retrospective transition provision of IFRS 2 and the modified prospective transition provision of FAS 123(R) give
rise to differences in the historical income statement for share-based compensation. Further, associated differences
surrounding the effective date of application of the standards to unvested shares give rise to both current and historical
income statement differences in share-based compensation. Share issue premium reflects the cumulative difference
between the amount of share based compensation recorded under US GAAP and IFRS and the amount of deferred
compensation previously recorded in accordance with APB 25.

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Overall analysis
The survey of 130 reconciliations identified almost 200 unique IFRS to US GAAP differences
from a combined total of over 1,900 reconciling items. These almost 200 unique differences
were allocated to 28 areas of accounting, or categories. Certain of these categories have been
combined to align the descriptions of differences with the quantifications of those differences
disclosed in the reconciliations.
A total of 225 differences relating to taxation were reported by 126 of the 130 companies surveyed, despite the
supposedly similar full provision approaches to accounting for taxation under IFRS and US GAAP. This makes
taxation the third most reported category of difference, after pensions and post-retirement benefits and business
combinations. The reported differences reflect the many and often significant methodology differences that exist in
the computation of deferred tax between IFRS and US GAAP. However, the main reason for the number of reported
differences relating to taxation is that a high proportion of other IFRS to US GAAP income and equity reconciliation
adjustments have to be tax effected. Although reconciling items are shown gross and not net of tax, many
companies do not quantify the effect of taxation methodology differences separately from the deferred tax effect
of other reconciliation items. It is therefore not possible to provide a meaningful analysis of taxation differences.
Also, the survey included 102 companies that are first-time adopters of IFRS. These companies reported a total of
397 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1
First time Adoption of International Financial Reporting Standards. However, companies do not separately identify
the impact of first-time adoption differences in their reconciliations, so we have allocated those differences to the
appropriate underlying areas of accounting or categories.

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Many companies that were not first-time adopters of IFRS report differences due to the transitional provisions on
adoption of specific accounting standards under IFRS and/or US GAAP, including standards that impact the
accounting for business combinations, share-based payments and pensions. These differences have been
allocated to the appropriate underlying categories of difference.
After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting
categories are presented in the table below.

Category of differences

Number of differences

Business combinations

258

Foreign currency translation

90

Intangible assets

45

Capitalisation of borrowing costs

47

Impairment

87

Financial instruments recognition and measurement

126

Financial instruments derivatives and hedge accounting

159

Provisions and contingencies

125

Share-based payments

152

Financial instruments shareholders equity


Leasing

Revenue recognition

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61

46

Pensions and post-retirement benefits

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Business combinations
Of the 130 companies surveyed, 122 companies reported a difference relating to business combinations.
Of the 258 differences allocated to the business combinations category, 95 (37%) relate to the application of
exemptions for first-time adoption of IFRS under IFRS 1 First-time Adoption of International Financial Reporting
Standards. Under IFRS 1, a first-time adopter may elect to not apply IFRS 3 Business Combinations fully
retrospectively to business combinations completed in prior years.
57 (22%) of the differences relate to purchase price measurement and allocation. These differences include
purchase price measurement date differences, different recognition criteria for contingent consideration,
different accounting for in-process research and development assets and differences in the recognition of
restructuring provisions.
When the purchase consideration includes equity instruments, the date on which the value of the consideration
is measured differs between IFRS and US GAAP. Under IFRS, the date of exchange is used while US GAAP
specifies that measurement is based on a reasonable period of time before and after the terms of the acquisition
are agreed and announced. Also, IFRS requires that if the purchase consideration includes a contingent element
and payment of that element is probable, and the amount can be reliably measured, the contingent consideration
should be recorded at the date of acquisition. Under US GAAP, contingent consideration is usually recorded only
once the contingency is resolved.
Under IFRS, purchase consideration allocated to acquired in-process research and development projects that
meet the IFRS 3 recognition criteria, should be capitalised and amortised over their useful economic lives. Under
US GAAP, a portion of the purchase price paid in a business combination is assigned to in-process research and
development, including tangible assets to be used in research and projects that have no alternative future use,
and charged to expense at the acquisition date.
Under IFRS 3, the acquirer should not recognise liabilities for future losses or other costs expected to be incurred
as a result of the combination. US GAAP may allow the acquirers intentions to be taken into account, to an
extent, when measuring the liabilities acquired in a business combination.

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20 (8%) of the differences relate to the measurement of, or accounting for, minority interests, including the
acquisition of minority interests. Under IFRS, on initial acquisition of a controlling interest in a business, any
minority interest is recorded at fair value. Under US GAAP, only the portion of the assets and liabilities acquired
is recorded at fair value. The minority interest usually represents the minoritys share of the carrying amount of
the subsidiarys net assets. After the initial acquisition of a subsidiary, if an additional portion of that subsidiary is
subsequently acquired, under IFRS, the difference between the purchase consideration and the consolidated
amount of the net assets acquired is recorded as goodwill. Under US GAAP, the incremental portion of the assets
and liabilities is generally recorded at fair value, with any excess being allocated to goodwill, creating a difference
in the carrying values of assets and liabilities acquired and goodwill.
19 (7%) of the differences relate to the excess of the acquirers interest in the fair value of the identifiable assets,
liabilities and contingent liabilities over the cost of the combination. Under IFRS, where the acquirers interest in
the fair value of the identifiable assets and liabilities exceeds the cost of the combination, any excess, after a
reassessment of the purchase price allocation, is recognised immediately in profit or loss. Under US GAAP,
negative goodwill arising on a business combination should be allocated to proportionately reduce the value of
most categories of non-current, non-financial assets acquired. Any balance of negative goodwill remaining is
recognised as an extraordinary gain.
Foreign currency translation
Differences relating to foreign currency translation were reported by 82 companies.
Of the 90 differences allocated to this category, 75 (83%) relate to the application of IFRS 1 exemptions for firsttime adoption of IFRS. Under IFRS 1, a first-time adopter may elect not to apply IAS 21 The Effects of Changes
in Foreign Exchange fully retrospectively. Under this exemption, the cumulative translation difference for all
foreign operations is reset to zero.

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Intangible assets
A total of 45 differences allocated to the intangible assets category were reported by 36 companies.
22 (49%) of the differences relate to capitalised development costs. Under IFRS, when the technical and
economic feasibility of a project can be demonstrated, and further prescribed conditions are satisfied, project
development costs must be capitalised. Under US GAAP, development costs that are not covered by specific
accounting guidance are generally expensed as incurred.
9 (20%) of the differences relate to acquired in-process research and development. In-process research and
development projects acquired other than as part of a business combination are capitalised under IFRS if the
cost of acquiring the projects meets the definition of an intangible asset. Under US GAAP, the costs of acquired
research and development projects, or assets used in research and development projects, that have no
alternative future use, are generally charged to expense as incurred.
7 (16%) of the differences relate to the capitalisation of software development costs. Under IFRS, certain
development costs are capitalised once technical and economic feasibility can be demonstrated and other
conditions are satisfied. Under US GAAP, although most development costs are expensed as incurred, there is
specific guidance for software development costs that requires certain costs incurred during certain development
activities to be capitalised. However, the application of the IFRS and US GAAP guidance often results in
differences due to either the individual costs that are capitalised or the specific development activities for which
the costs are capitalised.
Impairment
62 companies reported a total of 87 differences relating to impairment. Of these 87 differences, 33 (38%) concern
the reversal of previous impairment write-downs. Under IFRS, impairment losses are reversed for an asset other
than goodwill if there has been a change in the estimates used to determine the assets recoverable amount
since the last impairment loss was recognised. US GAAP generally prohibits the reversal of an impairment loss,
except for long-lived assets held for sale.

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29 (33%) of the differences relate to the evaluation of impairment for long-lived assets, other than goodwill.
Under IFRS, impairment is both assessed and measured based on discounted cash flows. Under US GAAP, an
undiscounted cash flow evaluation is first performed to confirm impairment before any impairment is measured
based on fair value. An impairment charge reported under IFRS may be reversed under US GAAP as a result of
the undiscounted cash flow evaluation.
23 (26%) of the differences are the result of goodwill impairment. Under IFRS, impairment evaluations are based
on cash generating units, which are the smallest identifiable groups of assets whose cash flows are independent
of other asset groups. Under US GAAP, impairment evaluations are based on reporting units, which are operating
segments as defined for segmental reporting purposes or one level below an operating segment. Impairment
assessments at different levels under IFRS and US GAAP are a common source of reconciling items.
Financial instruments recognition and measurement
Differences relating to the recognition and measurement of financial instruments were reported by 70 companies.
Of the 126 differences allocated to this category, 26 (20%) relate to the presentation of deferred costs, including
finance fees. Under IFRS, debt issue costs are usually shown as a reduction of the liability and amortised over
the life of the debt. Under US GAAP, such costs are sometimes capitalised as a separate asset and amortised
over the life of the debt.
23 (18%) of the differences relate to the measurement of investments in non-exchange listed or privately held
companies. Under IFRS, investments in equity securities should be measured at fair value unless the fair value
cannot be reliably measured. Under US GAAP, in most situations, investments in non-listed equity securities
are accounted for based on historical cost, as fair value measurement is only available where there are readily
determinable fair values and fair values are readily determinable only if sales prices are currently available on
a recognised securities exchange.

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12 (10%) of the differences relate to insurance, assurance and related investment contracts. IFRS currently
permits companies to account for assets and liabilities of insurance and investment contracts with discretionary
participation features and their related deferred acquisition costs under a companys previous GAAP. As most
companies in the Financial Services sector elected to apply their previous GAAP, the differences reported do not
reflect consistent IFRS to US GAAP differences.
13 (10%) of the differences relate to assets designated as held at fair value through profit and loss. Under IFRS,
financial assets may be classified into four categories: held at fair value through profit and loss; held to maturity
investments; loans and receivables; and available-for-sale. Under US GAAP, the categories are trading securities,
held-to-maturity (debt) securities, and available-for-sale securities.
8 (6%) of the differences relate to securitisation transactions. Under US GAAP, a securitisation can only be
recognised as a sale and achieve off-balance sheet treatment if the transaction meets the derecognition criteria
and the other party in the securitisation is either a qualifying special purpose entity (QSPE) or is otherwise not
required to be consolidated. IFRS has similar requirements for off-balance sheet treatment of securitisations but
does not have an equivalent of the QSPE concept.
Financial instruments shareholders equity
A total of 41 differences relating to shareholders equity were reported by 38 companies.
Of these 41 differences, 26 (63%) relate to convertible debentures/bonds. Where a financial instrument (eg,
convertible debt) comprises both debt and equity elements, IFRS requires, on initial recognition, its carrying value
to be allocated between the debt and equity components, each of which is accounted for separately as debt or
equity. This allocation is made by calculating the fair value of the debt component of the instrument and allocating
the remainder of the fair value of the instrument as a whole to the equity component. Once this allocation is
made, it is not changed. US GAAP normally does not permit an allocation of part of the proceeds to the conversion
feature. However, if the conversion feature is in the money at the commitment date, then the intrinsic value of the
conversion feature is allocated to additional paid in capital.

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10 (24%) of the differences relate to the treatment of preference shares. Under IFRS, the issuer must determine
whether the preferred shares are a liability or a form of equity based on the rights associated with the shares.
When distributions to holders of the preference shares, whether cumulative or non-cumulative, are non discretionary
the shares are a liability. Under US GAAP often these preference shares are treated as temporary equity.
Financial instruments derivatives and hedge accounting
85 companies reported differences relating to derivatives and hedge accounting.
Of the 159 differences allocated to this category, 64 (40%) are due to the exemptions available to first-time
adopters. Many companies applied hedge accounting under their previous GAAP, but did not designate hedges
under FAS 133 Accounting for Derivative Instruments and Hedging Activities. Under the IFRS 1 and IAS 39
transition exemptions, transactions accounted for as hedges under previous GAAP may continue to receive
hedge accounting treatment if hedge documentation (including effectiveness testing) was prepared under IFRS
no later than the date of transition (or the beginning of the first IFRS reporting period, if comparatives are not
restated). Alternatively, previously hedged transactions are accounted for as discontinued hedges under IFRS if
no hedge documentation was prepared. For transactions that did not meet the US GAAP hedge criteria in the
comparative period, including the designation and documentation requirements, differences will arise, whether or
not hedge accounting continues under IFRS.
32 (20%) of the differences are due to hedge relationships under IFRS not meeting the designation and
documentation requirement under US GAAP. This is usually not because there are any substantive differences
between the IFRS and US GAAP requirements, but rather because companies elect not to designate and
document the hedge relationships under US GAAP.

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Leasing
A total of 61 differences relating to leasing transactions were reported by 49 companies.
Of these differences, 38 (62%) relate to deferred gains on sale and operating leaseback arrangements.
Under IFRS, IAS 17 Leases requires the gain on a sale and operating leaseback transaction to be recognised
immediately where the sale price is established at fair value. If the sales price is below fair value, any profit or
loss is recognised immediately, except where the loss is compensated for by below-market future lease
payments, in which case the loss is deferred and amortised in proportion to the lease payments over the period
of expected use. If the sale price is above fair value the difference between the sale price and fair value should
be deferred and amortised over the period for which the asset is expected to be used. Under US GAAP, FAS 28
Accounting for Sales with Leasebacks (an amendment of FASB Statement No. 13) generally requires any gain
arising on a sale and operating leaseback to be deferred and recognised in proportion to the gross rental charged
to expense over the lease term.
4 (7%) of the differences relate to leases involving real estate. Under IFRS, leases involving land and buildings
are accounted for using the same principles as for other types of asset, but the land and buildings elements are
considered separately for the purposes of lease classification. Under IAS 40 Investment Property, a property
interest held under an operating lease that otherwise satisfies the definition of an investment property may be
classified as an investment property (carried under the fair value model) and accounted for as if it were a finance
lease. US GAAP contains specific rules on accounting for leases involving real estate and, unless the lease
transfers ownership to the lessee by the end of the lease term or there is a bargain purchase option, a leasehold
interest in land should be accounted for as an operating lease.
4 (7%) of the differences relate to deferred gains on sale and operating leaseback arrangements when the seller
has a continuing involvement in the assets. IFRS does not contain special rules on such transactions. Under US
GAAP, a seller generally would not recognise a sale where the sale and leaseback transaction allows for some
continuing involvement by the seller in the property.

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Provisions and contingencies


A total of 125 differences relating to provisions and contingencies were reported by 74 companies.
Of these 125 differences, 45 (36%) relate to costs associated with restructurings or other employee terminations
and early retirement, as the recognition criteria for certain provisions or elements of provisions are different under
IFRS and US GAAP.
19 (15%) of the differences are due to discounting of provisions. Under IFRS, IAS 37 Provisions, Contingent
Liabilities and Contingent Assets requires the time value of money to be taken into account when making a
provision. Under US GAAP, discounting generally is only possible where both the amount of the liability and the
timing of payments are either fixed or reliably determinable.
18 (14%) of the differences relate to asset retirement obligations. Although the rules on asset retirement
obligations are similar, it remains possible for a measurement difference to occur (1) when the liability does
not arise from a legal obligation or (2) when there are changes in cost estimates or discount rates.
17 (14%) of the differences are in connection with provisioning for onerous contracts, mostly leases. Under IFRS,
a provision should be recognised when a contract is considered onerous. Under US GAAP, onerous contract
losses generally can be recognised only when legal notice of termination has been given or an agreement to
terminate has been made or, for onerous leases, when the leased premises have been vacated.
Provisions for major overhaul, guarantees and contingencies make up the remaining differences in this category.
Revenue recognition
35 companies reported a total of 46 differences relating to revenue recognition.
Of these differences, 12 (26%) relate to up-front fees. IFRS does not provide specific guidance for accounting for
up-front fees, so the general rules on revenue recognition apply. Under US GAAP, up-front fees, even if nonrefundable, are earned as the products and or services are delivered or performed over the term of the
arrangement or the expected period of performance.

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10 (22%) of the differences relate to multiple element arrangements and long-term service arrangements. IFRS
does not provide any specific guidance for multiple element arrangements. US GAAP provides specific guidance
which states that multiple deliverables within a revenue arrangement should be divided into separate units of
accounting if certain criteria are met at the inception of the arrangement and as each item is delivered. Deferral of
revenue recognition often occurs when deliverables in a multiple element arrangement cannot be treated as
separate units of accounting.
5 (11%) of the differences in the revenue recognition category relate to regulated pricing. Under FAS 71
Accounting for the Effects of Certain Types of Regulation, an entity accounts for the effects of regulation by
recognising a regulatory asset (or liability) that reflects the increase (or decrease) in future prices approved
by the regulator. Under IFRS, there is no specific guidance which addresses this issue.
4 (9%) of the differences relate to sales incentives offered to vendors. Under IFRS, certain sales incentives
given to customers with renewal obligations are accrued for. Under US GAAP, sales incentives generally are
recognised upon the renewal of the contract.
Share-based payments
A total of 152 differences relating to share-based payments were reported by 74 companies.
Of these differences, 50 (33%) relate to the application of IFRS 1 exemptions for first-time adoption of IFRS.
Under IFRS 1, a first-time adopter is not required to apply IFRS 2 Share- Based Payment to equity instruments
granted on or before 7 November 2002 or granted after 7 November 2002 but vested before the later of (1) the
date of transition to IFRS and (2) 1 January 2005.
48 (32%) of the differences relate to the adoption of the fair value model for accounting for share-based payments
under IFRS compared to the application of the intrinsic value model under US GAAP or as a result of the
transition provisions on adoption of IFRS 2 and FAS 123(R) Share-Based Payment. Under US GAAP, many
companies were still accounting for share-based payments under the intrinsic value method in accordance with
APB 25 Accounting for Stock Issued to Employees. FAS 123(R), which requires the application of a fair value
model, is effective for most public companies no later than the first fiscal year beginning after 15 June 2005.

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12 (8%) of the differences are in connection with payroll taxes on share-based payments. Under IFRS, in most
instances, payroll taxes should be recognised over the same period as the related share-based payment
expense. Under US GAAP, payroll taxes generally are recognised only on the exercise of the stock options.
Pensions and post retirement benefits
Differences relating to pensions and post-retirement benefits were reported by 100 companies.
Of the 311 differences allocated to pensions and post-retirement benefits, 86 (28%) relate to the recognition
of a minimum pension liability under US GAAP. IFRS does not have any similar requirement. Recognition of a
minimum pension liability may have little impact on equity for a first-time adopter of IFRS as the full pension
liability recognised under the IFRS 1 exemptions against shareholders equity may be greater than the pension
liability, including an additional minimum liability, under US GAAP.
75 (24%) of the differences are due to the application of exemptions on first-time adoption of IFRS. Under the
IFRS 1 transitional exemptions, companies can take a one-time charge for past service cost directly to
shareholders equity. Under US GAAP, prior service costs generally are recognised in income over the expected
remaining service lives of the employees.
42 (14%) of the differences relate to the recognition of current period actuarial gains and losses through the
statement of recognised income and expense or net income under IFRS. Under IAS 19 Employee Benefits, an
entity may choose to recognise actuarial gains or losses in the period in which they occur, but outside profit and
loss in a statement of recognised income and expense. Under US GAAP, actuarial gains and losses generally
should be recognised in income over the future service lives of relevant employees.
37 (12%) of the differences are in connection with plan amendments and past service costs. Under IFRS,
past service cost are recognised immediately if the benefits are fully vested; otherwise the costs are recognised
on a straight-line basis over the remaining vesting period. Under US GAAP, prior service costs generally are
recognised in income over the expected remaining service lives of the employees.

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Other
Other accounting areas or items for which differences are reported include proportionate consolidation,
consolidation of special purpose entities and taxation.
Proportionate consolidation: Under IFRS, an entity may choose to account for a jointly controlled entity using the
equity method or, alternatively to apply proportionate consolidation. Under US GAAP, an entity generally should
apply the equity method, because US GAAP does not permit proportionate consolidation except where the
investee is in either the construction industry or an extractive industry where there is a longstanding practice of its
use. This was intended to be a narrow exception. To illustrate for practical purposes, an entity is in an extractive
industry only if its activities are limited to the extraction of mineral resources (eg, oil and gas exploration and
production) and do not involve related activities.
Special purpose entity consolidation: Under IFRS, SIC12 Consolidation Special Purpose Entities requires that
a special purpose entity (SPE) is consolidated when the substance of the relationship between an entity and the
SPE indicates that the SPE is controlled by the entity. Under US GAAP, the variable interest model introduced by
FIN 46(R) Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No.
51 determines control (and consolidation) of a variable interest entity (VIE). Differences occur where entities that
are considered to be VIEs under US GAAP are not SPEs under IFRS and vice versa.
Taxation: The differences identified in respect of income taxes are due in part to certain methodology differences
between IFRS and US GAAP but primarily reflect the tax effects of the other reconciling differences. Many
companies disclose income tax differences as a single reconciliation item and it is therefore impossible to quantify
the impact of methodology differences, if any.

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ERNST & YOUNG

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2007 EYGM Limited. EYG No. AU0037
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