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Financial statements
Executive summary
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In both frameworks, the components of a complete set of financial statements are the same
except that IFRS (and the SEC) requires the statement of changes in equity while US GAAP
permits it.
In both frameworks, the financial statement presentation is very similar. Differences between
the two tend to arise in the level of specific guidance. Significant differences are as follows:
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Balance sheet (statement of financial position):
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IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have
more detailed requirements than IFRS.
Income statement:
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IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have
more detailed requirements than IFRS.
IFRS prohibits extraordinary items unlike US GAAP.
IFRS does not define certain key income statement measures. While US GAAP does not define all these
measures either, SEC regulations provide requirements and limitations on the ability of public companies to
disclose non-GAAP measures.
Financial statements
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Executive summary
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Financial statement presentation differences (continued):
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Statement of comprehensive income:
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Statement of cash flows:
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IFRS permits comprehensive income to be presented in one statement of comprehensive income or in two
separate consecutive statements consisting of a separate income statement and a statement of
comprehensive income. To conform with these presentation options allowed for IFRS, changes were made to
US GAAP in 2011. These changes are effective for fiscal years beginning after December 15, 2011 for public
companies and December 15, 2012 for non-public companies.
There are some differences between the types of items reported in OCI and the requirements for grouping
such items that may or may not be reclassified into net income.
IFRS permits a choice of alternatives for the classification of interest and dividends while US GAAP does not.
Notes to the financial statements:
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Using IFRS, most companies will experience additional financial disclosure requirements compared to US
GAAP.
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Primary pronouncements
US GAAP
► ASC 205, Presentation of Financial Statements
► ASC 210, Balance Sheet
► ASC 215, Statement of Shareholder Equity
► ASC 220, Comprehensive Income
► ASC 225, Income Statement
► ASC 230, Statement of Cash Flows
► ASC 235, Notes to Financial Statements
► ASC 250, Accounting Changes and Error
Corrections
► ASC 260, Earnings Per Share
► ASC 505, Equity
Financial statements
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IFRS
► IAS 1, Presentation of Financial
Statements
► IAS 7, Statement of Cash Flows
► IAS 8, Accounting Policies, Changes
in Accounting Estimates and Errors
► IAS 18, Revenue
► IAS 33, Earnings per Share
► IFRS 5, Non-Current Assets Held for
Sale and Discontinued Operations
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Progress on convergence
Phase A
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In April 2004, the FASB and the IASB (the Boards) agreed to
undertake a joint project on financial statement presentation.
The project is being conducted in phases, as follows:
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Phase A addressed what constitutes a complete set of financial
statements and the requirements for presenting comparative
information. The FASB and IASB completed deliberations on Phase
A in 2005.
In 2007, the IASB published a revised IAS 1 Presentation of
Financial Statements. The revised IAS 1, which was effective
January 1, 2009, modified the requirements of the SORIE and
brought it largely in line with ASC 220, Reporting Comprehensive
Income.
The FASB did not issue an exposure draft on Phase A and has
decided to expose its Phase A decisions along with its Phase B
decisions.
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Progress on convergence
Phase B
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Addresses the more fundamental issues for presentation of information on the face of the financial
statements, and may result in significant changes. Phase B topics include:
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Developing principles for the aggregation and disaggregation of information.
Defining totals and subtotals to be reported in each financial statement.
Organizing financial statements such that each separate statement integrates with one another to clearly
show its relationship to the statement of cash flows.
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The Boards issued a Discussion Paper, Preliminary Views on Financial Statement Presentation,
on October 16, 2008. The comment period ended April 14, 2009 and the Boards are developing
an ED for a proposed standard on financial statement presentation. In October 2010, the Boards
acknowledged that they did not currently have the capacity to issue an ED. It is unclear when they
will return to this project.
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The Boards considered as a separate matter the presentation of other comprehensive income
(OCI) and decided to allow companies the option to present net income and OCI either in one
continuous statement of comprehensive income or in two separate consecutive statements.
Although consideration of this issue was initially a joint project, ultimately the Boards issued
separate amendments and updates to their respective standards.
Financial statements
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Progress on convergence
Phase B (continued)
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The IASB issued an amendment to IAS 1 on June 16, 2011.
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The amendment requires that entities report net income and OCI using one of the two formats noted
on the previous slide.
The amendment requires that items be presented in OCI separately as to those that may be
subsequently reclassified into net income and those that will not be reclassified and, therefore, will
remain in accumulated OCI. The tax effect of each grouping must be shown separately.
The amendment was effective for fiscal periods beginning on or after July 1, 2012, with early
adoption permitted.
The FASB issued an update (ASU No. 2011-05) to Topic 220 in June 2011.
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The amendment requires that entities report net income and OCI using one of the two formats noted
on the previous slide.
The amendment does not require separate presentation of OCI items subject to reclassification, since
under US GAAP, all items recorded in OCI are subject to reclassification to net income.
The amendment required presentation of reclassification adjustments out of accumulated OCI on the
face of the financial statements.
The update was effective for fiscal periods beginning on or after December 15, 2011 for public
companies. The effective date for non-public companies is December 15, 2012.
Financial statements
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Progress on convergence
Phase B (continued)
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The FASB issued an update (ASU 2011-12) to Topic 220 in December 2011 to defer the
presentation requirements for reclassification adjustments out of accumulated OCI on the face
of the financial statements.
After deliberations concluded at the end of June 2012, the Board decided that the presentation
requirements deferred in ASU 2011-12 would not be reinstated.
As an alternative, the Board decided to require an entity to provide enhanced disclosures to
explain the effect of reclassification adjustments on OCI by component. In addition, an entity
would be required to provide a tabular disclosure showing the effect of items reclassified from
accumulated OCI on the line items of net income with references to other disclosures required
under US GAAP.
The Board directed the staff to draft a proposed ASU, which is expected in the third quarter of
2012. The Board decided that the comment period on the proposed ASU will be 60 days.
Financial statements
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Progress on convergence
Phase C
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Phase C will address the presentation and display of interim financial statements for both US
GAAP and IFRS using IAS 34. This phase of the Financial Statement Presentation project
has not commenced, as the Boards plan to begin work on Phase C in the latter stages of
Phase B.
Financial statements
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Financial statement presentation
General
US GAAP
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IFRS
A complete set of financial statements
includes the balance sheet, statement of
comprehensive income, statement of cash
flows and accompanying notes to the
financial statements. A statement in
changes in equity is not required but is
almost always presented in practice.
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A complete set of financial statements
includes the statement of financial position
(balance sheet), statement of
comprehensive income, statement of cash
flows, statement of changes in equity and
accompanying notes to the financial
statements.
Convergence
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The Boards have affirmed that the ED will require a statement of changes in equity, thereby
conforming both frameworks.
Financial statements
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Financial statement presentation
General
US GAAP
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IFRS
Does not require a third balance sheet (and
related notes) as of the beginning of the
earliest comparative period presented
when an entity restates its financial
statements.
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Does require a third balance sheet (and
related notes) as of the beginning of the
earliest comparative period presented
when an entity restates its financial
statements.
Convergence
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The FASB decided in the ED to make a requirement for a third balance sheet similar to
IFRS, thereby conforming both frameworks.
Financial statements
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Financial statement presentation
General
US GAAP
IFRS
Prepared on an accrual basis except for the
statement of cash flows.
Similar
Includes concepts of materiality and
consistency for the preparer to follow.
Similar
Financial statements
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Financial statement presentation
Comparative financial information
► IFRS requires comparative
information for all amounts
reported in the financial
statements.
► US GAAP allows a singleyear presentation in
certain circumstances.
► SEC rules require a twoyear balance sheet
presentation and threeyear presentation for all
other financial statements.
Financial statements
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Statement of financial position presentation
Classification and liquidity
► IFRS requires a classified
balance sheet, except
when liquidity presentation
provides more reliable and
relevant information.
► US GAAP allows the use
of either a classified or
unclassified balance
sheet.
Financial statements
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Statement of financial position presentation
Minimum accounts
US GAAP
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IFRS
No minimum account presentation
requirements.
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Requires a minimum presentation of
certain asset, liability and equity accounts.
SEC rules have more rigorous presentation
criteria.
Financial statements
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Statement of financial position presentation
Minimum accounts
The minimum accounts to be
presented on the statement of
financial position as defined by IAS
1.54 are:
a) Property, plant and equipment
b) Investment property
c) Intangible assets
d) Financial assets (excluding amounts
shown under (e), (h) and (i))
e) Investments accounted for using the
equity method
f) Biological assets
g) Inventories
h) Trade and other receivables
i) Cash and cash equivalents
j) Total of assets classified as held for sale
and assets included in disposal groups
classified as held for sale per IFRS 5
Financial statements
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Balance sheet presentation
Minimum account information
The minimum accounts to be presented on
the balance sheet as defined by IAS 1.54
(continued):
a) Trade and other payables
b) Provisions
c) Financial liabilities (excluding amounts shown under
(a) and (b))
d) Liabilities and assets for current tax per IAS 12
e) Deferred tax liabilities and deferred tax assets per
IAS 12
f) Liabilities included in disposal groups classified as
held for sale per IFRS 5
g) Minority interest, presented within equity
h) Issued capital and reserves attributable to equity
holders of the parent
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Statement of financial position
Typical IFRS order
Although no particular format is required, IFRS
generally presents accounts in the following order
(representative of UK legacy requirements):
► Non-current assets
► Current assets
► Equity
► Non-current liabilities
► Current liabilities
US GAAP presents current assets and liabilities
before non-current.
Financial statements
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Statement of financial position presentation
Cash and cash equivalents
US GAAP
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IFRS
ASC 210-20 does not address bank
overdrafts and they are generally reported
as a liability in the balance sheet.
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IAS 7 makes an explicit distinction
between bank borrowings and bank
overdrafts. Overdrafts may be classified
as a component of cash and cash
equivalents if considered to be an integral
part of an enterprises’ cash management.
Convergence
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The Boards have affirmed that the ED will specify that overdrafts should be presented in the
debt category of the financing section of the statement of financial position, thereby
conforming both frameworks.
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Statement of financial position presentation
Deferred tax assets and liabilities
► IFRS prohibits deferred tax
assets or liabilities to be
classified as current.
► US GAAP requires
classification as current or
non-current based on the
nature of the underlying
asset or liability.
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Statement of financial position presentation
Debt classification under default for covenant violation
US GAAP
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IFRS
Allows debt to retain non-current
classification as of the balance sheet date
if a lender waives or modifies the related
debt covenant violation on or after the
balance sheet date but prior to the
issuance of the financial statements.
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Requires that a lender must waive or
modify a debt covenant violation prior to or
at the balance sheet date in order for the
related debt to be classified as non-current
at the balance sheet date.
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Debt classification under default for covenant violation
example
Example 1:
Riley’s Roosters, Inc. (RRI) has a December 31 year-end. As of June 30, 2012, RRI obtains a
$100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In
December 2012, RRI spends too much of its cash on its holiday party and incurs a debt covenant
violation as of December 31, 2012. As a result of the violation, the loan becomes due within 30
days. At this time, RRI asks the bank to waive the violation. RRI tells the bank it will recoup some
of the cash by selling the leftover holiday party favors on eBay. On January 5, 2013, the bank
agrees to waive the violation. RRI issues its financial statements on January 25, 2013.
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How should this loan be classified (current or non-current)
on RRI’s balance sheet as of December 31, 2012 using
IFRS and US GAAP?
Financial statements
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Debt classification under default for covenant violation
example
Example 1 (solution):
Balance sheet date
IFRS
Fiscal year
Post-fiscal year and prior
to issuance of financials
US
GAAP
Fiscal year
Post-fiscal year and prior
to issuance of financials
Solution:
As the bank modified the debt covenant violation subsequent to RRI’s balance sheet date of
December 31, 2012 but prior to the financial statement issuance date of January 25, 2013, the
debt is classified as current as of the balance sheet date using IFRS but non-current for
US GAAP. See the timeline noted above showing the allowable period (in yellow) for a lender to
waive or modify a debt covenant violation to retain non-current classification under IFRS and
US GAAP.
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Statement of income and statement of comprehensive
income presentation
IFRS and US GAAP require comprehensive income to be presented in one statement of comprehensive
income or in two separate consecutive statements comprising of a separate statement of income and a
statement of comprehensive income.
US GAAP
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Generally, US GAAP
considers all items
recorded in OCI as
subject to
reclassification into net
income and, therefore,
no separate
presentation
groupings are
required.
IFRS
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For fiscal years beginning July 1, 2012 (with early adoption permitted),
IFRS requires the presentation of items in OCI that ultimately may be
reclassified into net income to be presented separately from those that will
not be reclassified into net income. The tax effect must be shown
separately, either by individual item or in aggregate.
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Reclassification adjustments do not arise on changes in revaluation surplus
recognized in accordance with IAS 16 (Property, Plant and Equipment) or
on actuarial gains and losses on defined benefit plans recognized in
accordance with paragraph 93A of IAS 19 (Employee Benefits).
Financial statements
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Classification of other comprehensive income items
Example 2:
Treadstone International’s controller, Hans Burke, called you yesterday inquiring about the
differences for classification of various items in OCI that might be encountered when his company
changes from US GAAP to IFRS next year. Hans emailed you a list of potential transactions.
Hans would like you to prepare a draft statement of other comprehensive income based on IFRS.
The tax rate for all items in OCI is 30%.
Cash flow hedges
Foreign currency exchange differences
Available for sale gains
Defined benefit plan actuarial (losses) / gains
Revaluation of property
Financial statements
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2012
$ 40
670
170
(60)
300
2011
$ (90)
550
64
80
–
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Classification of other comprehensive income items
Example 2 solution (IFRS):
2012
2011
Other comprehensive income:
Items that will not be subsequently reclassified to profit or loss:
Revaluation of property
$300
Defined benefit plan actuarial (losses)/gains
(60)
$ 80
Income tax
(72)
(24)
168
56
40
(90)
Foreign currency exchange differences
670
550
Available for sale gains
170
64
(264)
(157)
616
367
$784
$423
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges
Income tax
Other comprehensive income, net of tax
Financial statements
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Statement of income and statement of comprehensive
income presentation
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IFRS allows reclassification adjustments to be disclosed in the notes to the financial statements and
US GAAP prohibits this option based on ASU 2011-05. However, the FASB deferred these
requirements in ASU 2011-12 and began redeliberating their position during the first half of 2012 to
determine if reclassifications could be disclosed in the notes to the financial statements.
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At the end of June 2012, the Board decided that the presentation requirements deferred in ASU 201112 would not be reinstated and directed the staff to draft a proposed ASU that would require an entity
to provide enhanced disclosures to explain the effect of reclassification adjustments on OCI by
component. In addition, an entity would be required to provide a tabular disclosure showing the effect
of items reclassified from accumulated OCI on the line items of net income with references to other
disclosures required under US GAAP.
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The Board decided that the comment period on the proposed ASU will be 60 days. Until this issue is
resolved, US GAAP will allow reclassifications to be disclosed either on the face of the financial
statements or in the related notes.
Financial statements
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Statement of income and statement of comprehensive
income presentation
US GAAP
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IFRS
No minimum information requirements.
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SEC rules have more rigorous presentation
criteria.
Requires certain minimum amount of
information with order and description
amended as necessary for nature and type
of entity, industry, etc.
Financial statements
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Statement of income
Minimum information required
The minimum information to be presented on
the income statement as defined by IAS 1.82:
► Revenue
► Finance costs
► Share of profit or loss of associates and joint
ventures accounted for using the equity method
► A single amount comprising the total of:
► The post-tax profit or loss of discontinued
operations
► The post-tax gain or loss recognized on the
measurement of fair value less costs to sell
or on the disposal of assets or disposal
group(s) constituting the discontinued
operations
► Tax expense
► Profit or loss
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Statement of comprehensive
income – Minimum information required
The minimum information to be
presented on the statement of
comprehensive income as defined by
IAS 1.82:
► Each component of other comprehensive
income classified by nature (excluding
amounts presented in the next item)
► Share of the other comprehensive income
of associates and joint ventures accounted
for using the equity method
► Total comprehensive income
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Income statement presentation
Key measures
US GAAP
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IFRS
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Defines most key measures excluding
operating profit:
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SEC regulations define certain measures
and provide requirements and limitations on
the ability of public companies to disclose
non-GAAP measures.
Does not define certain key measures:
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Using IFRS, management may use nonstandard measurements, creating diversity
in practice regarding line items, headings
and subtotals.
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Companies should expect a change in the
pattern of earnings and financial position
when comparisons to historical
performance are made.
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This will require management to understand
and explain business performance to
shareholders and the marketplace.
The traditional definition of operating profit is
still used in practice.
Financial statements
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Income statement presentation
Natural presentation
IFRS allows either a natural expense
classification presentation (by type such as
salaries, depreciation, advertising, etc.) or
functional classification expense
presentation (by function as part of cost of
sales, distribution, administration, etc.).
Financial statements
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Income statement presentation
Functional presentation
If functional presentation is used, specific
disclosures in the notes are required
about the nature of the expenses.
US GAAP has no general requirement,
but the SEC requires that expenses be
based on the functional classification.
Financial statements
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Income statement presentation
Extraordinary items
IFRS
US GAAP
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Extraordinary items are reported separately
on the income statement.
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Prohibits extraordinary items, but major
revenue and expense items are disclosed
in the income statement or notes.
Convergence
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Tentatively, the FASB has affirmed that an entity should not label a line item as extraordinary
and that an entity should not show the effects of extraordinary events or transactions as a
section or category in the statement of comprehensive income as currently required. The
Boards have agreed that the ED will specify a requirement to present the effects of unusual
or infrequently occurring events or transactions in the statement of comprehensive income
and disclosure of related information in the notes to financial statements, thereby conforming
both frameworks.
Financial statements
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Statement of changes in equity
IFRS uses the terminology “other reserves” and
US GAAP uses “accumulated other
comprehensive income” to identify items of
income and expense that are required by other
standards or interpretations to be recognized
directly in equity.
Financial statements
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Statement of cash flows
IFRS permits an entity to classify:
► Interest paid or received and dividends paid or received
as operating cash flows
or
► Interest and dividends received as investing cash flows
and
► Interest and dividends paid as financing cash flows.
Interest and dividends must be classified in a consistent
manner from period to period.
US GAAP requires that interest received and paid and
dividends received be classified as operating cash flows and
dividends paid are classified as financing cash flows.
Financial statements
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Summary chart of cash flow classification for interest and
dividends
Cash flow classification
Transaction
IFRS
US GAAP
Interest paid
Operating or financing
Operating
Interest received
Operating or investing
Operating
Dividends paid
Operating or financing
Financing
Dividends received
Operating or investing
Operating
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Cash flow classification example
Example 3:
Carl Cash, CEO of Big Bucks, Inc. (BBI), goes to visit his accountant, Francis Flow, to discuss the
classification of interest and dividends in BBI’s statement of cash flows. BBI currently reports
using US GAAP but is considering adopting IFRS. For its current fiscal year, BBI has interest
received of $500, interest paid of $250, dividends received of $1,000 and dividends paid of $700.
Carl asks Francis if BBI adopts IFRS, can BBI classify its interest and dividend amounts in the
statement of cash flows consistent with their classification under US GAAP?
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Determine what Francis’ response should be to Carl’s question.
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Cash flow classification example
Example 3 (solution):
Cash flow classification
Transaction
IFRS
US GAAP
Interest paid
Operating or financing
Operating
Interest received
Operating or investing
Operating
Dividends paid
Operating or financing
Financing
Dividends received
Operating or investing
Operating
Yes, BBI can classify these amounts the same in the statement of cash flows using IFRS as
US GAAP by classifying interest paid, interest received, and dividends received as “operating”
and dividends paid as “financing.” Additionally, if BBI chooses to report using IFRS, interest and
dividends must be classified in a consistent manner from period to period.
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Notes to the financial statements
Using IFRS, most companies
will experience additional
financial disclosures.
IFRS requires that an explicit
statement be made in the
notes that the financial
statements comply with IFRS.
Absence of such disclosure
renders the entire financial
statements non-compliant.
Financial statements
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Notes to the financial statements
Cash and cash equivalents disclosures
IFRS requires the disclosure of the
components of cash and cash equivalents.
US GAAP does not require this disclosure.
Both US GAAP and IFRS requires policy
disclosure of which items are treated as cash
equivalents.
US GAAP requires that cash and cash
equivalents line item in the statement of cash
flows equals the cash and cash equivalents in
the statement of financial position. Under
IFRS, the total of cash and cash equivalents
presented in the statement of cash flows does
not need to agree to a single line item in the
balance sheet. Entities must disclose a
reconciliation of the components of cash and
cash equivalents to the amounts presented on
the statement of financial position.
Financial statements
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Notes to the financial statements
Departure from an accounting standard
US GAAP
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Does not allow non-compliance with an
accounting standard if, in the opinion of
management, that compliance would be
misleading.
IFRS
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Allows non-compliance with an accounting
standard if, in the opinion of management ,that
compliance would be misleading. This is called
“The True and Fair Override” and is extremely
rare. If used, the rationale and effect on the
financial statements must be disclosed.
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