ACTG 6570 IFRS Implementation Virginia Tech As of June 30, 2009

Income Statement and Other Comprehensive Income IAS 1 No set format for the income statement Six required elements –Revenue –Finance costs –Profit or loss from associates and joint ventures –Tax expense –Discontinued operations –Profit or loss (bottom line) Expenses –Can be presented by nature OR function (required by SEC) Extraordinary items PROHIBITED

Other Comprehensive Income Revised IAS 1, effective 2009 Comprehensive income –Must be presented along with the regular income statement OR –Must have a separate Statement of Comprehensive Income –Components may be presented net of tax or before tax with a single tax for OCI. –Prohibits the presentation of OCI in the statement of changes in shareholders’ equity

Minority Interest 100% of the subsidiary’s income is reported by the parent company A disclosure on the face of the financial statements indicates the amount of net income attributed to shareholders of the parent company and the amount attributed to minority interest of the subsidiary This correlates to FAS 160 effective in 2009.

PROPOSED CHANGES U.S. GAAP –Single statement for comprehensive income –Revenues and expenses classified according to cash flow categories of operating, investing, and financing

Balance Sheet IAS 1 does not require a specific format for the balance sheet Entities can choose between a classified or non- classified balance sheet. Current and noncurrent sections should be presented unless a liquidity presentation is more appropriate IFRS does not allow assets and liabilities to be offset unless specifically allowed under a standard. Minority interests are presented in the equity section. One year of comparative financial information must be presented.

PROPOSED CHANGES Assets and liabilities will be classified as operating, investing, or financing according to the management approach. Within each section, management must classify short-term/long-term unless liquidity better. Short-term will be one year (no operating cycle). Cash equivalents reported separately from cash.

Statement of Cash Flows IAS 7 No exemptions provided to certain investment entities as does US GAAP. Bank overdrafts can be included in “cash and cash equivalents” Interest and dividends received can be classified as investing or operating activities. Interest and dividends paid can be classified as financing or operating activities. Income taxes can be classified as operating, investing, or financing activities. A company must be consistent in their application.

PROPOSED CHANGES Cash equivalents will be taken out of cash. Cash flow statement will reconcile beginning and ending cash balance. Classification will be based on the underlying purpose of the asset. Operating – central purpose of company Property, plant and equipment likely to be in operating category.

Cash and Receivables Bank overdrafts can be offset against cash U.S. GAAP makes most overdrafts liabilities. IAS 39 defines loans and receivables as financial assets that are created by the enterprise by providing money, goods or services directly to a debtor –US GAAP has no related category. IFRS requires loans and receivables to be measured initially at fair value. Subsequent valuation changes are accounted for at amortized cost using the effective interest method. Derecognition –For US GAAP, control test is used (page 26) –IFRS derecognizes financial assets based on a test of risk and rewards first and a test of control second (page 27)

Receivables Allowance method must be used. “Allowance” is termed “provision”. Impairments –When carrying value > present value of expected future cash flows discounted at the asset’s original effective interest rate. –Impairment losses can be reversed if objective evidence exists warranting reversal.

Inventories IAS 2 LIFO is prohibited IFRS requires entities to apply the same cost formula to all inventories similar in nature or use (US GAAP does not). IFRS and US GAAP require consistent treatment. IFRS requires net realizable value for market in “lower of cost or market” valuation IFRS allows reversals of write downs

Property, Plant and Equipment IAS 23 – Borrowing Costs allows exchange rate differences from foreign currency borrowings to be included in the capitalized borrowing costs (US GAAP does not) Interest earned on borrowings can offset interest expense (Disallowed under US GAAP) Beginning in 2009, all borrowing costs on constructed assets must be capitalized. (Only capitalized interest costs allowed for US GAAP)

Depreciation and Impairments IAS 16 does not require a particular method of depreciation Companies should choose a method that reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Impairments are recorded if carrying value > recoverable amount (Greater of net sales price or PV of expected future cash flows) Impairments can be reversed up to the amount the carrying value would have been if no impairment loss had been recognized.

Intangible Assets - Impairments IAS 36 states that goodwill and other assets with an indefinite life must be reviewed at least annually. Reverals of impairment losses are allowed for certain intangibles, BUT NOT GOODWILL. Impairment test –Performed at the cash-generating unit (CGU) level for IFRS –Impairment exists if the CGU’s carrying value > both its discounted fair value less cost to sell and its discounted value in use. –An impairment loss is first applied against goodwill. –Once goodwill is gone, any remaining impairment is allocated to the other assets of the CGU on a prorated basis based on their carrying amounts.

Current Liabilities and Contingencies (Provisions) IAS 1 requires refinancing to be completed BEFORE THE BALANCE SHEET DATE to reclassify short-term debt that has been refinanced to long-term debt. US GAAP allows reclassification as long as the refinancing agreement is completed before the report date. With contingencies, US GAAP requires the lowest amount of a range of values to be recorded. IFRS requires the mid-point of the range. US GAAP – probable is “likely to occur” – 75% prob. IFRS – probable is “more likely than not” - >50% prob.

Long-term Liabilities FAS 150 specifically identifies conditions where equity instruments must be classified as liabilities (page 49) –Mandatorily redeemable –Obligation to repurchase –Obligation that may require issuing a variable number of equity shares For IFRS, focus is on the substance of the transaction and meets two conditions to be equity (page 49): –The instrument includes no contractual obligation to deliver or exchange cash or financial assets AND –If the instrument will/may be settled in the issuer’s own equity instruments

Long-term Liabilities Convertible debt –IFRS requires split accounting whereby the proceeds are allocated between a liability component (fair value) and an equity component (residual). –US GAAP records the entire amount of proceeds as a liability unless it contains a beneficial conversion feature or may be at least partially settled for cash upon conversion.

Stockholders’ Equity IFRS uses the term “reserves” for all equity accounts other than contributed capital US GAAP discourages the word “reserve” Treasury Stock –Shown as a reduction in stockholders’ equity –No guidance as to where it is to be reported –No subsequent gain or loss upon sale can be recognized (must be a change in equity)

Earnings Per Share IAS 33 requires both basic and diluted EPS from continuing operations and net profit or loss. US GAAP also requires basic and diluted EPS for discontinued operations and extraordinary items. US GAAP requires diluted quarterly EPS to use the average market prices during the three- month period. IFRS only uses a weighted average at the end of the year

Share-Based Compensation IFRS 2 Equity-settled share-based compensation –Recorded at fair value of services received –When shares are used to compensate employees, the market value of the stock is fair value. –Recorded at the grant date Cash-settled transactions (occur when a company enters into an agreement in which it incurs a liability linked to the company’s stock price- typically settled by transfer of cash or other assets) –Initially recorded at the grant date –Remeasured to fair value in each period until the liability is settled

Share-Based Compensation Grant Date –Definition more detailed for US GAAP Recognition –IFRS requires separate vesting periods for graded vesting –US GAAP allows the option of separate vesting periods or over the entire period Taxes –IFRS requires deferred taxes based on time of recording –US GAAP requires taxes when taxes are actually due Non-employee transactions –May differ in definition of “non-employees”

Investments IAS 39 specifies four categories of financial assets –Financial assets at fair value through profit or loss –Held to maturity investments –Loans and receivables –Available for sale financial assets IFRS allows entities to designate ANY financial asset to be measured at fair value with changes in valuation recognized in profit or loss. SFAS 159 allows companies to measure certain financial instruments at fair value with changes recognized in earnings each reporting period –Election must be made upon initial recognition and is irrevocable except for specific exceptions.

Investments IAS 39 allows entities to classify loans and receivables as available for sale –Valuation changes must be recognized in equity –This is not allowed under US GAAP. IFRS allows reversal of impairment losses when certain conditions have been met. IFRS allows entities to derecognize part of a financial asset as long as the entity has lost control over the asset. (Not allowed under US GAAP). Equity investments –Both consider 20-50% of share ownership as “significant control” unless not proven –Equity method is used

Investments Equity investments –Under IFRS, the investor and associate must have the same accounting policies (not required for US GAAP) –Both IFRS and US GAAP require the associate’s reporting date to be within 3 months of the investors. –Under IFRS, share warrants, share call options, and convertible debt or equity instruments should be considered when evaluating the investor’s percentage of voting rights. (Not stated as such for US GAAP)

Revenue Recognition IAS 18 requires the percentage-of-completion method to be used unless the outcome cannot be reasonably estimated. If outcome can’t be estimated, the zero-profit method should be used, where revenue is only recognized to the extent of costs. US GAAP allows the completed contract method to be used but percentage-of-completion is preferred. COMPLETED CONTRACT METHOD IS PROHIBITED FOR IFRS.

PROPOSED CHANGES Revenue should be recognized based on transfer of control of goods rather than consideration of risks and rewards.

Income Taxes IAS 12 recognizes deferred tax assets only if it is probable (more likely than not) that the asset will be applied against future taxable profits. US GAAP initially recognizes the full deferred income tax asset, but requires a valuation allowance if it more likely than not that some or all of the asset will not be realized. IFRS utilizes tax rates that been enacted or substantively enacted as of the balance sheet date (US GAAP only uses enacted rates). IFRS classifies all deferred tax assets and liabilities as noncurrent. PROPOSED - Elimination of US GAAP/IFRS differences

Pensions IAS 19 recognizes the funded status of the benefit plan less any unrecognized actuarial gains/losses and unrecorded prior service costs. It places a ceiling on the defined benefit asset equal to the amount of unrecognized actuarial losses and prior service costs. SFAS 158 recognizes the funded status of the defined benefit plan (present value of the projected benefit obligation less the fair value of plan assets) on the balance sheet.

Pension Costs Prior Service Costs –IFRS recognizes a component of net periodic benefit cost over the related vesting period (an immediate expensing of benefits that are fully vested). –US GAAP records the cost in other comprehensive income during the period of amendment. The cost is then amortized and expensed as a component of periodic benefit cost over the remaining service period of active participants. (Called recycling and not allowed under IFRS). CHANGES HAVE BEEN PROPOSED BY IFRS.

Leases IAS 17 classifies a lease as a finance or operating lease. A lease is a finance lease when substantially all the risks and rewards related to ownership are transferred from the lessor to the lessee. Includes a fifth indicator not specified by US GAAP: –Leased assets are of a specialized nature and are only usable by the lessee unless substantial adjustments are made to the asset. DRASTIC CHANGES ARE PROPOSED – ELIMINATION OF OPERATING LEASES, ALL WILL LEASES WILL BE FINANCE LEASES WITH “RIGHT TO USE”.

Accounting Changes and Errors IAS 8 – Similar to US GAAP Material prior period errors and changes in accounting principles – Should be corrected retrospectively –Comparative information should be restated Change in accounting estimate –Recognized prospectively in the current and future periods only