1. Presentation of Financial Statements

2. Academic Resource Center Conceptual framework Page 2 Executive summary ► 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: ► Balance sheet (statement of financial position): ► IFRS includes a minimum list of items to be presented unlike US GAAP. However, SEC regulations have more detailed requirements than IFRS. ► Income statement: ► 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.

3. Academic Resource Center Conceptual framework Page 3 Executive summary ► Financial statement presentation differences (continued): ► Statement of comprehensive income: ► IFRS permits comprehensive income to be presented in one statement of comprehensive income or in two statements consisting of a separate income statement and a statement of comprehensive income similar to US GAAP. ► Statement of changes in equity: ► IFRS does not permit the components of comprehensive income to be presented in the statement of changes in equity in lieu of the statement of comprehensive income as permitted by US GAAP. ► Statement of cash flows: ► IFRS permits a choice of alternatives for the classification of interest and dividends while US GAAP does not. ► Notes to the financial statements: ► Using IFRS, most companies will experience additional financial disclosure requirements compared to US GAAP.

4. Academic Resource Center Conceptual framework Page 4 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 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

5. Academic Resource Center Conceptual framework Page 5 Progress on convergence Phase A ► Addresses 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 was effective January 1, 2009 and modified the requirements of the Statement of Recognized Income and Expense (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.

6. Academic Resource Center Conceptual framework Page 6 Progress on convergence Phase B ► 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: ► 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. ► The Boards issued a Discussion Paper, Preliminary Views on Financial Statement Presentation in 2008. The comment period ended April 14, 2009 and the Boards are developing an Exposure Draft of a proposed standard on financial statement presentation. The ED is expected to be issued in the second quarter of 2010 and a final standard is expected to be issued in the first half of 2011. ► The Boards decided to consider as a separate matter the presentation of other comprehensive income (OCI). An ED, Presentation of Items of Other Comprehensive Income-Proposed amendments to IAS 1, was issued in May 2010. Public comments are due to be received by September 30, 2010. This is a joint project with FASB who issued an ED entitled Statement of Comprehensive Income Proposed Update in May 2010.

7. Academic Resource Center Conceptual framework Page 7 Progress on convergence Phase C ► 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.

8. Academic Resource Center Conceptual framework Page 8 Financial statement presentation General IFRS ► 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. US GAAP ► 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. Convergence ► The Boards have affirmed that the ED will require a statement of changes in equity, thereby conforming both frameworks.

9. Academic Resource Center Conceptual framework Page 9 Financial statement presentation General IFRS ► 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. US GAAP ► 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. Convergence ► The FASB decided in the ED to make a requirement for a third balance sheet similar to IFRS, thereby conforming both frameworks.

10. Academic Resource Center Conceptual framework Page 10 IFRSUS GAAP Financial statement presentation General 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

11. Academic Resource Center Conceptual framework Page 11 Financial statement presentation Comparative financial information ►IFRS requires comparative information for all amounts reported in the financial statements. ►US GAAP allows a single- year presentation in certain circumstances. ►SEC rules require a two- year balance sheet presentation and three-year presentation for all other financial statements.

12. Academic Resource Center Conceptual framework Page 12 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.

13. Academic Resource Center Conceptual framework Page 13 Statement of financial position presentation Minimum accounts IFRS ► Requires a minimum presentation of certain asset, liability and equity accounts. US GAAP ► No minimum account presentation requirements. ► SEC rules have more rigorous presentation criteria.

14. Academic Resource Center Conceptual framework Page 14 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

15. Academic Resource Center Conceptual framework Page 15 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.

16. Academic Resource Center Conceptual framework Page 16 Statement of financial position presentation Cash and cash equivalents IFRS ► 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. US GAAP ► ASC 210-20 does not address bank overdrafts and they are generally reported as a liability in the balance sheet. Convergence ► 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.

17. Academic Resource Center Conceptual framework Page 17 ►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. Statement of financial position presentation Deferred tax assets and liabilities

18. Academic Resource Center Conceptual framework Page 18 Statement of financial position presentation Debt classification under default for covenant violation IFRS ► 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. US GAAP ► 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.

19. Academic Resource Center Conceptual framework Page 19 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, 2010, RRI obtains a $100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In December 2010, RRI spends too much of its cash on its holiday party and incurs a debt covenant violation as of December 31, 2010. 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 its cash by selling its leftover holiday party favors on eBay. On January 5, 2011, the bank agrees to waive the violation. RRI issues its financial statements on January 25, 2011. ► How should this loan be classified (current or non-current) on RRI’s balance sheet as of December 31, 2010 using IFRS and US GAAP?

20. Academic Resource Center Conceptual framework Page 20 Debt classification under default for covenant violation example Solution: As the bank modified the debt covenant violation subsequent to RRI’s balance sheet date of December 31, 2010 but prior to the financial statement issuance date of January 25, 2011, 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. Fiscal year Post-fiscal year and prior to issuance of financials Balance sheet date Fiscal year Post-fiscal year and prior to issuance of financials IFRS US GAAP Example 1 (solution):

21. Academic Resource Center Conceptual framework Page 21 Statement of income and statement of comprehensive income presentation IFRS ► Permits comprehensive income to be presented in one of the following ways: ► One statement of comprehensive income. ► Two statements of comprehensive income comprising a separate income statement and a statement of comprehensive income. US GAAP ► Permits comprehensive income to be presented one of the following ways: ► One statement of comprehensive income. ► Two statements of comprehensive income comprising a separate income statement and a statement of comprehensive income. ► In the statement of changes in equity. Convergence ► The Boards have affirmed that the EDs on OCI eliminate the existing alternatives and will require items of OCI to be presented in one statement of comprehensive income with net income items.

22. Academic Resource Center Conceptual framework Page 22 Statement of income and statement of comprehensive income presentation IFRS ► Requires certain minimum amount of information with order and description amended as necessary for nature and type of entity, industry, etc. US GAAP ► No minimum information requirements. ► SEC rules have more rigorous presentation criteria.

23. Academic Resource Center Conceptual framework Page 23 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 Statement of income Minimum information required

24. Academic Resource Center Conceptual framework Page 24 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 Statement of comprehensive income Minimum information required

25. Academic Resource Center Conceptual framework Page 25 Income statement presentation Key measures IFRS ► Does not define certain key measures: ► Using IFRS, management may use non- standard measurements, creating diversity in practice regarding line items, headings and subtotals. ► Companies should expect a change in the pattern of earnings and financial position when comparisons to historical performance are made. ► This will require management to understand and explain business performance to shareholders and the marketplace. US GAAP ► Defines most key measures excluding operating profit: ► SEC regulations define certain measures and provide requirements and limitations on the ability of public companies to disclose non-GAAP measures. ► The traditional definition of operating profit is still used in practice.

26. Academic Resource Center Conceptual framework Page 26 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.).

27. Academic Resource Center Conceptual framework Page 27 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.

28. Academic Resource Center Conceptual framework Page 28 Income statement presentation Extraordinary items IFRS ► Prohibits extraordinary items, but major revenue and expense items are disclosed in the income statement or notes. US GAAP ► Extraordinary items are reported separately on the income statement. Convergence ► 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.

29. Academic Resource Center Conceptual framework Page 29 Statement of changes in equity Using IFRS, components of comprehensive income are not permitted to be presented in a separate statement of changes in equity as allowed using US GAAP. 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.

30. Academic Resource Center Conceptual framework Page 30 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.

31. Academic Resource Center Conceptual framework Page 31 Notes to the financial statements Cash and cash equivalents disclosures – Good Group Limited (2009) 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.

32. Academic Resource Center Conceptual framework Page 32 Notes to the financial statements Departure from an accounting standard IFRSUS GAAP ► Does not allow non-compliance with an accounting standard if, in the opinion of management, that compliance would be misleading. ► 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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