IAS 1 - Financial statements

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IAS 1 - Financial statements
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Progress on convergencePhase 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.

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Progress on convergencePhase B and C

• 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, 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 do not currently have the
  capacity to issue an ED and expect to return to
  this project after June 2011.
• 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.

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Financial statement presentationGeneral

• 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.

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Financial statement presentationGeneral

• IFRS

• US GAAP

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
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Statement of financial position
presentationClassification 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.

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Statement of financial position
presentationMinimum 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.

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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
• Property, plant and equipment
• Investment property
• Intangible assets
• Financial assets (excluding amounts shown under
  (e), (h) and (i))
• Investments accounted for using the equity method
• Biological assets
• Inventories
• Trade and other receivables
• Cash and cash equivalents
• Total of assets classified as held for sale and
  assets included in disposal groups classified as
  held for sale per IFRS 5

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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.

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Statement of financial position presentationCash
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.

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Statement of financial position presentationDebt
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.

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Debt classification under default for covenant
violation example

• Example 1
• Rileys 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 RRIs balance sheet as of
  December 31, 2010 using IFRS and US GAAP?

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Debt classification under default for covenant
violation example
Example 1 (solution)
Balance sheet date
Fiscal year
Post-fiscal year and priorto issuance of
financials
IFRS
Fiscal year
Post-fiscal year and priorto issuance of
financials
US GAAP

• Solution
• As the bank modified the debt covenant violation
  subsequent to RRIs 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.

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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 separate consecutive 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 US GAAP alternative for presentation in the
  statement of changes in equity is being
  eliminated in an updated standard that is
  expected to be issued in the first quarter of
  2011, to be effective for fiscal years beginning
  after December 15, 2011.

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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.

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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 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.).
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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.
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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.

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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.
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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.
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Notes to the financial statementsCash 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.
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Notes to the financial statementsDeparture from
an accounting standard
IFRS

• US 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.