IFRS v GAAP Basics Jan09

7/31/2019 IFRS v GAAP Basics Jan09

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US GAAP vs. IFRSThe basicsJanuary 2009


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Table of contents

2 Introduction5 Financial statement presentation

7 Interim financial reporting

8 Consolidations, joint venture accounting and equity

method investees

11 Business combinations

13 Inventory

14 Long-lived assets

16 Intangible assets

18 Impairment of long-lived assets, goodwill and

intangible assets

20 Financial instruments

24 Foreign currency matters

26 Leases

29 Income taxes

32 Provisions and contingencies

34 Revenue recognition

36 Share-based payments

38 Employee benefits other than share-based payments

40 Earnings per share

41 Segment reporting

42 Subsequent events

43 Related parties

44 Appendix The evolution of IFRS


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2 US GAAP vs. IFRS The basics

It is not surprising that many people who followthe development of worldwide accountingstandards today might be confused. Convergenceis a high priority on the agendas of both theUS Financial Accounting Standards Board (FASB)and the International Accounting StandardsBoard (IASB) and convergence is a termthat suggests an elimination or comingtogether of differences. Yet much is still madeof the many differences that exist between

US GAAP as promulgated by the FASB andInternational Financial Reporting Standards(IFRS) as promulgated by the IASB, suggestingthat the two GAAPs continue to speaklanguages that are worlds apart. This apparentcontradiction has prompted many to ask justhow different are the two sets of standards?And where differences exist, why do they exist,and when, if ever, will they be eliminated?

In this guide, US GAAP v. IFRS: The basics,we take a top level look into these questionsand provide an overview, by accounting area,both of where the standards are similar andalso where they diverge. While the US andinternational standards do contain differences,the general principles, conceptual framework,and accounting results between them are oftenthe same or similar, even though the areas of

divergence seem to have disproportionatelyovershadowed these similarities. We believethat any discussion of this topic should not losesight of the fact that the two sets of standardsare generally more alike than different for mostcommonly encountered transactions, with IFRSbeing largely, but not entirely, grounded in thesame basic principles as US GAAP.

No publication that compares two broad sets ofaccounting standards can include all differencesthat could arise in accounting for the myriad ofbusiness transactions that could possibly occur.The existence of any differences and theirmateriality to an entitys financial statements depends on a variety of specific factors including:the nature of the entity, the detailed transactionsit enters into, its interpretation of the moregeneral IFRS principles, its industry practices,

and its accounting policy elections whereUS GAAP and IFRS offer a choice. This guidefocuses on those differences most commonlyfound in present practice and, where applicable,provides an overview of how and when thosedifferences are expected to converge.

Why do differences exist?

As the international standards were developed,

the IASB and its predecessor, the InternationalAccounting Standards Committee (IASC),had the advantage of being able to draw onthe latest thinking of standard setters fromaround the world. As a result, the internationalstandards contain elements of accountingstandards from a variety of countries. Andeven where an international standard lookedto an existing US standard as a starting point,

the IASB was able to take a fresh approachto that standard. In doing so, the IASB couldavoid some of the perceived problems in theFASB standard for example, exceptionsto the standards underlying principlesthat had resulted from external pressureduring the exposure process, or practicedifficulties that had emerged subsequent

Introduction


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3US GAAP vs. IFRS The basics

to the standards issuance and attempt toimprove them. Further, as part of its annualImprovements Project, the IASB reviews itsexisting standards to enhance their clarity andconsistency, again taking advantage of morecurrent thinking and practice.

For these reasons, some of the differencesbetween US GAAP and IFRS are embodied inthe standards themselves that is, they are

intentional deviations from US requirements.

Still other differences have emergedthrough interpretation. As a general rule,IFRS standards are more broad than theirUS counterparts, with limited interpretiveguidance. The IASB has generally avoidedissuing interpretations of its own standards,preferring to instead leave implementationof the principles embodied in its standards

to preparers and auditors, and its officialinterpretive body, the International FinancialReporting Interpretations Committee (IFRIC).While US standards contain underlyingprinciples as well, the strong regulatory andlegal environment in the US market has resultedin a more prescriptive approach with far morebright lines, comprehensive implementationguidance and industry interpretations.

Therefore, while some might read the broaderIFRS standard to require an approach similarto that contained in its more detailed UScounterpart, others might not. Differences alsoresult from this divergence in interpretation.

Will the differences ever beeliminated?

Both the FASB and IASB (the Boards) publiclydeclared their commitment to the convergenceof IFRS and US GAAP in the NorwalkAgreement in 2002, and since that time havemade significant strides toward that goal,including formally updating their agreement in2008. Additionally, the United States Securities

and Exchange Commission (SEC) has been veryactive in this area. For example, within the pasttwo years, the SEC eliminated the requirementfor foreign private issuers to reconcile theirIFRS results to US GAAP and proposed anupdated Roadmap addressing the future useof IFRS in the United States. The Roadmapincludes the potential for voluntary adoptionof IFRS by certain large companies as early as2009 and contemplates mandatory adoption

for all companies by 2014, 2015 or 2016. TheSEC has stated that continued progress towardsconvergence is an important milestone that itwill assess when ultimately deciding on the useof IFRS in the United States.

Convergence efforts alone will not totallyeliminate all differences between US GAAPand IFRS. In fact, differences continue to existin standards for which convergence effortsalready have been completed, and for whichno additional convergence work is planned.And for those standards currently on theBoards convergence agenda, unless thewords of the standards are totally conformed,interpretational differences will almost certainlycontinue to arise.


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The success of a uniform set of globalaccounting standards also will depend on thewillingness of national regulators and industrygroups to cooperate and to avoid issuinglocal interpretations of IFRS and guidancethat provides exceptions to IFRS principles.Some examples of this have already begun toemerge and could threaten the achievement ofinternational harmonization.

In planning a possible move to IFRS, it isimportant that US companies monitor progresson the Boards convergence agenda to avoidspending time now analyzing differences thatmost likely will be eliminated in the near future.At present, it is not possible to know the exactextent of convergence that will exist at thetime US public companies may be required toadopt the international standards. However,that should not stop preparers, users and

auditors from gaining a general understandingof the similarities and key differences betweenIFRS and US GAAP, as well as the areaspresently expected to converge. We hope youfind this guide a useful tool for that purpose.

January 2009


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SimilaritiesThere are many similarities between US GAAPand IFRS relating to financial statementpresentation. For example, under bothframeworks, the components of a complete setof financial statements include: balance sheet,income statement, other comprehensive incomefor US GAAP or statement of recognized incomeand expense (SORIE) for IFRS, statement of

cash flows, and accompanying notes to the

financial statements. Further, both frameworksrequire that the financial statements beprepared on the accrual basis of accounting(with the exception of the cash flows statement)except for rare circumstances. Both GAAPshave similar concepts regarding materiality andconsistency that entities have to consider inpreparing their financial statements. Differencesbetween the two tend to arise in the level ofspecific guidance.

Financial statement presentation

Significant differences

US GAAP IFRS

Financial periodsrequired

Generally, comparative financialstatements are presented; however, asingle year may be presented in certaincircumstances. Public companies mustfollow SEC rules, which typically requirebalance sheets for the two most recentyears, while all other statements mustcover the three-year period ended onthe balance sheet date.

Comparative information must bedisclosed in respect of the previousperiod for all amounts reported in thefinancial statements.

Layout of balance sheetand income statement

No general requirement withinUS GAAP to prepare the balance sheetand income statement in accordancewith a specific layout; however, publiccompanies must follow the detailedrequirements in Regulation S-X.

IAS 1 Presentation of FinancialStatements does not prescribe astandard layout, but includes a listof minimum items. These minimumitems are less prescriptive than therequirements in Regulation S-X.

Presentation of debt

as current versus non-current in the balancesheet

Debt for which there has been a

covenant violation may be presentedas non-current if a lender agreement towaive the right to demand repaymentfor more than one year exists prior tothe issuance of the financial statements.

Deferred taxes are presented ascurrent or non-current based on thenature of the related asset or liability.

Debt associated with a covenant

violation must be presented as currentunless the lender agreement wasreached prior to the balance sheet date.

Deferred taxes are presented as non-current. (Note: In the joint convergenceproject on income taxes, IFRS isexpected to converge with US GAAP.)

Income statement classification ofexpenses

SEC registrants are required to presentexpenses based on function (forexample, cost of sales, administrative).

Entities may present expenses based oneither function or nature (for example,salaries, depreciation). However, if

function is selected, certain disclosuresabout the nature of expenses must beincluded in the notes.


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Convergence

In April 2004, the FASB and the IASB (theBoards) agreed to undertake a joint projecton financial statement presentation. As part

of Phase A of the project, the IASB issueda revised IAS 1 in September 2007 (with aneffective date for annual reporting periodsending after January 1, 2009) modifyingthe requirements of the SORIE within IAS 1and bringing it largely in line with the FASBsstatement of other comprehensive income. Aspart of Phase B, the Boards each issued aninitial discussion document in October 2008,with comments due by April 2009. This phaseof the project addresses the more fundamentalissues for presentation of information on the

face of the financial statements, and mayultimately result in significant changes in thecurrent presentation format of the financialstatements under both GAAPs.

In September 2008, the Boards issuedproposed amendments to FAS 144 and IFRS 5to converge the definition of discontinuedoperations. Under the proposals, a discontinuedoperation would be a component of an entitythat is either (1) an operating segment (asdefined in FAS 131 and IFRS 8, respectively)held for sale or that has been disposed of, or(2) a business (as defined in FAS 141(R)) thatmeets the criteria to be classified as held forsale on acquisition.

US GAAP IFRSIncome statement extraordinary items

Restricted to items that are bothunusual and infrequent.

Prohibited.

Income statement discontinued operationspresentation

Discontinued operations classificationis for components held for sale or tobe disposed of, provided that therewill not be significant continuing cashflows or involvement with the disposedcomponent.

Discontinued operations classificationis for components held for sale or to bedisposed of that are either a separatemajor line of business or geographicalarea or a subsidiary acquiredexclusively with an intention to resale.

Changes in equity Present all changes in each caption of

stockholders equity in either a footnoteor a separate statement.

At a minimum, present components

related to recognized income andexpense as part of a separatestatement (referred to as the SORIE if itcontains no other components). Otherchanges in equity either disclosed in thenotes, or presented as part of a single,combined statement of all changes inequity (in lieu of the SORIE).

Disclosure ofperformance measures

SEC regulations define certain keymeasures and require the presentationof certain headings and subtotals.

Additionally, public companies areprohibited from disclosing non-GAAPmeasures in the financial statementsand accompanying notes.

Certain traditional concepts such asoperating profit are not defined;therefore, diversity in practice exists

regarding line items, headings andsubtotals presented on the incomestatement when such presentation isrelevant to an understanding of theentitys financial performance.


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SimilaritiesAPB 28 and IAS 34 (both entitled InterimFinancial Reporting) are substantially similarwith the exception of the treatment of certaincosts as described below. Both require anentity to use the same accounting policiesthat were in effect in the prior year, subjectto adoption of new policies that are disclosed.Both standards allow for condensed interim

financial statements (which are similar but notidentical) and provide for comparable disclosurerequirements. Neither standard mandateswhich entities are required to present interimfinancial information, that being the purviewof local securities regulators. For example,US public companies must follow the SECsRegulation S-X for the purpose of preparinginterim financial information.

Interim financial reporting

Significant difference

US GAAP IFRS

Treatment of certaincosts in interim periods

Each interim period is viewed as anintegral part of an annual period. Asa result, certain costs that benefitmore than one interim period maybe allocated among those periods,resulting in deferral or accrual ofcertain costs. For example, certaininventory cost variances may bedeferred on the basis that the interimstatements are an integral part of anannual period.

Each interim period is viewed as adiscrete reporting period. A cost thatdoes not meet the definition of an assetat the end of an interim period is notdeferred and a liability recognized at aninterim reporting date must representan existing obligation. For example,inventory cost variances that do notmeet the definition of an asset cannotbe deferred. However, income taxesare accounted for based on an annualeffective tax rate (similar to US GAAP).

Convergence

As part of their joint Financial StatementPresentation project, the FASB will addresspresentation and display of interim financial

information in US GAAP, and the IASB mayreconsider the requirements of IAS 34. Thisphase of the Financial Statement Presentationproject has not commenced.


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SimilaritiesThe principle guidance for consolidationof financial statements under US GAAP isARB 51 Consolidated Financial Statements(as amended by FAS 160 NoncontrollingInterests in Consolidated Financial Statements)and FAS 94 Consolidation of All Majority-Owned Subsidiaries; while IAS 27 (Amended)Consolidated and Separate Financial

Statements provides the guidance underIFRS. Special purpose entities are addressedin FIN 46 (Revised) Consolidation of VariableInterest Entities and SIC 12 Consolidation Special Purpose Entities in US GAAP and IFRSrespectively. Under both US GAAP and IFRS,the determination of whether or not entitiesare consolidated by a reporting enterprise isbased on control, although differences existin the definition of control. Generally, under

both GAAPs all entities subject to the control ofthe reporting enterprise must be consolidated(note that there are limited exceptions inUS GAAP in certain specialized industries).Further, uniform accounting policies are used

for all of the entities within a consolidatedgroup, with certain exceptions under US GAAP(for example, a subsidiary within a specializedindustry may retain the specialized accountingpolicies in consolidation). Under both GAAPs,the consolidated financial statements of theparent and its subsidiaries may be basedon different reporting dates as long as thedifference is not greater than three months.However, under IFRS a subsidiarys financial

statements should be as of the same date asthe financial statements of the parents unlessis it impracticable to do so.

An equity investment that gives an investorsignificant influence over an investee (referredto as an associate in IFRS) is considered anequity-method investment under both US GAAP(APB 18 The Equity Method of Accounting forInvestments in Common Stock) and IFRS (IAS 28

Investments in Associates), if the investee isnot consolidated. Further, the equity method ofaccounting for such investments, if applicable,generally is consistent under both GAAPs.

Consolidations, joint venture accounting andequity method investees


US GAAP IFRS

Consolidation model Focus is on controlling financial

interests. All entities are first evaluatedas potential variable interest entities(VIEs). If a VIE, FIN 46 (Revised)guidance is followed (below). Entitiescontrolled by voting rights areconsolidated as subsidiaries, butpotential voting rights are not includedin this consideration. The concept ofeffective control exists, but is rarelyemployed in practice.

Focus is on the concept of the power

to control, with control being theparents ability to govern the financialand operating policies of an entity toobtain benefits. Control presumed toexist if parent owns greater than 50%of the votes, and potential voting rightsmust be considered. Notion of de factocontrol must also be considered.


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US GAAP IFRSSpecial purpose entities(SPE)

FIN 46 (Revised) requires the primarybeneficiary (determined based on theconsideration of economic risks andrewards) to consolidate the VIE.

Under SIC 12, SPEs (entities created toaccomplish a narrow and well-definedobjective) are consolidated when thesubstance of the relationship indicatesthat an entity controls the SPE.

Preparation ofconsolidated financialstatements general

Required, although certain industry-specific exceptions exist (for example,investment companies).

Generally required, but there is a limitedexemption from preparing consolidatedfinancial statements for a parentcompany that is itself a wholly-ownedsubsidiary, or is a partially-owned

subsidiary if certain conditions are met.

Preparation ofconsolidated financialstatements differentreporting dates of parentand subsidiary(ies)

The effects of significant eventsoccurring between the reporting dateswhen different dates are used aredisclosed in the financial statements.

The effects of significant eventsoccurring between the reporting dateswhen different dates are used areadjusted for in the financial statements.

Presentation ofnoncontrolling orminority interest

Presented outside of equity on thebalance sheet (prior to the adoption ofFAS 160).

Presented as a separate component inequity on the balance sheet.

Equity-method

investments

FAS 159 The Fair Value Option for

Financial Assets and Financial Liabilitiesgives entities the option to accountfor their equity-method investmentsat fair value. For those equity-methodinvestments for which managementdoes not elect to use the fair valueoption, the equity method of accountingis required.

Uniform accounting policies betweeninvestor and investee are not required.

IAS 28 requires investors (other than

venture capital organizations, mutualfunds, unit trusts, and similar entities)to use the equity-method of accountingfor such investments in consolidatedfinancial statements. If separatefinancial statements are presented(that is, those presented by a parent orinvestor), subsidiaries and associatescan be accounted for at either cost orfair value.

Uniform accounting policies between

investor and investee are required.Joint ventures Generally accounted for using the

equity-method of accounting, with thelimited exception of unincorporatedentities operating in certain industrieswhich may follow proportionateconsolidation.

IAS 31 Investments in Joint Venturespermits either the proportionateconsolidation method or the equitymethod of accounting.


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ConvergenceAs part of their joint project on businesscombinations, the FASB issued FAS 160(effective for fiscal years beginning on or afterDecember 15, 2008) and the IASB amendedIAS 27 (effective for fiscal years beginningon or after July 1, 2009, with early adoptionpermitted), thereby eliminating substantially allof the differences between US GAAP and IFRS

pertaining to noncontrolling interests, outsideof the initial accounting for the noncontrollinginterest in a business combination (see theBusiness Combinations section). In addition,the IASB recently issued an exposure draftthat proposes the elimination of proportionateconsolidation for joint ventures.

At the time of this publication, the FASB isproposing amendments to FIN 46 (Revised).Additionally, the IASB is working on aconsolidation project that would replace IAS 27(amended) and SIC 12 and is expected to providefor a single consolidation model within IFRS.It is currently unclear whether these projectswill result in additional convergence, and futuredevelopments should be monitored.


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Business combinations

SimilaritiesThe issuance of FAS 141(R) and IFRS 3(R)(both entitled Business Combinations),represent the culmination of the first majorcollaborative convergence project between theIASB and the FASB. Pursuant to FAS 141(R)and IFRS 3(R), all business combinations areaccounted for using the acquisition method.Under the acquisition method, upon obtaining

control of another entity, the underlyingtransaction should be measured at fair value,and this should be the basis on which the

assets, liabilities and noncontrolling interests ofthe acquired entity are measured (as describedin the table below, IFRS 3(R) provides analternative to measuring noncontrolling interestat fair value), with limited exceptions. Eventhough the new standards are substantiallyconverged, certain differences will exist oncethe new standards become effective. The newstandards will be effective for annual periodsbeginning on or after December 15, 2008,

and July 1, 2009, for companies followingUS GAAP and IFRS, respectively.


US GAAP IFRS

Measurement ofnoncontrolling interest

Noncontrolling interest is measuredat fair value, which includes thenoncontrolling interests share ofgoodwill.

Noncontrolling interest is measuredeither at fair value including goodwill orits proportionate share of the fair valueof the acquirees identifiable net assets,

exclusive of goodwill.

Assets and liabilitiesarising fromcontingencies

Initial Recognition

Distinguishes between contractualand noncontractual contingencies.Contractual contingencies are measuredat fair value at the acquisition date,while noncontractual contingenciesare recognized at fair value at theacquisition date only if it is more likelythan not that the contingency meets thedefinition of an asset or liability.

Subsequent Measurement

Contingently liabilities aresubsequently measured at the higherof its acquisition-date fair value, orthe amount that would be recognizedif applying FAS 5, Accounting forContingencies. (See Provisions andcontingencies for differences betweenFAS 5 and IAS 37.)

Initial Recognition

Contingent liabilities are recognizedas of the acquisition date if there isa present obligation that arises frompast events and its fair value can bemeasured reliably. Contingent assetsare not recognized.

Subsequent Measurement

Contingent liabilities are subsequentlymeasured at the higher of its acquisition-date fair value less, if appropriate,cumulative amortization recognized inaccordance with IAS 18, Revenue, orthe amount that would be recognized ifapplying IAS 37, Provisions, ContingentLiabilities and Contingent Assets..


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US GAAP IFRSAcquiree operatingleases

If the terms of an acquiree operatinglease are favorable or unfavorablerelative to market terms, the acquirerrecognizes an intangible asset orliability, respectively, regardless ofwhether the acquiree is the lessor orthe lessee.

Separate recognition of an intangibleasset or liability is required only if theacquiree is a lessee. If the acquiree isthe lessor, the terms of the lease aretaken into account in estimating the fairvalue of the asset subject to the lease separate recognition of an intangibleasset or liability is not required.

Combination of entitiesunder common control

Accounted for in a manner similar to apooling of interests (historical cost).

Outside the scope of IFRS 3R. Inpractice, either follow an approach

similar to US GAAP or apply thepurchase method if there is substanceto the transaction.

Other differences may arise due to differentaccounting requirements of other existingUS GAAP-IFRS literature (for example, identifyingthe acquirer, definition of control, definition offair value, replacement of share-based paymentawards, initial classification and subsequent

measurement of contingent consideration, initialrecognition and measurement of income taxes,and initial recognition and measurement ofemployee benefits).

Convergence

No further convergence is planned at thistime. Note, however, that as of the date of thispublication, the FASB has issued a proposedFSP that would change the accounting for

preacquisition contingencies under FAS 141(R).The proposed FSP proposes a model that isvery similar to the existing requirements ofFAS 141 for purposes of initial recognition.Assets and liabilities measured at fair valuewould continue to be subject to subsequentmeasurement guidance similar to that currentlydescribed in FAS 141(R).


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Inventory

SimilaritiesARB 43 Chapter 4 Inventory Pricing and IAS2 Inventoriesare both based on the principlethat the primary basis of accounting forinventory is cost. Both define inventory asassets held for sale in the ordinary course ofbusiness, in the process of production for suchsale, or to be consumed in the production ofgoods or services. The permitted techniques

for cost measurement, such as standard costmethod or retail method, are similar underboth US GAAP and IFRS. Further, under bothGAAPs the cost of inventory includes all directexpenditures to ready inventory for sale,including allocable overhead, while sellingcosts are excluded from the cost of inventories,as are most storage costs and generaladministrative costs.


US GAAP IFRS

Costing methods LIFO is an acceptable method.Consistent cost formula for allinventories similar in nature is notexplicitly required.

LIFO is prohibited. Same cost formulamust be applied to all inventoriessimilar in nature or use to the entity.

Measurement Inventory is carried at the lower of costor market. Market is defined as currentreplacement cost as long as market is

not greater than net realizable value(estimated selling price less reasonablecosts of completion and sale) andis not less than net realizable valuereduced by a normal sales margin.

Inventory is carried at the lower of costor net realizable value (best estimateof the net amounts inventories are

expected to realize. This amount mayor may not equal fair value).

Reversal of inventorywrite-downs

Any write-downs of inventory to thelower of cost or market create a newcost basis that subsequently cannot bereversed.

Previously recognized impairmentlosses are reversed, up to the amountof the original impairment loss whenthe reasons for the impairment nolonger exist.

Permanent inventory

markdowns under theretail inventory method(RIM)

Permanent markdowns do not affect

the gross margins used in applying theRIM. Rather, such markdowns reducethe carrying cost of inventory to netrealizable value, less an allowance foran approximately normal profit margin,which may be less than both originalcost and net realizable value.

Permanent markdowns affect the

average gross margin used in applyingRIM. Reduction of the carrying cost ofinventory to below the lower of cost ornet realizable value is not allowed.

Convergence

In November 2004, the FASB issued FAS 151

Inventory Costs to address a narrow differencebetween US GAAP and IFRS related to theaccounting for inventory costs, in particular,

abnormal amounts of idle facility expense,freight, handling costs and spoilage. At present,there are no other ongoing convergence efforts

with respect to inventory.


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Long-lived assets

SimilaritiesAlthough US GAAP does not have acomprehensive standard that addresses long-lived assets, its definition of property, plant andequipment is similar to IAS 16 Property, Plantand Equipment, which addresses tangible assetsheld for use that are expected to be used formore than one reporting period. Other conceptsthat are similar include the following:

Cost

Both accounting models have similar recognitioncriteria, requiring that costs be included in thecost of the asset if future economic benefitsare probable and can be reliably measured. Thecosts to be capitalized under both models aresimilar. Neither model allows the capitalizationof start-up costs, general administrative andoverhead costs or regular maintenance.However, both US GAAP and IFRS require thatthe costs of dismantling an asset and restoringits site (that is, the costs of asset retirementunder FAS 143Accounting for Asset RetirementObligations or IAS 37 Provisions, ContingentLiabilities and Contingent Assets) be includedin the cost of the asset. Both models requirea provision for asset retirement costs to berecorded when there is a legal obligation,

although IFRS requires provision in othercircumstances as well.

Capitalized interest

FAS 34 Capitalization of Interest and IAS 23Borrowing Costs address the capitalizationof borrowing costs (for example, interestcosts) directly attributable to the acquisition,construction or production of a qualifying

asset. Qualifying assets are generally definedsimilarly under both accounting models.However, there are significant differences

between US GAAP and IFRS in the specificcosts and assets that are included withinthese categories as well as the requirement tocapitalize these costs.

Depreciation

Depreciation of long-lived assets is requiredon a systematic basis under both accountingmodels. FAS 154Accounting Changes andError Corrections and IAS 8AccountingPolicies, Changes in Accounting Estimates

and Error Corrections both treat changesin depreciation method, residual value anduseful economic life as a change in accountingestimate requiring prospective treatment.

Assets held for sale

Assets held for sale are discussed in FAS144 and IFRS 5 Non-Current Assets Held forSale and Discontinued Operations, with bothstandards having similar held for sale criteria.Under both standards, the asset is measuredat the lower of its carrying amount or fairvalue less costs to sell; the assets are notdepreciated and are presented separately onthe face of the balance sheet. Exchanges ofnonmonetary similar productive assets are alsotreated similarly under APB 29Accounting for

Nonmonetary Exchanges as amended by FAS153Accounting for Nonmonetary Transactionsand IAS 16, both of which allow gain/lossrecognition if the exchange has commercialsubstance and the fair value of the exchangecan be reliably measured.


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Significant differencesUS GAAP IFRS

Revaluation of assets Revaluation not permitted. Revaluation is a permitted accountingpolicy election for an entire class ofassets, requiring revaluation to fairvalue on a regular basis.

Depreciation of assetcomponents

Component depreciation permitted butnot common.

Component depreciation required ifcomponents of an asset have differingpatterns of benefit.

Measurement ofborrowing costs Eligible borrowing costs do not includeexchange rate differences. Interestearned on the investment of borrowedfunds generally cannot offset interestcosts incurred during the period.

For borrowings associated with aspecific qualifying asset, borrowingcosts equal to the weighted averageaccumulated expenditures times theborrowing rate are capitalized.

Eligible borrowing costs includeexchange rate differences from foreigncurrency borrowings. Borrowing costsare offset by investment income earnedon those borrowings.

For borrowings associated with aspecific qualifying asset, actualborrowing costs are capitalized.

Costs of a majoroverhaul

Multiple accounting models haveevolved in practice, including: expensecosts as incurred, capitalize costs andamortize through the date of the nextoverhaul, or follow the IFRS approach.

Costs that represent a replacementof a previously identified componentof an asset are capitalized if futureeconomic benefits are probable andthe costs can be reliably measured.

Investment property Investment property is not separatelydefined and, therefore, is accounted foras held for use or held for sale.

Investment property is separatelydefined in IAS 40 as an asset held toearn rent or for capital appreciation(or both) and may include propertyheld by lessees under a finance/operating lease. Investment property

may be accounted for on a historicalcost basis or on a fair value basis as anaccounting policy election. Capitalizedoperating lease classified as investmentproperty must be accounted for usingthe fair value model.

Other differences include: (i) hedging gainsand losses related to the purchase of assets,(ii) constructive obligations to retire assets,(iii) the discount rate used to calculate asset

retirement costs, and (iv) the accounting forchanges in the residual value.

Convergence

No further convergence is planned at this time.


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SimilaritiesThe definition of intangible assets as non-monetary assets without physical substance isthe same under both US GAAPs FAS 141(R)and FAS 142 Goodwill and Other Intangible

Assets and the IASBs IFRS 3(R) and IAS 38Intangible Assets. The recognition criteriafor both accounting models require thatthere be probable future economic benefits

and costs that can be reliably measured.However, some costs are never capitalizedas intangible assets under both models, suchas start-up costs. Goodwill is recognized onlyin a business combination in accordancewith FAS 141(R) and IFRS 3(R). In general,intangible assets that are acquired outsideof a business combination are recognized atfair value. With the exception of developmentcosts (addressed in the following table),

internally developed intangibles are notrecognized as an asset under either FAS 142or IAS 38. Moreover, internal costs relatedto the research phase of research anddevelopment are expensed as incurred underboth accounting models.

Amortization of intangible assets over theirestimated useful lives is required under bothUS GAAP and IFRS, with one minor exception in

FAS 86Accounting for the Costs of ComputerSoftware to be Sold, Leased or OtherwiseMarketed related to the amortization ofcomputer software assets. In both, if there isno foreseeable limit to the period over whichan intangible asset is expected to generatenet cash inflows to the entity, the useful life isconsidered to be indefinite and the asset is notamortized. Goodwill is never amortized.


US GAAP IFRS

Development costs Development costs are expensed asincurred unless addressed by a separatestandard. Development costs relatedto computer software developed forexternal use are capitalized oncetechnological feasibility is established inaccordance with specific criteria (FAS

86). In the case of software developedfor internal use, only those costs incurredduring the application development stage(as defined in SOP 98-1 Accountingfor the Costs of Computer SoftwareDeveloped or Obtained for Internal Use)may be capitalized.

Development costs are capitalizedwhen technical and economic feasibilityof a project can be demonstratedin accordance with specific criteria.Some of the stated criteria include:demonstrating technical feasibility,intent to complete the asset, and ability

to sell the asset in the future, as well asothers. Although application of theseprincipals may be largely consistentwith FAS 86 and SOP 98-1, thereis no separate guidance addressingcomputer software development costs.

Advertising costs Advertising and promotional costs areeither expensed as incurred or expensedwhen the advertising takes place for thefirst time (policy choice). Direct response

advertising may be capitalized if thespecific criteria in SOP 93-07 Reportingon Advertising Costs are met.

Advertising and promotional costs areexpensed as incurred. A prepaymentmay be recognized as an asset onlywhen payment for the goods or

services is made in advance of theentitys having access to the goods orreceiving the services.

Intangible assets


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US GAAP IFRSRevaluation Revaluation is not permitted Revaluation to fair value of intangible

assets other than goodwill is apermitted accounting policy electionfor a class of intangible assets. Becauserevaluation requires reference to anactive market for the specific type ofintangible, this is relatively uncommonin practice.

ConvergenceWhile the convergence of standards on intangibleassets was part of the 2006 Memorandum ofUnderstanding (MOU) between the FASB andthe IASB, both boards agreed in 2007 not toadd this project to their agenda. However, in

the 2008 MOU, the FASB indicated that it will

consider in the future whether to undertake aproject to eliminate differences in the accountingfor research and development costs by fullyadopting IAS 38 at some point in the future.


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Impairment of long-lived assets, goodwill andintangible assets

SimilaritiesBoth US GAAP and IFRS contain similarlydefined impairment indicators for assessing theimpairment of long-lived assets. Both standardsrequire goodwill and intangible assets withindefinite lives to be reviewed at least annuallyfor impairment and more frequently ifimpairment indicators are present. Long-livedassets are not tested annually, but rather

when there are indicators of impairment. Theimpairment indicators in US GAAP and IFRSare similar. Additionally, both GAAPs require

that an asset found to be impaired be writtendown and an impairment loss recognized. FAS142, FAS 144Accounting for the Impairmentor Disposal of Long-Lived Assets, and IAS 36Impairment of Assets apply to most long-livedand intangible assets, although some of thescope exceptions listed in the standards differ.Despite the similarity in overall objectives,differences exist in the way in which impairmentis reviewed, recognized and measured.


US GAAP IFRS

Method of determiningimpairment long-livedassets

Two-step approach requires arecoverability test be performedfirst (carrying amount of the assetis compared to the sum of future

undiscounted cash flows generatedthrough use and eventual disposition).If it is determined that the asset is notrecoverable, impairment testing mustbe performed.

One-step approach requires thatimpairment testing be performed ifimpairment indicators exist.

Impairment losscalculation long-livedassets

The amount by which the carryingamount of the asset exceeds its fairvalue, as calculated in accordance withFAS 157.

The amount by which the carryingamount of the asset exceeds itsrecoverable amount; recoverableamount is the higher of: (1) fair valueless costs to sell, and (2) value in use(the present value of future cash flows

in use including disposal value). (Notethat the definition of fair value inIFRS has certain differences from thedefinition in FAS 157.)

Allocation of goodwill Goodwill is allocated to a reportingunit, which is an operating segment orone level below an operating segment(component).

Goodwill is allocated to a cash-generating unit (CGU) or group ofCGUs which represents the lowest levelwithin the entity at which the goodwillis monitored for internal managementpurposes and cannot be larger thanan operating segment as defined in

IFRS 8, Operating Segments.


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US GAAP IFRSMethod of determiningimpairment goodwill

Two-step approach requires arecoverability test to be performedfirst at the reporting unit level (carryingamount of the reporting unit iscompared to the reporting unit fairvalue). If the carrying amount of thereporting unit exceeds its fair value,then impairment testing must beperformed.

One-step approach requires thatan impairment test be done at thecash generating unit (CGU) level bycomparing the CGUs carrying amount,including goodwill, with its recoverableamount.

Impairment loss

calculation goodwill

The amount by which the carrying

amount of goodwill exceeds the impliedfair value of the goodwill within itsreporting unit.

Impairment loss on the CGU (amount

by which the CGUs carrying amount,including goodwill, exceeds itsrecoverable amount) is allocated first toreduce goodwill to zero, then, subjectto certain limitations, the carryingamount of other assets in the CGU arereduced pro rata, based on the carryingamount of each asset.

Impairment losscalculation indefinitelife intangible assets

The amount by which the carryingvalue of the asset exceeds its fair value.

The amount by which the carryingvalue of the asset exceeds itsrecoverable amount.

Reversal of loss Prohibited for all assets to be held andused.

Prohibited for goodwill. Other long-lived assets must be reviewed annuallyfor reversal indicators. If appropriate,loss may be reversed up to the newlyestimated recoverable amount, notto exceed the initial carrying amountadjusted for depreciation.

Convergence

Impairment is one of the short-term

convergence projects agreed to by the FASBand IASB in their 2006 MOU. However, as partof their 2008 MOU, the boards agreed to deferwork on completing this project until their otherconvergence projects are complete.


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Financial instruments

SimilaritiesThe US GAAP guidance for financialinstruments is contained in several standards.Those standards include, among others, FAS65Accounting for Certain Mortgage Banking

Activities, FAS 107 Disclosures about Fair Valueof Financial Instruments, FAS 114Accountingby Creditors for Impairment of a Loan, FAS115

Accounting for Certain Investments inDebt

and Equity Securities, FAS 133Accounting forDerivative Instruments and Hedging Activities,FAS 140Accounting for Transfers and ServicingofFinancial Assets and Extinguishments ofLiabilities, FAS 150Accounting for CertainFinancial Instruments with Characteristics of

bothLiabilities and Equity, FAS 155Accountingfor Certain Hybrid Financial Instruments,FAS 157 Fair Value Measurements, and FAS 159The Fair Value Option for Financial Assets

and Financial Liabilities. IFRS guidance forfinancial instruments, on the other hand, islimited to three standards (IAS 32 FinancialInstruments: Presentation, IAS 39 FinancialInstruments: Recognition and Measurement,and IFRS 7 Financial Instruments: Disclosures).Both GAAPs require financial instruments to beclassified into specific categories to determinethe measurement of those instruments,clarify when financial instruments should

be recognized or derecognized in financialstatements, and require the recognition ofall derivatives on the balance sheet. Hedgeaccounting and use of a fair value option ispermitted under both. Each GAAP also requiresdetailed disclosures in the notes to financialstatements for the financial instrumentsreported in the balance sheet.


US GAAP IFRS

Fair value measurement One measurement model wheneverfair value is used (with limitedexceptions). Fair value is the pricethat would be received to sell an assetor paid to transfer a liability in anorderly transaction between marketparticipants at the measurement date.

Fair value is an exit price, which maydiffer from the transaction (entry)price.

Various IFRS standards use slightlyvarying wording to define fair value.Generally fair value representsthe amount that an asset could beexchanged for, or a liability settledbetween knowledgeable, willing partiesin an arms length transaction.

At inception, transaction (entry) pricegenerally is considered fair value.

Use of fair value option Financial instruments can be measuredat fair value with changes in fair valuereported through net income, exceptfor specific ineligible financial assetsand liabilities.

Financial instruments can be measuredat fair value with changes in fair valuereported through net income providedthat certain criteria, which are morerestrictive than under US GAAP, are met.


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US GAAP IFRSDay one gains and losses Entities are not precluded from

recognizing day one gains and losseson financial instruments reported atfair value even when all inputs to themeasurement model are not observable.For example, a day one gain or loss mayoccur when the transaction occurs in amarket that differs from the reportingentitys exit market.

Day one gains and losses arerecognized only when all inputs to themeasurement model are observable.

Debt vs. equity

classification

US GAAP specifically identifies certain

instruments with characteristics ofboth debt and equity that must beclassified as liabilities.

Certain other contracts that are indexedto, and potentially settled in, a companysown stock may be classified as equityif they: (1) require physical settlementor net-share settlement, or (2) give theissuer a choice of net-cash settlement or

settlement in its own shares.

Classification of certain instruments with

characteristics of both debt and equityfocuses on the contractual obligation todeliver cash, assets or an entitys ownshares. Economic compulsion does notconstitute a contractual obligation.

Contracts that are indexed to, andpotentially settled in, a companys ownstock are classified as equity whensettled by delivering a fixed number ofshares for a fixed amount of cash.

Compound (hybrid)financial instruments

Compound (hybrid) financial instruments(for example, convertible bonds) are notsplit into debt and equity componentsunless certain specific conditions aremet, but they may be bifurcated intodebt and derivative components, withthe derivative component subjected tofair value accounting.

Compound (hybrid) financialinstruments are required to be splitinto a debt and equity component and,if applicable, a derivative component.The derivative component may besubjected to fair value accounting.

Impairment recognition Available for Sale (AFS)

financial instruments

Declines in fair value below cost mayresult in an impairment loss being

recognized in the income statementon an AFS debt security due solely toa change in interest rates (risk-free orotherwise) if the entity does not havethe positive ability and intent to holdthe asset for a period of time sufficientto allow for any anticipated recovery infair value.

When an impairment is recognizedthrough the income statement, anew cost basis in the investment isestablished. Such losses can not be

reversed for any future recoveries.

Generally, only evidence of creditdefault results in an impairment being

recognized in the income statement ofan AFS debt instrument.

Impairment losses recognized throughthe income statement for available-for-sale equity securities cannot bereversed through the income statementfor future recoveries. However,impairment losses for debt instrumentsclassified as available-for-sale may bereversed through the income statementif the fair value of the asset increases ina subsequent period and the increase

can be objectively related to an eventoccurring after the impairment losswas recognized.


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US GAAP IFRSHedge effectiveness shortcut method forinterest rate swaps

Permitted. Not permitted.

Hedging a componentof a risk in a financialinstrument

The risk components that may behedged are specifically defined by theliterature, with no additional flexibility.

Allows entities to hedge components(portions) of risk that give rise tochanges in fair value.

Measurement effectiveinterest method

Requires catch-up approach,retrospective method or prospectivemethod of calculating the interest for

amortized cost-based assets, dependingon the type of instrument.

Requires the original effective interestrate to be used throughout the life of theinstrument for all financial assets and

liabilities, except for certain reclassifiedfinancial assets, in which case the effectof increases in cash flows are recognizedas prospective adjustments to theeffective interest rate.

Derecognition offinancial assets

Derecognition of financial assets (salestreatment) occurs when effectivecontrol has been surrendered overthe financial assets. Control has beensurrendered only if certain specificcriteria have been met, including

evidence of legal isolation.Special rules apply for transfers involvingqualifying special-purpose entities.

Derecognition is based on a mixedmodel that considers both transfer ofrisks and rewards and control. If thetransferor has neither retained nortransferred substantially all of therisks and rewards, there is then an

evaluation of the transfer of control.Control is considered to be surrenderedif the transferee has the practical abilityto unilaterally sell the transferred assetto a third party, without restrictions.There is no legal isolation test

The concept of a qualifying special-purpose entity does not exist.

Measurement loansand receivables

Unless the fair value option is elected,loans and receivables are classified aseither (1) held for investment, which

are measured at amortized cost, or(2) held for sale, which are measuredat the lower of cost or fair value.

Loans and receivables are carried atamortized cost unless classified intothe fair value through profit or loss

category or the available for salecategory, both of which are carried atfair value on the balance sheet.

Other differences include: (i) application offair value measurement principles, includinguse of prices obtained in principal versusmost advantageous markets, (ii) definitionsof a derivative and embedded derivative,(iii) cash flow hedge basis adjustment and

effectiveness testing, (iv) normal purchase and

sale exception, (v) foreign exchange gain and/or losses on AFS investments, (vi) recognitionof basis adjustments when hedging futuretransactions, (vii) macro hedging, (viii) hedgingnet investments, (ix) impairment criteria forequity investments, (x) puttable minority interest

and (xi) netting and offsetting arrangements.


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ConvergenceThe IASB is currently working on a project toestablish a single source of guidance for all fairvalue measurements required or permittedby existing IFRSs to reduce complexity andimprove consistency in their application (similarto FAS 157). The IASB intends to issue anexposure draft of its fair value measurementguidance in Q2 of 2009.

In September 2008, FASB issued a proposedamendment to FAS 140. The proposedstatementwould remove (1) the concept ofa qualifying SPE from FAS 140, and (2) theexceptions from applying FASB InterpretationNo. 46 (revised December 2003) Consolidationof Variable Interest Entities to qualifying SPEs.

The FASB and the IASB have separate, butrelated, projects on reducing complexity inthis area, with both Boards issuing documentsin 2008. The FASB issued an exposure draftdirected at simplifying hedge accounting, andthe IASB issued a discussion paper on reducingcomplexity in reporting financial instruments.Additionally, the FASB and the IASB have a jointproject to address the accounting for financialinstruments with characteristics of equity, with a

goal of issuing a converged standard by 2011.

The IASB has a project on its agenda todevelop a new standard on derecognition thatis more consistent with the IASB conceptualframework of financial reporting. Ultimately,the two Boards will seek to issue a convergedderecognition standard.


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US GAAP IFRS

Translation/functionalcurrency of foreignoperations in ahyperinflationaryeconomy

Local functional currency financialstatements are remeasured as if thefunctional currency was the reportingcurrency (US dollar in the case of aUS parent) with resulting exchangedifferences recognized in income.

Local functional currency financialstatements (current and prior period)are indexed using a general price index,and then translated to the reportingcurrency at the current rate.

Treatment of translation

difference in equitywhen a partial return ofa foreign investment ismade to the parent

Translation difference in equity is

recognized in income only uponsale (full or partial), or completeliquidation or abandonment of theforeign subsidiary. No recognition ismade when there is a partial return ofinvestment to the parent.

A return of investment (for example,

dividend) is treated as a partial disposalof the foreign investment and aproportionate share of the translationdifference is recognized in income.

Foreign currency matters

SimilaritiesFAS 52 Foreign Currency Translation and IAS21 The Effects of Changes in Foreign ExchangeRates are quite similar in their approachto foreign currency translation. While theguidance provided by each for evaluating thefunctional currency of an entity is different,it generally results in the same determination(that is, the currency of the entitys primary

economic environment). Both GAAPsgenerally consider the same economies to behyperinflationary, although the accounting foran entity operating in such an environment canbe very different.

Both GAAPs require foreign currencytransactions of an entity to be remeasured intoits functional currency with amounts resultingfrom changes in exchange rates being reported in

income. Once a subsidiarys financial statementsare remeasured into its functional currency, bothstandards require translation into its parentsfunctional currency with assets and liabilitiesbeing translated at the period-end rate, andincome statement amounts generally at theaverage rate, with the exchange differencesreported in equity. Both standards also permitthe hedging of that net investment with exchangedifferences from the hedging instrument

offsetting the translation amounts reportedin equity. The cumulative translation amountsreported in equity are reflected in incomewhen there is a sale, or complete liquidationor abandonment of the foreign operation, butthere are differences between the two standardswhen the investment in the foreign operation isreduced through dividends or repayment of long-term advances as indicated below.


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Convergence

No convergence activities are underway orplanned for foreign currency matters.

US GAAP IFRSConsolidation of foreignoperations

The step-by-step method is usedwhereby each entity is consolidatedinto its immediate parent until theultimate parent has consolidated thefinancial statements of all the entitiesbelow it.

The method of consolidation is notspecified and, as a result, either thedirect or the step-by-step methodis used. Under the direct method,each entity within the consolidatedgroup is directly consolidated intothe ultimate parent without regardto any intermediate parent. Thechoice of method could affect thecumulative translation adjustments

deferred within equity at intermediatelevels, and therefore the recycling ofsuch exchange rate differences upondisposal of an intermediate foreignoperation.


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Leases

SimilaritiesThe overall accounting for leases underUS GAAP and IFRS (FAS 13Accounting forLeases and IAS 17 Leases, respectively) issimilar, although US GAAP has more specificapplication guidance than IFRS. Both focuson classifying leases as either capital (IAS 17uses the term finance) or operating, andboth separately discuss lessee and lessor

accounting.

Lessee accounting(excluding real estate)

Both standards require the party that bearssubstantially all the risks and rewards ofownership of the leased property to recognizea lease asset and corresponding obligation, andspecify criteria (FAS 13) or indicators (IAS 17)

to make this determination (that is, whethera lease is capital or operating). The criteriaor indicators of a capital lease are similar inthat both standards include the transfer ofownership to the lessee at the end of the leaseterm and a purchase option that, at inception,is reasonably expected to be exercised. Further,FAS 13 requires capital lease treatment if thelease term is equal to or greater than 75%of the assets economic life, while IAS 17

requires such treatment when the lease termis a major part of the assets economic life.FAS 13 specifies capital lease treatment if thepresent value of the minimum lease paymentsexceeds 90% of the assets fair value, while IAS17 uses the term substantially all of the fairvalue. In practice, while FAS 13 specifies brightlines in certain instances (for example, 75% ofeconomic life), IAS 17s general principles are

interpreted similarly to the bright line tests. Asa result, lease classification is often the sameunder FAS 13 and IAS 17.

Under both GAAPs, a lessee would record acapital (finance) lease by recognizing an assetand a liability, measured at the lower of thepresent value of the minimum lease paymentsor fair value of the asset. A lessee would recordan operating lease by recognizing expenseon a straight-line basis over the lease term.Any incentives under an operating lease areamortized on a straight line basis over the termof the lease.

Lessor accounting(excluding real estate)

Lessor accounting under FAS 13 and IAS 17 issimilar and uses the above tests to determinewhether a lease is a sales-type/direct financinglease or an operating lease. FAS 13 specifiestwo additional criteria (that is, collection oflease payments is reasonably expected and no

important uncertainties surround the amountof unreimbursable costs to be incurred by thelessor) for a lessor to qualify for sales-type/direct financing lease accounting that IAS 17does not have. Although not specified in IAS17, it is reasonable to expect that if theseconditions exist, the same conclusion may bereached under both standards. If a lease is asales-type/direct financing lease, the leasedasset is replaced with a lease receivable. If alease is classified as operating, rental incomeis recognized on a straight-line basis over thelease term and the leased asset is depreciatedby the lessor over its useful life.


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Significant differencesUS GAAP IFRS

Lease of land andbuilding

A lease for land and buildings thattransfers ownership to the lessee orcontains a bargain purchase optionwould be classified as a capital leaseby the lessee, regardless of the relativevalue of the land.

If the fair value of the land at inceptionrepresents 25% or more of the total

fair value of the lease, the lesseemust consider the land and buildingcomponents separately for purposesof evaluating other lease classificationcriteria. (Note: Only the building is subjectto the 75% and 90% tests in this case.)

The land and building elements ofthe lease are considered separatelywhen evaluating all indicators unlessthe amount that would initially berecognized for the land element isimmaterial, in which case they wouldbe treated as a single unit for purposesof lease classification. There is no 25%

test to determine whether to considerthe land and building separately whenevaluating certain indicators.

Recognition of again or loss on a saleand leaseback whenthe leaseback is anoperating leaseback

If the seller does not relinquish morethan a minor part of the right to use theasset, gain or loss is generally deferredand amortized over the lease term.If the seller relinquishes more than a

minor part of the use of the asset, thenpart or all of a gain may be recognizeddepending on the amount relinquished.(Note: Does not apply if real estate isinvolved as the specialized rules are veryrestrictive with respect to the sellerscontinuing involvement and they maynot allow for recognition of the sale.)

Gain or loss is recognized immediately,subject to adjustment if the sales pricediffers from fair value.

Recognition of gain orloss on a sale leasebackwhen the leaseback is a

capital leaseback

Generally, same as above for operatingleaseback where the seller does notrelinquish more than a minor part of

the right to use the asset.

Gain or loss deferred and amortizedover the lease term.


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Other differences include: (i) the treatmentof a leveraged lease by a lessor under FAS 13(IAS 17 does not have such classification),(ii) real estate sale-leasebacks, (iii) real estatesales-type leases, and (iv) the rate used todiscount minimum lease payments to thepresent value for purposes of determining leaseclassification and subsequent recognition of acapital lease, including in the event of a renewal.

ConvergenceThe Boards are jointly working on a long-termconvergence project on lease accountingwith an overall objective of comprehensivelyreconsidering the existing guidance issuedby both standard setters. The Boards havetentatively decided to defer the development ofa new accounting model for lessors and to adoptan approach that would apply the existing capital

lease model, adapted as necessary, to all leases.A joint discussion paper is planned to be issuedin the first quarter of 2009, with the Boards thenmoving towards publication of an exposure draft.


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Income taxes

SimilaritiesFAS 109 Accounting for Income Taxes andIAS 12 Income Taxes provide the guidancefor income tax accounting under US GAAPand IFRS, respectively. Both pronouncementsrequire entities to account for both current taxeffects and expected future tax consequencesof events that have been recognized (that is,deferred taxes) using an asset and liability

approach. Further, deferred taxes for temporarydifferences arising from non-deductible goodwillare not recorded under either approach, andtax effects of items accounted for directly inequity during the current year also are allocateddirectly to equity. Finally, neither GAAP permitsthe discounting of deferred taxes.

Significant differences andconvergence

The IASB is expected to publish an exposuredraft to replace IAS 12 in 2009 that will eliminatecertain of the differences that currently existbetween US GAAP and IFRS. The table belowhighlights the significant differences in thecurrent literature, as well as the expectedproposed accounting under the IASBs

exposure draft. While initially participating inthe deliberations on this proposed standard,the FASB decided to suspend deliberations onthis project until the IASB issues its exposuredocument on the proposed replacement toIAS 12 for public comment. The FASB is expectedto solicit input from US constituents regardingthe IASBs proposed replacement to IAS 12 andthen determine whether to undertake a project tofully eliminate the differences in the accounting

for income taxes by adopting the revised IAS 12.

US GAAP IFRS IASB exposure draft

Tax basis Tax basis is a question offact under the tax law.For most assets andliabilities there is nodispute on this amount;however, when uncertaintyexists it is determined in

accordance with FIN 48Accounting for Uncertaintyin Income Taxes.

Tax basis is generally theamount deductible ortaxable for tax purposes.The manner in whichmanagement intendsto settle or recover thecarrying amount affects

the determination of taxbasis.

IFRS is expected topropose a new definitionfor tax basis that willeliminate considerationof managements intentin determination of thetax basis.


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US GAAP IFRS IASB exposure draftUncertain tax positions FIN 48 requires a two-

step process, separatingrecognition frommeasurement. A benefitis recognized when it ismore likely than not tobe sustained based on thetechnical merits of theposition. The amount ofbenefit to be recognized

is based on the largestamount of tax benefitthat is greater than 50%likely of being realizedupon ultimate settlement.Detection risk is precludedfrom being considered inthe analysis.

Does not include specificguidance. IAS 12indicates tax assetsand liabilities shouldbe measured at theamount expected to bepaid. In practice, therecognition principlesin IAS 37 on provisionsand contingencies are

frequently applied.Practice varies regardingconsideration of detectionrisk in the analysis.

IFRS is expected toaddress uncertain taxpositions; however, theapproach is expected tobe different from FIN 48.The IFRS exposure draftis not expected to includeseparate recognitioncriteria; instead it isexpected to require, based

on the technical merits ofthe position, measurementof the benefit to berecognized based onthe probability weightedaverage of the possibleoutcomes, includingconsideration of detection.

Initial recognitionexemption

Does not include anexemption like that underIFRS for non-recognition

of deferred tax effectsfor certain assets orliabilities.

Deferred tax effectsarising from the initialrecognition of an

asset or liability arenot recognized when(1) the amounts did notarise from a businesscombination and(2) upon occurrencethe transaction affectsneither accountingnor taxable profit (forexample, acquisition ofnon-deductible assets).

IFRS is expected toconverge with US GAAPrequirements by

eliminating the initialrecognition exemption.

Recognition of deferredtax assets

Recognized in full (exceptfor certain outside basisdifferences), but valuationallowance reduces assetto the amount that ismore likely than not tobe realized.

Amounts are recognizedonly to the extent itis probable (similar tomore likely than notunder US GAAP) thatthey will be realized.

IFRS is expected toconverge with US GAAPrequirements.

Calculation of deferredtax asset or liability

Enacted tax rates mustbe used.

Enacted or substantivelyenacted tax rates as ofthe balance sheet datemust be used.

IFRS is expected toclarify the definition ofsubstantively enactedto indicate that for USjurisdictions, it equates to

when tax laws are enacted.


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US GAAP IFRS IASB exposure draftClassification of deferredtax assets and liabilitiesin balance sheet

Current or non-currentclassification, based onthe nature of the relatedasset or liability, isrequired.

All amounts classifiedas non-current in thebalance sheet.


Recognition ofdeferred tax liabilitiesfrom investments insubsidiaries or jointventures (JVs) (often

referred to as outsidebasis differences)

Recognition not requiredfor investment in foreignsubsidiary or corporateJV that is essentiallypermanent in duration,

unless it becomesapparent that thedifference will reverse inthe foreseeable future.

Recognition requiredunless the reportingentity has controlover the timing of thereversal of the temporary

difference and it isprobable (more likelythan not) that thedifference will not reversein the foreseeable future.


Taxes on intercompanytransfers of assetsthat remain within aconsolidated group

Requires taxes paid onintercompany profits to bedeferred and prohibits therecognition of deferredtaxes on differencesbetween the tax bases

of assets transferredbetween entities/taxjurisdictions that remainwithin the consolidatedgroup.

Requires taxes paid onintercompany profitsto be recognized asincurred and permits therecognition of deferredtaxes on differences

between the tax basesof assets transferredbetween entities/taxjurisdictions that remainwithin the consolidatedgroup.

IFRS is not expected tochange.

Other differences include: (i) the allocationof subsequent changes to deferred taxesto components of income or equity, (ii) the

calculation of deferred taxes on foreignnonmonetary assets and liabilities when thelocal currency of an entity is different thanits functional currency and (iii) the tax rateapplicable to distributed or undistributed profits.


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Provisions and contingencies

SimilaritiesWhile the sources of guidance under US GAAPand IFRS differ significantly, the generalrecognition criteria for provisions are similar.For example, IAS 37 Provisions, ContingentLiabilities and Contingent Assets providesthe overall guidance for recognition andmeasurement criteria of provisions andcontingencies. While there is no equivalent

single standard under US GAAP, FAS 5Accounting for Contingencies and a numberof other statements deal with specific typesof provisions and contingencies (for example,FAS 143 for asset retirement obligationsand FAS 146 for exit and disposal activities).Further, the guidance provided in two ConceptStatements in US GAAP (CON 5 Recognition

and Measurement in Financial Statements ofBusiness Enterprises and CON 6 Elements ofFinancial Statements) is similar to the specificrecognition criteria provided in IAS 37. BothGAAPs require recognition of a loss basedon the probability of occurrence, althoughthe definition of probability is different underUS GAAP (where probable is interpreted aslikely) and IFRS (where probable is interpretedas more likely than not). Both US GAAP and

IFRS prohibit the recognition of provisions forcosts associated with future operating activities.Further, both GAAPs require information abouta contingent liability, whose occurrence is morethan remote but did not meet the recognitioncriteria, to be disclosed in the notes to thefinancial statements.


US GAAP IFRS

Discounting provisions Provisions may be discounted only whenthe amount of the liability and the timingof the payments are fixed or reliablydeterminable, or when the obligationis a fair value obligation (for example,an asset retirement obligation underFAS 143). Discount rate to be usedis dependent upon the nature of theprovision, and may vary from that used

under IFRS. However, when a provisionis measured at fair value, the time valueof money and the risks specific to theliability should be considered.

Provisions should be recorded atthe estimated amount to settle ortransfer the obligation taking intoconsideration the time value of money.Discount rate to be used should bea pre-tax rate that reflects currentmarket assessments of the time valueof money and the risks specific to theliability.

Measurement ofprovisions range ofpossible outcomes

Most likely outcome within rangeshould be accrued. When no oneoutcome is more likely than the others,the minimum amount in the range ofoutcomes should be accrued.

Best estimate of obligation should beaccrued. For a large population of itemsbeing measured, such as warrantycosts, best estimate is typicallyexpected value, although mid-pointin the range may also be used whenany point in a continuous range is aslikely as another. Best estimate fora single obligation may be the mostlikely outcome, although other possibleoutcomes should still be considered.


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US GAAP IFRSRestructuring costs Under FAS 146, once management has

committed to a detailed exit plan, eachtype of cost is examined to determinewhen recognized. Involuntary employeetermination costs are recognized overfuture service period, or immediatelyif there is none. Other exit costs areexpensed when incurred.

Once management has demonstrablycommitted (that is a legal orconstructive obligation has beenincurred) to a detailed exit plan, thegeneral provisions of IAS 37 apply. Coststypically are recognized earlier thanunder US GAAP because IAS 37 focuseson exit plan as a whole, rather thanindividual cost components of the plan.

Disclosure of contingent

liability

No similar provision to that allowed

under IFRS for reduced disclosurerequirements.

Reduced disclosure permitted if it

would be severely prejudicial to anentitys position in a dispute with otherparty to a contingent liability.

Convergence

Both the FASB and the IASB have currentagenda items dealing with this topic. Anexposure draft proposing amendments toIAS 37 was issued in 2005, with a final standard

expected no earlier than 2010. The IASB hasindicated its intent to converge with US GAAPin the accounting for restructuring costs aspart of this project. In June 2008, the FASBissued proposed amendments to the disclosurerequirements in FAS 5. Many of the proposedchanges are consistent with current disclosuresunder IAS 37. A final standard is expected in thesecond quarter of 2009.


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Revenue recognition

SimilaritiesRevenue recognition under both US GAAP andIFRS is tied to the completion of the earningsprocess and the realization of assets from suchcompletion. Under IAS 18 Revenue, revenueis defined as the gross inflow of economicbenefits during the period arising in the courseof the ordinary activities of an entity whenthose inflows result in increases in equity other

than increases relating to contributions fromequity participants. Under US GAAP, revenuesrepresent actual or expected cash inflows thathave occurred or will result from the entitysongoing major operations. Under both GAAPs,revenue is not recognized until it is bothrealized (or realizable) and earned. Ultimately,both GAAPs base revenue recognition on thetransfer of risks and both attempt to determinewhen the earnings process is complete. Both

GAAPs contain revenue recognition criteriathat, while not identical, are similar. Forexample, under IFRS, one recognition criteriais that the amount of revenue can be measuredreliably, while US GAAP requires that theconsideration to be received from the buyer isfixed or determinable.

Significant differencesDespite the similarities, differences in revenuerecognition may exist as a result of differinglevels of specificity between the two GAAPs.There is extensive guidance under US GAAP,which can be very prescriptive and oftenapplies only to specific industries. For example,under US GAAP there are specific rules for therecognition of software revenue and sales of real

estate, while comparable guidance does not existunder IFRS. In addition, the detailed US rulesoften contain exceptions for particular types oftransactions. Further, public companies in the USmust follow additional guidance provided by theSEC staff. Conversely, a single standard (IAS 18)exists under IFRS, which contains generalprinciples and illustrative examples of specifictransactions. Exclusive of the industry-specificdifferences between the two GAAPs, following

are the major differences in revenue recognition.

US GAAP IFRS

Sale of goods Public companies must follow SAB 104Revenue Recognition, which requiresthat delivery has occurred (the risksand rewards of ownership have beentransferred), there is persuasiveevidence of the sale, the fee is fixedor determinable, and collectibility isreasonably assured.

Revenue is recognized only when risksand rewards of ownership have beentransferred, the buyer has control ofthe goods, revenues can be measuredreliably, and it is probable that theeconomic benefits will flow to thecompany.


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US GAAP IFRSRendering of services Certain types of service revenue,

primarily relating to services sold withsoftware, have been addressed separatelyin US GAAP literature. All other servicerevenue should follow SAB 104.Application of long-term contractaccounting (SOP 81-1 Accounting forPerformance of Construction-Type andCertain Production-Type Contracts) is notpermitted for non-construction services.

Revenue may be recognized inaccordance with long-term contractaccounting, including considering thestage of completion, whenever revenuesand costs can be measured reliably, andit is probable that economic benefits willflow to the company.

Multiple elements Specific criteria are required in orderfor each element to be a separate unitof accounting, including deliveredelements that must have standalonevalue, and undelivered elementsthat must have reliable and objectiveevidence of fair value. If those criteriaare met, revenue for each elementof the transaction can be recognizedwhen the element is complete.

IAS 18 requires recognition of revenueon an element of a transaction if thatelement has commercial substanceon its own; otherwise the separateelements must be linked and accountedfor as a single transaction. IAS 18 doesnot provide specific criteria for makingthat determination.

Deferred receipt of

receivables

Discounting to present value is required

only in limited situations.

Considered to be a financing agreement.

Value of revenue to be recognized isdetermined by discounting all futurereceipts using an imputed rate of interest.

Construction contracts Construction contracts are accountedfor using the percentage-of-completionmethod if certain criteria are met.Otherwise completed contract methodis used.

Construction contracts may be, but

are not required to be, combined orsegmented if certain criteria are met.

Construction contracts are accountedfor using the percentage-of-completionmethod if certain criteria are met.Otherwise, revenue recognition islimited to recoverable costs incurred.The completed contract method isnot permitted.

Construction contracts are combined or

segmented if certain criteria are met.Criteria under IFRS differ from those inUS GAAP.

Convergence

The FASB and the IASB are currentlyconducting a joint project to develop conceptsfor revenue recognition and a standardbased on those concepts. The Boards issueda discussion paper in December 2008 that

describes a contract-based revenue recognitionapproach using the customer consideration

model. This model focuses on the assetor liability that arises from an enforceablearrangement with a customer. The customerconsideration model allocates the customerconsideration to the contractual performanceobligations on a pro rata basis, and revenue is

not recognized until a performance obligationis satisfied.


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Share-based payments

SimilaritiesThe guidance for share-based payments,FAS 123 (Revised) and IFRS 2 (both entitledShare-Based Payment), is largely convergent.Both GAAPs require a fair value-based approachin accounting for share-based paymentarrangements whereby an entity (1) acquiresgoods or services in exchange for issuing shareoptions or other equity instruments (collectively

referred to as shares in this guide) or (2) incursliabilities that are based, at least in part, on theprice of its shares or that may require settlementin its shares. Under both GAAPs, this guidanceapplies to transactions with both employeesand non-employees, and is applicable to allcompanies. Both FAS 123 (Revised) and IFRS 2define the fair value of the transaction to be the

amount at which the asset or liability could bebought or sold in a current transaction betweenwilling parties. Further, both GAAPs require,if applicable, the fair value of the shares to bemeasured based on market price (if available)or estimated using an option-pricing model.In the rare cases where fair value cannot bedetermined, both standards allow the use ofintrinsic value. Additionally, the treatment ofmodifications and settlement of share-based

payments is similar in many respects underboth GAAPs. Finally, both GAAPs require similardisclosures in the financial statements to provideinvestors sufficient information to understandthe types and extent to which the entity isentering into share-based payment transactions.


US GAAP IFRS

Transactions with non-employees

Either the fair value of (1) the goodsor services received, or (2) the equityinstruments is used to value thetransaction, whichever is more reliable.

If using the fair value of the equityinstruments, EITF 96-18Accountingfor Equity Instruments That are Issued

to Other Than Employees for Acquiring,or in Conjunction with Selling, Goodsor Services requires measurement atthe earlier of (1) the date at which acommitment for performance by thecounterparty is reached, or (2) the dateat which the counterpartys performanceis complete.

Fair value of transaction should bebased on the value of the goods orservices received, and only on the fairvalue of the equity instruments if thefair value of the goods and servicescannot be reliably determined.

Measurement date is the date theentity obtains the goods or thecounterparty renders the services. No

performance commitment concept.


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US GAAP IFRSMeasurement andrecognition of expense awards with gradedvesting features

Entities make an accounting policyelection to recognize compensationcost for awards containing only serviceconditions either on a straight-line basisor on an accelerated basis, regardlessof whether the fair value of the awardis measured based on the award as awhole or for each individual tranche.

Must recognize compensation cost onan accelerated basis each individualtranche must be separately measured.

Equity repurchasefeatures at employees

election

Does not require liability classificationif employee bears risks and rewards of

equity ownership for at least six monthsfrom date equity is issued or vests.

Liability classification is required (nosix-month consideration exists).

Deferred taxes Calculated based on the cumulativeGAAP expense recognized and truedup or down upon realization of thetax benefit.

If the tax benefit exceeds the deferredtax asset, the excess (windfallbenefit) is credited directly toshareholder equity. Shortfall of taxbenefit below deferred tax asset ischarged to shareholder equity to extentof prior windfall benefits, and to taxexpense thereafter.

Calculated based on the estimated taxdeduction determined at each reportingdate (for example, intrinsic value).

If the tax deduction exceeds cumulativecompensation expense, deferred taxbased on the excess is credited toshareholder equity. If the tax deductionis less than or equal to cumulativecompensation expense, deferred taxesare recorded in income.

Modification ofvesting terms thatare improbable ofachievement

If an award is modified such that theservice or performance condition,which was previously improbableof achievement, is probable ofachievement as a result of themodification, the compensationexpense is based on the fair value ofthe modified award at the modificationdate. Grant date fair value of theoriginal award is not recognized.

Probability of achieving vesting termsbefore and after modification is notconsidered. Compensation expense isthe grant-date fair value of the award,together with any incremental fairvalue at the modification date.

Convergence

No significant convergence activities areunderway or planned for share-based payments.


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Employee benefits other thanshare-based payments

SimilaritiesMultiple standards apply under US GAAP,including FAS 87 Employers Accounting forPensions, FAS 88 Employers Accountingfor Settlements and Curtailments of Defined

Benefit Pension Plans and for Termination

Benefits, FAS 106 Employers Accountingfor Postretirement Benefits Other than

Pensions, FAS 112 Employers Accounting for

Postemployment Benefits, FAS 132 (Revised)Employers Disclosures about Pensions andOther Postretirement Benefi

Documents

IFRS v GAAP Basics Jan09