Similarities and Differences 2009 IFRS USGAAP[1]

Similarities and DifferencesA comparison of IFRS, US GAAP and JP GAAP

2009

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©2009 PricewaterhouseCoopers Aarata. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers Aarata or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

1Similarities and Differences - A comparison of IFRS, US GAAP and JP GAAP - 2009

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Preface

Starting with the European Union’s (EU) compulsory measure for listed companies within the EU to prepare

consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), we are

witnessing a growing trend towards adoption of IFRS. With the creation of a single global accounting standard,

transparency and comparability of financial reporting is expected to improve for those entities who participate in

cross-border, capital-market transactions.

In this surrounding, the US, which is the world’s largest capital market, is no exception. The US has continued its

preparation for convergence between US GAAP (Accounting Principles Generally Accepted in the United States of

America) and IFRS through issuance of the “Norwalk Agreement” in September, 2002 and the Road Map and the

MoU (Memorandum of Understanding) in February, 2006. While in Japan, the “Tokyo Agreement” in August, 2007

between the ASBJ (The Accounting Standards Board of Japan) and the IASB provided a framework for discussion of

convergence between JP GAAP (Accounting Principles Generally Accepted in Japan) and IFRS.

As a result, currently differences among IFRS, US GAAP and JP GAAP are gradually decreasing, however differences

still remain in some areas among those three standards.

In parallel with the international move toward accounting convergence, the US announced its full adoption of IFRS-

based financial statements for non-US listed entities and issued a proposed “Road Map” which permits adoption of

IFRS for US listed entities. In Japan, in response to the growing trend for international transformation of accounting

standards, the Financial Services Agency (FSA) issued in June 2009, an “Opinion on the Application of International

Financial Reporting Standards (IFRS) in Japan (Interim Report)”.

The treatment of the International Accounting Standard in Japan (Interim Report)” for adoption of IFRS and

preparations of related laws and regulations are under way for voluntary adoption of IFRS starting from the first

quarter of 2010.

Under these circumstances, this publication focuses on and explains the major differences among IFRS, US GAAP

and JP GAAP. This publication does not address all the differences among those three standards, however explains

the differences we consider specifically important. We hope that this publication will be useful in identifying the key

differences among the three standards and help you gain a foothold for introduction of IFRS which is expected to be

a single accounting standard used worldwide.

Koji Hatsukawa, CEOPricewaterhouseCoopers Aarata

2 Similarities and Differences - A comparison of IFRS, US GAAP and JP GAAP - 2009

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Contents

Page

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

How to use this publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Summary of similarities and differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Accounting framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Revenue recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Expense recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Financial liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Derivatives and hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Other accounting and reporting topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Related-party disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Events after the Reporting Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Interim financial reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112


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How to use this publication

This publication is prepared by PricewaterhouseCoopers Aarata for those who wish to gain a broad understanding of

the key similarities and differences among IFRS, US GAAP and JP GAAP. The first part of this document provides a

summary of the similarities and differences among IFRS, US GAAP and JP GAAP. It refers to subsequent sections of

the document where key differences are highlighted and explained in more detail.

No summary publication can do justice to the many differences of detail that exist among IFRS, US GAAP and JP

GAAP. Even if the guidance is similar, there can be differences in the detailed application, which could have a

material impact on the financial statements. This publication focuses on the measurement similarities and

differences most commonly found in practice. When applying the individual accounting frameworks, readers should

consult all the relevant accounting standards and, where applicable, their national law. Listed companies should also

follow relevant securities regulations — for example, requirements regulated by the Financial Services Agency in

Japan or the US Securities and Exchange Commission and local stock exchange listing rules.

This publication takes account of authoritative pronouncements issued under IFRS, US GAAP and JP GAAP up to

June 2009 and is based on the most recent version of those pronouncements, should an earlier version of a

pronouncement still be effective at the date of those issuances. We have noted certain recent developments or

exposure drafts within the detailed text; however, not all recent developments or exposure drafts have been

included.


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Summary of similarities and differences

SUBJECT IFRS US GAAP JP GAAP PAGE

Accounting framework

Historical cost or valuation

Generally uses historical cost, but intangible assets, property, plant and equipment (PPE) and investment property may be revalued to fair value. Derivatives, certain other financial instruments and biological assets are revalued to fair value.

No revaluations except for certain types of financial instruments.

No revaluations except for certain types of financial instrument.

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First-time adoption of accounting framework

Full retrospective application of all IFRSs effective at the end of the reporting date for an entity’s first IFRS financial statements, with some optional exemptions and limited mandatory exceptions. Reconciliations of profit or loss in respect of the last period reported under previous GAAP, of equity at the end of that period and of equity at the start of the earliest period presented in comparatives must be included in an entity’s first IFRS financial statements.

First-time adoption of US GAAP requires retrospective application. There is no requirement to present reconciliations of equity or profit or loss on first-time adoption of US GAAP.

Full retrospective application of all JP GAAP effective at the reporting date for an entity’s first JP GAAP financial statements. There is no requirement to present reconciliations of equity or profit or loss on first-time adoption of JP GAAP.

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Financial Statement

Components of financial statements

Two years’ statements of financial position as at the end of the period, statements of comprehensive income (or separate income statements), statements of cash flows, statements of changes in equity, accounting policies and notes. A statement of financial position as at the beginning of the earliest comparative period is required when an entity applies retrospective changes in accounting policy, restatement or reclassification, including notes.

Similar to IFRS, except that: 1)comparative financial statements are not required for private companies, 2) two years of comparative are required for SEC registrants for all statements except for balance sheet and 3) US GAAP does not have a separate incremental balance sheet requirement as at the beginning of the comparative period.

With respect to item 2 above, specific accommodations in certain circumstances for foreign private issuers that may offer relief from the three-year (two years of comparatives) requirement.

Two year's statement of balance sheet, income statement, cash flow statement, statement of changes in stockholder’s equity and notes to the financial statements as at the end of the reporting period.

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Statement of financial position (Balance sheet)

Does not prescribe a particular format. A current/non-current presentation of assets and liabilities is used unless a liquidity presentation provides reliable and more relevant information. Certain minimum items are presented on the face of the statement of financial position.

Entities may present either a classified or non-classified balance sheet. Items on the face of the balance sheet are generally presented in decreasing order of liquidity.

SEC registrants should follow SEC regulations.

A current/non-current presentation of assets and liabilities is used. Public companies and companies that report under the Financial Instruments and Exchange Law are required to comply with disclosure requirements stipulated in the Financial Instruments and Exchange Law. Balance sheet captions are more detailed compared to IFRS. A standard format for balance sheets is prescribed.

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Statement of comprehensive income(Statement of operations)

All items of income and expenses recognised in a period is presented either in:

(1) a single statement of comprehensive income; or

(2) two statements: separate income statement and statement of comprehensive income.

There is no prescribed standard format, although expenses recognised in profit or loss are presented in one of two formats (function or nature). Certain minimum items are presented on the face of the statement of comprehensive income.

Present as either a single-step or multiple-step format.

Expenditures are presented by function.


Present in multi-step format. JP GAAP requires three categories of income to be presented: operating income, ordinary income and net income.

Expenses are basically presented by function.

Public companies and companies that report under the Financial Instruments and Exchange Law are required to comply with requirements of Financial Instruments and Exchange Law. Income statement captions are more detailed compared to IFRS. Standard format of income statement is prescribed.

Presentation of comprehensive income is not required.

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Exceptional (significant) items

Does not use the term but requires separate disclosure of items that are of such size, incidence or nature that their separate disclosure is necessary to explain the performance of the entity.

Similar to IFRS, but individually significant unusual or infrequent occurring items are presented on the face of the statement of operations or disclosed in the notes.

JP GAAP requires exceptional items be presented separately in a “special gain or loss” category of the income statement. The scope of items to be presented is very pervasive compared to IFRS. Extraordinary items are also included.

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Extraordinary items Prohibited. Defined as being both infrequent and unusual, and are rare in practice.

Included in a “special gain or loss” category of the income statement.

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Statement of changes in equity

Statement shows capital transactions with owners, the movement in accumulated profit/loss and a reconciliation of all other components of equity.

SEC rules permit the statement to be presented either as a primary statement or in the notes.

Similar to IFRS. 21

Statement of cash flow (Cash flow statements) – exemptions

No exemptions. Limited exemptions for certain investment entities and defined benefit plans.

No exemptions for financial statements prepared in accordance with the disclosure requirements stipulated in the Financial Instruments and Exchange Law. Exceptions for financial statements prepared in accordance with the corporate law.

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Statement of cash flow (Cash flow statements) – format and method

Standard headings but limited guidance on contents. Use direct or indirect method.

Similar headings to IFRS, but more specific guidance for items included in each category. Direct or indirect method used.

Similar to US GAAP. Use of direct or indirect method is permitted.

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Statement of cash flow (Cash flow statements) – definition of cash

and cash equivalents

Cash includes cash equivalents with maturities of three months or less from the date of acquisition and may include bank overdrafts.

Similar to IFRS, except that bank overdrafts are excluded.

Similar to IFRS. 22

Changes in accounting policy

Comparatives and prior year are restated against opening retained earnings, unless specifically exempted.

Similar to IFRS. Unless retrospective application is specifically required, the impact on prior periods of changes in accounting policy is presented in the current year income statement. The nature and amounts of the changes must be disclosed.

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Correction of errors Comparatives are restated and, if the error occurred before the earliest prior period presented, the opening balances of assets, liabilities and equity for the earliest prior period presented are restated.

Similar to IFRS. Similar to changes in accounting policy. Generally presented in a net income for the period.

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Changes in accounting estimates

Reported profit or loss in the current period and future, if applicable.

Similar to IFRS. Similar to IFRS. However, in some cases, changes in depreciation-related estimates are adjusted retrospectively and the effects are presented in a “special gain or loss” category.

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Consolidated financial statements

Consolidation model Based on control, which is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is presumed to exist when parent owns, directly or indirectly through subsidiaries, more than one half of an entity's voting power. Control also exists when the parent owns half or less of the voting power but has legal or contractual rights to control, or de facto control (rare circumstances). The existence of currently exercisable potential voting rights is also taken into consideration of all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert.

A bipolar consolidation model is used, which distinguishes between a variable interest entity (VIE) model and a voting interest model.

The VIE model is discussed below. Under the voting interest model, control can be direct or indirect and may exist with less than 50% ownership. ‘Effective control’, which is a similar notion to de facto control under IFRS, is very rare if ever employed in practice.

Also has a concept similar to IFRS in determining the scope of consolidation. “Control” means to control other entity’s decision-making body. For the following cases, there is a rebuttable presumption that control exists. Parent substantially owns more than half of an entity’s voting power, and parent holds between 40% or more and less than 50% of the voting rights of an entity, but holds more than 50% when combining voting rights held by a party having a close relationship with the parent, or certain facts exist indicating that parent controls the decision-making body of the entity.

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Special purpose entities (SPE)

Consolidated where the substance of the relationship indicates control.

An overall assessment of all facts and characteristics of the SPE, including the allocation of risks and benefits between the parties, its design, the nature of its activities and its governance, and an understanding of the economics and objective behind the creation of the SPE are necessary to determine who the controlling party is.

Consolidation requirements focus on whether an entity is a VIE regardless of whether it would be considered an SPE.

Often, an SPE would be considered a VIE, since they are typically narrow in scope, often highly structured and thinly capitalized, but this is not always the case. For example, clear SPEs benefit from exceptions to the variable interest model such as pension, postretirement or postemployment plans.

The guidance above applies only to legal entities.

Legally specified SPE and other entities operating similar business as SPE in which the change of operation is restricted are not considered to be subsidiaries when certain requirements are met, and hence are precluded from consolidation.

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Employee share (stock) trusts

Consolidated where substance of relationship indicates control (SIC 12 model). Entity’s own shares held by an employee share trust are accounted for as treasury shares.

Similar to IFRS except where specific guidance applies for Employee Stock Ownership Plans (ESOPs) in SOP 93-6.

No specific guidance exists as employee share trusts are not common.

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Definition of associate Based on significant influence, which is the power to participate in the financial and operating policy decisions; presumed if 20% or greater interest.

Similar to IFRS, although the term ‘equity investment' is used instead of ‘associate’.

Similar to IFRS. Several examples for the determination of significant influence are provided.

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Presentation of associate results

Equity method is used. Share of post-tax results is shown.

Similar to IFRS. Similar to IFRS. 28

Disclosures about associates

Detailed information on associates’ assets, liabilities, revenue and profit/loss is required.


Presentation of jointly controlled entities (joint ventures)

Both proportionate consolidation and equity method are permitted.

Equity method required except in specific circumstances.

Equity method is required. 29

Uniform accounting policies

Consolidated financial statements are prepared by using uniform accounting policies for like transactions and events in similar circumstances for all of the entities in a group.

Similar to IFRS, with certain exceptions when a subsidiary has specialised industry accounting principles. Equity method investee’s accounting policies may not conform to the investor’s accounting policies, if the investee follows an acceptable alternative US GAAP treatment.

Similar to IFRS. 31

Business combinations*

Types: acquisitions or mergers

All business combinations, except a business combination between entities or businesses under common control (see below), are acquisitions, thus the acquisition method of accounting is only allowed.


Fair values on acquisition

All identifiable assets acquired and liabilities assumed (including contingent liabilities) are fair valued. Goodwill is measured as the excess of the sum of (i) the consideration transferred generally measured at acquisition-date fair value (ii) the amount of any non-controlling interest in the acquiree and (iii) the acquisition-date fair value of any previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Liabilities for restructuring activities are recognised only when acquiree has an existing liability at acquisition date. Liabilities for future losses or other costs expected to be incurred as a result of the business combination cannot be recognised.

Similar to IFRS. Similar to IFRS in general. Intangible assets such as legal rights which can be separately transferred and to which an independent value can reasonably be allocated are recognised as an asset.

Restructuring liabilities can be recorded when certain conditions are met, even if the liabilities aren’t incurred at the acquisition date.

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* The IASB and FASB issued new standards on business combination in January 2008 and December 2007 respectively and many historical differences were eliminated.


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Contingent consideration

The acquisition-date fair value of contingent consideration is recognised as part of the consideration transferred. Subsequent changes in contingent consideration do not adjust the amount of goodwill recognised, unless it is a measurement period adjustment.

Similar to IFRS. Initially measured at fair value. In subsequent periods, changes in the fair value of contingencies classified as assets or liabilities will be recognised in earnings.

Contingent consideration is not recognised at the acquisition date. Subsequently, when the transfer or delivery of the contingent consideration becomes substantive and when the fair value is reasonably determinable, such contingent consideration is adjusted to goodwill or recognised as profit or loss, depending on the nature of the contingent consideration

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Acquired contingencies

The acquiree’s contingent liabilities are recognised separately at the acquisition date as part of allocation of the cost, provided they arise from past event and their fair values can be measured reliably.

The contingent liability is measured subsequently at the higher of the amount initially recognised or, if qualifying for recognition as a provision, the best estimate of the amount required to settle (under the provisions guidance).

Contingent assets are not recognised.

Acquired contingencies are recognised at fair value if fair value can be determined during the measurement period. If fair value can not be determined, companies should typically account for the acquired contingencies using existing guidance.

An acquirer shall develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies depending on their nature.

In principle, contingent liability of an acquiree is recognised when general requirements for provisions are met

Contingent asset are not recognised.

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Goodwill Capitalised but not amortised. Goodwill is reviewed for impairment annually and when indicators of impairment arise. Testing performed at either the cash-generating unit (CGU) level or groups of CGUs, as applicable.

Similar to IFRS, although the level of impairment testing may be different and the impairment test itself is different.

Goodwill is capitalised and amortised over a period up to 20 years. When an indicator of impairment is identified, an impairment test shall be performed. However, no annual impairment testing is required.

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Bargain purchase (“Negative goodwill”)

The identification and measurement of acquiree’s identifiable assets, liabilities and contingent liabilities, the non-controlling interests (if any), the acquirer’s previously held interest (if any) and the consideration transferred are reassessed. Any excess remaining after reassessment is recognised as a gain in profit or loss on the acquisition date.


Non-controlling interests at acquisition

Stated either at full fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

Measured at fair value. Measured at proportionate share of minority interests (non-controlling interests) in identifiable net assets of acquiree.

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Business combinations involving entities under common control

Not specifically addressed. Entities elect and consistently apply either acquisition method or merger accounting (otherwise known as ‘predecessor accounting’) for all such transactions.

Specific rules exist for accounting. Generally recorded at predecessor cost reflecting the transferor’s carrying amount of assets and liabilities transferred.

Merger accounting is applied (book value prior to the transfer).

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Revenue recognition

Revenue recognition - general

Based on several criteria, which require the recognition of revenue when risks and rewards and control have been transferred and the revenue can be measured reliably.

Similar to IFRS in broad principle, although there is extensive detailed guidance for specific types of transactions that may lead to differences in practice.

There is no comprehensive standard for revenue recognition. It is generally interpreted that “completion of transfer of goods or rendering of services” and “receipt for corresponding consideration” are the conditions to meet the concept.

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Revenue recognition - contingent

consideration

For the sale of a good, one looks to the general recognition criteria which include the probability that economic benefit will flow to the entity and the amount of revenue can be reliably measured. Assuming that all of the revenue recognition criteria are met, revenue related to contingent consideration may be recognised.

Even when delivery has clearly occurred (or services have clearly been rendered) the SEC has emphasized that revenue related to contingent consideration should not be recognised until the contingency is resolved.

No specific guidance. However, similar to IFRS in practice.

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Rendering services IFRS requires that service transactions be accounted for by reference to the stage of completion of the transaction. This method is often referred to as the percentage-of-completion method. The stage of completion may be determined by a variety of methods (including the cost-to-cost method).

US GAAP prohibits the use of the cost-to-cost percentage-of-completion method to recognise revenue under service arrangements unless the contract is within the scope of specific guidance for construction or certain production-type contracts.

Generally, companies would have to apply the proportional-performance (based on output measures) model or the completed-performance model.

There is no standard which explicitly specifies the accounting for service transactions. However, it is a common practice that revenue is recognised based on passage of time, for services rendered over time pursuant to written arrangements, otherwise upon completion of the service. In general, the percentage-of-completion method is not applied to those other than construction contracts or made-to-order software development.

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Multiple-element arrangements – identification of

transaction

Revenue recognition criteria are applied to each separately identifiable component of a transaction to reflect the substance of the transaction – e.g., to divide one transaction into the sale of goods and to the subsequent servicing of those goods or to combine two or more transactions when they are linked in such a way that the whole commercial effect cannot be understood without reference to the series of transaction as a whole.

Revenue arrangements with multiple deliverables are separated into different units of accounting if the deliverables in the arrangement meet all of the specified criteria outlined in the guidance. Revenue recognition is then evaluated independently for each separate unit of accounting.

There are no general guidelines for identifying multiple-element arrangements but limited guidelines exist for software transactions and construction contracts.

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Multiple-element arrangements – fair value allocation

The best evidence of the fair value of separately identifiable components of a transaction is the price that is regularly charged when an item is sold separately. At the same time, under certain circumstances, a cost-plus-reasonable-margin approach to estimating fair value would be appropriate. Under rare circumstances, a reverse residual methodology may be acceptable.

US GAAP does not allow an estimated internal calculation of fair value based on costs and an assumed or reasonable margin.

When there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration should be allocated to the separate units of accounting based on their relative fair values.

When fair value is known for the undelivered items, but not for the delivered item, a residual approach can be used.

The reverse-residual method is precluded with certain exceptions.

Refer to the “Recent proposals– IFRS and US GAAP” section in the end of the chapter for proposed changes to US GAAP multiple element arrangements guidance.

No standard for measuring multiple-element arrangement is provided.

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Customer loyalty programmes

IFRS requires that the fair value of the award credits (otherwise attributed in accordance with the multiple-element guidance) be deferred and recognised separately upon achieving all applicable criteria for revenue recognition.

Currently, divergence exists under US GAAP in the accounting for customer loyalty programs. There are two very different models that are generally employed.

No specific guidance. However, it is common to use the provision method by recognising the full amount of revenue at initial recognition including the awards credit and the estimated future expense for goods and services.

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Construction contracts

Accounted for using percentage-of-completion method. Completed contract method is prohibited.

Similar to IFRS; however, completed contract method is permitted in rare circumstances.

Similar to IFRS; however, completed contract method is applied if application requirements for percentage-of-completion method are not met.

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Expense recognition

Interest expense Recognised on an accruals basis using the effective interest method.

Interest incurred on borrowings to construct an asset over a substantial period of time are capitalised as part of the cost of the asset.

Similar to IFRS.

Similar to IFRS with some differences in the detailed application.

Similar to IFRS.

Interest incurred on borrowings to construct an asset over a substantial period of time is expensed as incurred in principle but can be capitalised as part of the cost of the asset.

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Employee benefits: pension costs – defined benefit

plans

Projected unit credit method is used to determine benefit obligation and plan assets are recorded at fair value. Actuarial gains and losses can be deferred. If actuarial gains and losses are recognised immediately, they can be recognised in profit or loss or outside profit or loss through other comprehensive income in the statement of comprehensive income.

Similar to IFRS but with several areas of differences in the detailed application. Actuarial gains and losses cannot be deferred and are recognised in accumulated other comprehensive income with subsequent amortisation to the statement of operations.

Similar to IFRS but with several areas of differences in the detailed application.

There is no concept for other comprehensive income in JP GAAP.

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Termination benefits Termination benefits arising from redundancies are accounted for when the entity is demonstrably committed to the reduction in workforce. Termination indemnity schemes are accounted for based on actuarial present value of benefits.

Four types of termination benefits with three different timing methods for recognition. Termination indemnity schemes are accounted for as pension plans; related liability is calculated as either vested benefit obligation or actuarial present value of benefits.

Termination indemnity schemes are treated under the accounting rule for retirement benefits.

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Employee share-based payment transactions

Expense for services received is recognised based on the fair value of the equity awarded or the liability incurred.

Similar model to IFRS, although many areas of difference exist in application.

Similar to IFRS, however, there is no standard for cash-settled transaction.

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Assets

Acquired intangible assets

Capitalised if recognition criteria are met; amortised over useful life. Intangibles assigned an indefinite useful life are not amortised but reviewed at least annually for impairment. Revaluations are permitted in rare circumstances.

Similar to IFRS, except revaluations are not permitted.

There is no recognition criterion. Examples of intangible assets are as below: Goodwill, patent, lease right, trademark, design right, mining right, fishery right and others.

57

Internally generated intangible assets

Research costs are expensed as incurred. Development costs are capitalised and amortised only when specific criteria are met.

Unlike IFRS, both research and development costs are expensed as incurred, with the exception of some software and website development costs that are capitalised.

Research and development costs are expensed as incurred. Some software costs are capitalised, consistent with US GAAP.

57

Advertising Cost Costs of advertising are expensed as incurred. IFRS does not provide for deferrals until the first time the advertising takes place, nor is there an exception related to the capitalisation of direct response advertising costs or programs.

Prepayment for advertising may be recorded as an asset only when payment for the goods or services is made in advance of the entity's having the right to access the goods or receive the services.

The cost of sales materials, such as brochures and catalogues, is recognised as an expense when the entity has the right to access those goods.

The costs of other than direct response advertising should be either expensed as incurred or deferred and then expensed the first time the advertising takes places. This is an accounting policy decision and should be applied consistently to similar types of advertising activities.

Certain direct response advertising costs are eligible for capitalisation if, among other requirements, probable future economic benefits exist.

Direct response advertising costs that have been capitalised are then amortised over the period of future benefits (subject to impairment considerations).

There is no specified guidance for advertising cost. Advertising costs are expensed based on the term of advertising or the distribution of catalogues and others.

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Property, plant and equipment

Historical cost or revalued amounts are used. Regular valuations of entire classes of assets are required when revaluation option is chosen.

Historical cost is used; revaluations are not permitted.

Similar to US GAAP. 59

Asset retirement obligations

IFRS requires that management’s best estimate of the costs of dismantling and removing the item or restoring the site on which it is located be recorded when an obligation exists.

The estimate is to be based on a present obligation (legal or constructive) that arises as a result of the acquisition, construction or development of a long-lived asset.

If it is not clear whether a present obligation exists, the entity may evaluate the evidence under a more-likely-than-not threshold.

US GAAP requires that the fair value of an asset retirement obligation be recorded when a reasonable estimate of fair value can be made.

The estimate is to be based on a legal obligation that arises as a result of the acquisition, construction or development of a long-lived asset.

Similar to IFRS.

When an asset retirement obligation is incurred, the liability should be recognised at the discounted value based on the estimated undiscounted future cash flows for dismantling properties. Discount rate should be risk free rate before tax that reflects time value of money.

If the estimate for undiscounted future cash flows is significantly changed, the adjustment for this change is provided to the carrying amounts of asset retirement obligations and related properties.

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Non-current assets held for sale or disposal group

Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. A non-current asset classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell.

Similar to IFRS. There is no standard for a non-current asset held for sale or disposal group. However, the treatment is similar to IFRS in practice.

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Leases – classification

A lease is a finance lease if substantially all risks and rewards of ownership are transferred. Substance rather than form is important.

Similar to IFRS, but with more extensive form-driven requirements.

Similar to IFRS, but with more extensive form-driven requirements.

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Leases – lessor accounting

Amounts due under finance leases are recorded as a receivable. Gross earnings allocated to give constant rate of return based on (pre-tax) net investment method.

Similar to IFRS, but with specific rules for leveraged leases.

Similar to IFRS. 62

Impairment of long-lived assets held for use

Impairment is a one-step approach under IFRS where the carrying amount is compared with the recoverable amount. If impairment is indicated, assets are written down to higher of fair value less costs to sell and value in use. Reversal of impairment losses is required in certain circumstances, except for goodwill.

Impairment is a two-step approach under US GAAP. Firstly, impairment is assessed on the basis of undiscounted cash flows. If less than carrying amount, the impairment loss is measured as the amount by which the carrying amount exceeds fair value. Reversal of losses is prohibited.

Similar to US GAAP. A two-step approach is applied. Reversal of losses is prohibited.

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Investment property Measured at depreciated cost or fair value, with changes in fair value recognised in profit or loss.

Treated the same as for other properties (depreciated cost). Industry-specific guidance applies to investor entities (for example, investment companies).

Treated the same as for other properties (depreciated cost). And there is no Industry-specific guidance in particular.

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Inventories Carried at the lower of cost and net realisable value. FIFO or weighted average method is used to determine cost. LIFO prohibited.

Reversal is required for subsequent increase in value of previous write-downs.

Similar to IFRS; however, use of LIFO is permitted.

Reversal of write-down is prohibited.

Similar to IFRS.

Because an entity can choose either to apply the reversal method or non-reversal method, reversal of previous write-downs is permitted.

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Biological assets Measured at fair value less estimated costs to sell (unless fair value can not be reliably measured), with changes in valuation recognised in profit or loss.

Not specified. Generally historical cost used.

Not specified. Generally historical cost is used.

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Financial assets – measurement

Depends on classification of investment – if held to maturity or loans and receivables, they are carried at amortised cost; otherwise at fair value. Gains/losses on fair value through profit or loss classification (including trading instruments) is recognised in profit or loss. Gains and losses on available-for-sale investments, whilst the investments are still held, are recognised in other comprehensive income.

Classification depends on whether the legal form of the financial asset is a security. Impairment triggers as well as impairment measurement for securities will produce different results for US GAAP compared to IFRS.

Similar accounting model to IFRS. Gains or losses on measuring outstanding available-for-sale investments at fair value are recognised in equity. In principle, receivables are measured at historical cost less allowances for doubtful accounts.

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Derecognition of financial assets

An entity derecognises the asset if an entity transfers substantially all the risks and rewards of ownership of the asset. It continues to recognise the asset if it retains substantially all the risks and rewards of ownership of the asset.

If an entity neither transfers nor retains substantially all the risks and rewards of ownership of the asset, it needs to determine whether it has retained control of the asset. The asset is derecognised if the entity has lost control.

If the entity has retained control, it continues to recognise the asset to the extent of its continuing involvement (partial derecognition).

The evaluation is governed by three key considerations:

• legal isolation,

• the ability of the transferee (or beneficial interest holder in transferee SPE) to pledge or exchange the asset (or beneficial interest), and

• no right or obligation of the transferor to repurchase.

If a transaction qualifies for derecognition, the transferor must recognise any retained ongoing interest at fair value.

Financial assets must be derecognised when contractual rights of the financial asset are exercised, lost or the control to those rights is transferred.

The following three requirements must be met for the transfer of control :

• Transferred assets are legally safeguarded,

• Transferee obtains contractual rights of the transferred assets, and

• There is no right or obligation of the transferor to repurchase the transferred assets.

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Liabilities

Provisions – general Liabilities relating to present obligations from past events recorded if outflow of resources is probable (defined as more likely than not) and can be reliably estimated.

Similar to IFRS. However, ‘probable’ is a higher threshold than ‘more likely than not’.

Similar to IFRS. There is no specific definition for ‘probability’. However, it is interpreted similar to US GAAP.

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Provisions – restructuring

A provision for restructuring costs is recognised when, among other things, an entity has a present obligation.

A present obligation exists when, among other conditions, the company is demonstrably committed to the restructuring. A company is usually demonstrably committed when there is legal obligation or when the entity has a detailed formal plan for the restructuring.

The guidance prohibits the recognition of a liability based solely on an entity’s commitment to an approved plan.

Recognition of a provision for onetime termination benefits requires communication of the details of the plan to employees who could be affected. The communication is to contain sufficient details about the types of benefits so that employees have information for determining the types and amounts of benefits they will receive.

No detailed guidance on restructuring provision is provided. Provisions are recorded based on general principle for provision.

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Contingencies Disclose unrecognised possible losses and probable gains.

Similar to IFRS. Similar to IFRS. However, probable gain is not disclosed.

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Deferred income taxes – general approach

Full provision method is used (some exceptions) driven by statement of financial position temporary differences. Deferred tax assets are recognised if recovery is probable (more likely than not).

Similar to IFRS but with many differences in application.

Similar to IFRS but with certain variations in application.

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Investments in subsidiaries – treatment of

deferred tax on undistributed profit

With respect to undistributed profits and other outside basis differences related to investments in subsidiaries, branches and associates, and joint ventures, deferred taxes are recognised except when a parent company (investor or venturer) is able to control the ultimate distribution of profits and it is probable that the temporary difference will not reverse in the foreseeable future.

With respect to undistributed profits and other outside basis differences, different requirements exist depending on whether they involve investments in subsidiaries, in joint ventures or in equity investees.

Similar to IFRS. 84


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Government grants Government grants are recognised once there is reasonable assurance that both (1) the conditions for their receipt will be met and (2) the grant will be received. Revenue-based grants are deferred in the statement of financial position and released to profit or loss to match the related expenditure that they are intended to compensate.

Grants that involve recognised assets are presented in the statement of financial position either as deferred income or by deducting the grant in arriving at the asset’s carrying amount, in which case the grant is recognised as a reduction of depreciation.

If conditions are attached to the grant, recognition of the grant is delayed until such conditions have been fulfilled. Contributions of long-lived assets or for the purchase of long-lived assets are to be credited to income over the expected useful life of the asset for which the grant was received.

Both capital-based grants and revenue-based grants are recognised as revenue when received. However, there is specific treatment provided by corporate-tax law and tax special measurement law, where government grants are offset against acquired assets. This treatment is also acceptable for accounting purpose.

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Leases – lessee accounting

Finance leases are recorded as asset with a corresponding obligation for future rentals and are depreciated over the useful life of the asset. Rental payments are apportioned to give a constant interest rate on the outstanding obligation. Operating lease rentals are charged on a straight-line basis.

Similar to IFRS. Specific rules should be met to record operating or capital lease.

Similar to IFRS. 86

Leases – lessee accounting:

sale and leaseback transactions

Profit arising on a sale and finance leaseback transaction is deferred and amortised. If an operating lease arises, profit recognition depends on whether the transaction is at fair value. Substance/linkage of transactions is considered.

Timing of profit and loss recognition depends on whether seller relinquishes substantially all or a minor part of the use of the asset. Losses are immediately recognised. Specific strict criteria should be considered if the transaction involves real estate.

Similar to IFRS, for finance leases. In some cases, depending on the cause, losses on sales are not deferred and immediately recognised as loss. There is no explicit requirement for operating leases, however, in practice, it is treated in the same method as IFRS requires.

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Financial liabilities and equity

Financial liabilities versus equity classification

Capital instruments are classified, depending on substance of issuer’s contractual obligations, as either liability or equity, except for certain puttable instruments which are classified as equity even with contractual obligations when certain conditions are met.

Contracts that may be settled in an issuer’s own shares must be carefully evaluated for classification.

Some redeemable and mandatorily redeemable preference shares are classified as liabilities.

Application of the US GAAP guidance may result in significant differences to IFRS, for example, certain redeemable instruments are permitted to be classified as ‘mezzanine equity’ (i.e., outside of permanent equity but also separate from debt).

Contracts that may be settled in an issuer's own shares must be carefully evaluated for classification, though the criteria for equity classification are different compared to IFRS.

Mandatorily (date certain) redeemable preference shares are classified as liabilities.

There is no detailed guideline for the classification as liability or equity. Financial instruments are classified as liability or equity based on legal form in principle.

Redeemable prefered shares are classified as equity.

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Convertible instruments

Convertible instruments (where the conversion feature results in a fixed number of shares for a fixed amount of cash) is accounted for on split basis, with proceeds allocated between equity and debt.

Conventional convertible debt is usually recognised entirely as liability, unless there is beneficial conversion feature.

Convertible instruments may be split into equity and liability components or treated as a single instrument by accounting policy election. In practice, they are generally treated as a single instrument.

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Derecognition of financial liabilities

Liabilities are derecognised when extinguished. Difference between carrying amount and amount paid is recognised in profit or loss.


Equity instruments

Capital instruments – purchase of own

shares

Show as deduction from equity. Similar to IFRS. Similar to IFRS. 93


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Derivatives and hedging

Derivatives Derivatives and embedded derivatives not qualifying for hedge accounting are measured at fair value with changes in fair value recognised in profit or loss.

Hedge accounting is permitted provided that certain stringent qualifying criteria are met.

Similar to IFRS. However, differences compared to IFRS can arise in the detailed application in determining the definition of derivatives, scope of derivatives, assessment of embedded derivatives and application of hedge accounting.

Similar to IFRS. 94

Other accounting and reporting topics

Functional currency definition

Currency of primary economic environment in which entity operates.

Similar to IFRS. Functional currency is determined based on legal entity, i.e., foreign subsidiaries and foreign branches.

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Functional currency – determination

If indicators are mixed and functional currency is not obvious, judgment is used to determine functional currency that most faithfully represents economic results of entity's operations by giving priority to currency that mainly influences sales prices and currency that mainly influences direct costs of providing the goods and services before considering the other factors.

Similar to IFRS. However, no specific hierarchy of factors to consider. In practice, currency in which cash flows are settled is often key consideration.

Foreign subsidiaries use local currency and foreign branches use headquarters’ currency, as their functional currency. This is on the basis that operations of foreign subsidiaries are deemed to be independent of their parent company whereas operations of foreign branches are deemed to be dependent on their parent company.

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Presentation currency When financial statements are presented in a currency other than the functional currency, assets and liabilities are translated at exchange rate at the reporting date. Statement of comprehensive income items are translated at exchange rate at dates of transactions, or average rates if rates do not fluctuate significantly.

Similar to IFRS, except equity is translated using historical rates.

Similar to IFRS. However income statement captions are translated using the average rate during the relevant time period in principle, and translation using the exchange rate as at closing date is also permitted.

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Earnings per share – diluted

IAS 33 is prescriptive about the procedure and methods used to determine whether potential shares are dilutive.

‘Treasury share’ method is used for share options/warrants.

Similar in principle to IFRS, although differences may arise in the case of common shares arising from contingently convertible debt securities and when applying the treasury stock (share) method in year-to-date computations.

Similar to IFRS. 105

Related-party transactions – definition

Determined by level of direct or indirect control, joint control and significant influence of one party over another or common control with another entity. A member of key management personnel and a post-employment benefit plan can also be a related party


Related-party transactions – disclosures

Name of the parent entity is disclosed and, if different, the ultimate controlling party, regardless of whether transactions occur. For related-party transactions, nature of relationship (seven categories), amount of transactions, outstanding balances, terms and types of transactions are disclosed. Disclosure of compensation of key management personnel is required within the financial statements.

Similar to IFRS except that disclosure of compensation of key management personnel is not required within the financial statements.


Similar to IFRS. Disclosure of compensation of key management personnel is not required in the financial statements; however, the description for the remuneration of board member (separately internal board member and external board member) is disclosed.

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Segment reporting – scope and basis of

disclosures

Applies to public entities and entities that file, or are in the process of filing, financial statements with a regulator for the purposes of issuing any instrument in a public market. Reporting of operating segments is based on those segments reported internally to entity’s chief operating decision-maker for purposes of allocating resources and assessing performance.

Applies to public entities. Basis of reporting is generally similar to IFRS.

Applies to financial statements of public companies and companies that report under the Financial Instruments and Exchange Law. Basis of reporting is similar to IFRS.

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Segment reporting – main disclosures

Disclosures for operating segments are profit or loss, total assets and, if regularly reported internally, liabilities. Other items, such as external revenues, intra-segment revenues, depreciation and amortisation, tax, interest income, interest expense and various material items are disclosed by segment where such items are included in the segment profit/loss or are reported internally. For geographical areas in which the entity operates, revenues and non-current assets are reported. Disclosure of factors used to identify segments and about major customers is required.

Similar disclosures to IFRS. Similar to disclosure requirements in IFRS.

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Discontinued operations – definition

Operations and cash flows that can be clearly distinguished operationally and for financial reporting and represent a separate major line of business or geographical area of operations, or a subsidiary acquired exclusively with a view to resale.

Wider definition than IFRS. Component that is clearly distinguishable operationally and for financial reporting can be a reportable segment, operating segment, reporting unit, subsidiary or asset group.

Discontinued operations are not defined or not presented separately.

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Discontinued operations – presentation

At a minimum, a single amount is disclosed on face of statement of comprehensive income, and further analysis disclosed in notes, for current and prior periods.

Similar to IFRS. Discontinued operations are reported as separate line items on face of income statement before extraordinary items.

Discontinued operations are not reported on the face of the income statement. However, items related to discontinued operations are presented in the special gain or loss category in some cases.

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Events after the reporting period

Financial statements are adjusted for subsequent events providing evidence of conditions that existed at the reporting date and materially affecting amounts in financial statements (adjusting events). Non-adjusting events are disclosed if material.


Interim financial reporting

Interim financial statements are prepared via the discrete-period approach, wherein the interim period is viewed as a separate and distinct period.

Contents are prescribed and basis should be consistent with full-year statements. Frequency of reporting (e.g., quarterly, half-year) is imposed by local regulator or is at discretion of entity which does not affect the measurement of its annual results.

US GAAP views interim periods primarily as integral parts of an annual cycle. As such, it allows entities to allocate among the interim periods certain costs that benefit more than one of those periods.

Additional quarterly reporting requirements apply for SEC registrants (domestic US entities only). Interim reporting requirements for foreign private issuers are based on local law and stock exchange requirements.

Similar to IFRS; however, quarterly reporting is required for listed companies.

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IFRS Historical cost is the main accounting convention. However, IFRS permits the revaluation of intangible assets, property,

plant and equipment (PPE) and investment property. IFRS also requires certain categories of financial instruments and

certain biological assets to be reported at fair value.

US GAAP Similar to IFRS but prohibits revaluations except for certain categories of financial instruments, which are carried at fair value.

JP GAAP Similar to IFRS, historical cost is the main accounting convention. JP GAAP does not permit revaluation and fair value

measurement is required only for certain financial instruments.

First-time adoption of accounting framework

IFRS The IFRS framework includes a specific standard on how to apply IFRS for the first time. It introduces certain reliefs and

imposes certain requirements and disclosures. First-time adoption of IFRS as the primary accounting basis requires full

retrospective application of IFRS effective at the reporting date for an entity’s first IFRS financial statements, with optional

exemptions primarily for PPE and other assets, business combinations, share-based payments and pension plan

accounting and limited mandatory exceptions. Comparative information is prepared and presented on the basis of IFRS.

Almost all adjustments arising from the first-time application of IFRS are adjusted against opening retained earnings of

the first period presented on an IFRS basis. Some adjustments are made against goodwill or against other classes of

equity. Further, in an entity’s first IFRS financial statements, it must present reconciliations of profit or loss in respect of

the last period reported under previous GAAP, of equity at the end of that period and of equity at the start of the earliest

period presented in comparatives in those first IFRS financial statements.

US GAAP Accounting principles should be consistent for financial information presented in comparative financial statements. US

GAAP does not give specific guidance on first-time adoption of its accounting principles. However, first-time adoption of

US GAAP requires full retrospective application. Some standards specify the transitional treatment upon first-time

application of a standard. Specific rules apply for carve-out entities and first-time preparation of financial statements for

the public. There is no requirement to present reconciliations of equity or profit or loss on first-time adoption of US GAAP.

JP GAAP Full retrospective application of all JP GAAP effective at the reporting date for an entity’s first JP GAAP financial statements.

There is no requirement to present reconciliations of equity or profit or loss on first-time adoption of JP GAAP.

Recent proposals – IFRS and US GAAP

IFRS for SMEsIn February 2007, the IASB published an exposure draft of IFRS for small and medium-sized entities (IFRS for SMEs).

The aim of the proposed standard is to provide a simplified, self-contained set of accounting principles that are appropriate for

companies that are not publicly accountable (for example, unlisted) and are based on full IFRSs. By removing choices for

accounting treatment, eliminating topics that are not generally relevant to SMEs, simplifying methods for recognition and

measurement and reducing disclosure requirements, the resulting draft standard reduces the volume of accounting guidance

applicable to SMEs by more than 85% when compared to the full set of IFRSs. Once issued in final form, it may be available for

use by subsidiaries in preparing their single entity accounts even though they are part of a large listed group. The final authority for

the standard when issued will come from national regulatory authorities and standard-setters.

In July 2009, the IASB issued IFRS for SMEs.

Conceptual FrameworkThe conceptual framework project is undertaken jointly by the IASB and the FASB as part of convergence. The project, conducted

in 8 phases, Phase A — H, strives to create a sound foundation for future accounting standards that are principles-based,

internally consistent and internationally converged. In May 2008, the IASB and FASB jointly published an exposure draft addressing

Phase A, considering the objective and qualitative characteristics of financial reporting.

Currently Phases A, B, C and D of the project are active.

Phase Topic Phase Topic

A Objectives and qualitative characteristics. E Boundaries of financial reporting, and Presentation and Disclosure

B Definitions of elements, recognition and derecognition F Purpose and status of the framework

C Measurement G Application of the framework to not-for-profit entities

D Reporting entity concept H Remaining Issues, if any

REFERENCES: IFRS: Framework, IAS 1, IAS 8, IAS 16, IAS 38, IAS 39, IAS 40, IAS 41, IFRS 1 US GAAP: ASC 220-10, ASC 250, ASC 320, ASC 323-10, ASC 815, CON 1, SAB Topic 4, SAB Topic 5 JP GAAP: Business Accounting Principle, The Discussion Paper from Accounting Standards Board of Japan ‘Conceptual Framework of Financial Accounting’


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Financial statements

Recent Changes-IFRS

IAS1(revised in 2007)

In September 2007, the IASB issued IAS1 (revised in 2007), which will become effective for annual periods beginning on or after

January 1, 2009. Entities can also determine whether they will present all items of income and expense recognised in the period in

a single statement of comprehensive income or in two statements (a separate income statement and a statement of

comprehensive income). IAS 1(revised in 2007) does not permit comprehensive income to be displayed in a statement of changes

in equity.

In November 2006, the IASB issued IFRS 8, Operating Segments, which will become effective for years beginning on or after

January 1, 2009. Following adoption, limited differences will exist in the determination and disclosure of operating segments

between IFRS and US GAAP.

General requirements

Compliance

IFRS Entities should make an explicit statement that financial statements comply with IFRS. Compliance cannot be claimed

unless the financial statements comply with all the requirements of each applicable standard and each applicable

interpretation.

US GAAP SEC registrants should comply with the SEC’s rules and regulations and applicable financial interpretations.

JP GAAP Public companies and companies that report under the Financial Instruments and Exchange Law should comply with JP

GAAP and the disclosure and presentation requirements under the Financial Instruments and Exchange Law. Foreign

entities listed in the security exchange market in Japan may present their financial statements disclosed at the security

exchange market of their home country without any reconciliations under permission of Commissioner of Financial

Service Agency. The financial statements must be presented in Japanese.


A set of financial statements under IFRS, US GAAP and JP GAAP comprises the following components.

COMPONENT IFRS US GAAP JP GAAP5 PAGE


Required Required Required 17

Statement of comprehensive income (Statements of operations)

Required1 Required2 Required3 19

Statement of changes in equity(Statement of changes in shareholders’ equity)

Required Required Required 21

Statement of Cash flows (Cash flow statement)

Required Required4 Required 21

Accounting policies Required Required Required –

Notes to financial statements Required Required Required –

1 IFRS: Entities should present all items of income and expenses recognised in a period: (a) in a single statement of comprehensive income; or (b) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying

components of other comprehensive income (statement of comprehensive income).

2 US GAAP: Entities may utilize one of three formats in their presentation of comprehensive income: • A single primary statement of income and comprehensive income. • A two-statement approach (a statement of income and a statement of comprehensive income). • A separate category highlighted within the primary statement of changes in shareholders’ equity

3 JP GAAP: Presentation of comprehensive income is not required and only income statement is disclosed

4 US GAAP: Except for certain entities, such as certain investment companies and defined benefit plans and certain other employee benefit plans.

5 JP GAAP: For public companies or companies that report under the Financial Instruments and Exchange Law.


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Comparatives

IFRS One year of comparatives is required for all numerical information in the financial statements, with limited exceptions in

disclosures. In limited note disclosures, more than one year of comparative information is required.

A third statement of financial position is also required for first time adopters of IFRS and in situations where a restatement

or reclassification has occurred. Reclassifications in this context are in relation to a change in accounting policies or

accounting estimates, errors or changes in presentation of previously issued financial statements.

US GAAP Comparative financial statements are not required for private companies; however, SEC requirements specify that most

registrants provide two years of comparatives (to the current year) for all statements except for the balance sheet, which

requires one comparative year.

JP GAAP Public companies and companies that report under the Financial Instruments and Exchange Law are required to disclose

one year (prior year) of comparatives for all information including explanatory notes.


Each framework requires prominent presentation of a statement of financial position (balance sheet) as a primary statement.

Format

IFRS Entities present current and non-current assets, and current and non-current liabilities, as separate classifications on the

face of the statement of financial position except when a liquidity presentation provides reliable and more relevant

information. All assets and liabilities are presented broadly in order of liquidity in such cases. Otherwise there is no

prescribed statement of financial position format, and management may use judgment regarding the form of presentation

in many areas. However, as a minimum, IFRS requires presentation of the following items on the face of the statement of

financial position:

• Assets: PPE, investment property, intangible assets, financial assets, investments accounted for using the equity

method, biological assets, inventories, trade and other receivables, current tax assets, deferred tax assets, cash and

cash equivalents, and the total of assets classified as held for sale and assets included in disposal groups classified as

held for sale in accordance with IFRS 5; and

• Equity and liabilities: issued share capital and other components of shareholders’ equity, non-controlling interests

(presented within equity), financial liabilities, provisions, current tax liabilities, deferred tax liabilities, trade and other

payables, and liabilities included in disposal groups classified as held for sale in accordance with IFRS 5.

US GAAP The presentation of a classified balance sheet is required, with the exception of certain industries. Generally presented as

total assets balancing to total liabilities and shareholders’ equity. Items presented on the face of the balance sheet are

similar to IFRS but are generally presented in decreasing order of liquidity. The balance sheet detail should be sufficient

to enable identification of material components. Public entities should follow specific SEC guidance.

JP GAAP Current and non-current items are separately presented. The financial statements regulations and its guidelines under the

Financial Instruments and Exchange Law require items to be presented in more detail in the balance sheet compared to

IFRS. The regulations and guidelines require companies to classify assets into current assets, non-current (fixed) assets

and deferred assets.

Current/non-current distinction (general)

IFRS The current/non-current distinction is required (except when a liquidity presentation is more relevant). Where the distinction

is made, assets are classified as current assets if they are: held for sale or consumed in the normal course of the entity’s

operating cycle; or cash or cash equivalents. Both assets and liabilities are classified as current where they are held for

trading or expected to be realised within 12 months of the end of the reporting period. Interest-bearing liabilities are

classified as current when they are due to be realised or settled within 12 months of the end of the reporting period, even if

the original term was for a period of more than 12 months. If completed after the end of the reporting period, neither an

agreement to refinance or reschedule payments on a long-term basis nor the negotiation of a debt covenant waiver would

result in noncurrent classification of debt, even if executed before the financial statements are issued.

US GAAP The requirements are similar to IFRS with the exception of certain industries. The SEC provides guidelines for the

minimum information to be included by registrants. Debt instruments due within the next 12 months may be classified as

non-current as of the balance sheet date provided that agreements to refinance or to reschedule payments on a long-

term basis (including waivers for certain debt covenants) get completed before the financial statements are issued.


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JP GAAP To classify current items or non-current items, the financial statements regulation and its guideline under the Financial

Instruments and Exchange Law adopts two classification standards, the operating cycle rule and the one-year rule, as

follows:

(a) Receivables or payables that arise from the normal course of the enterprise’s primary operating cycle should be

classified as current assets or liabilities, e.g., account receivables and payables, note receivables and payables,

deposits and advance payment received. However bankruptcy receivables and similar items that are not expected to

be collected within one year should be classified as non-current assets.

(b) Assets or liabilities that do not arise from the normal course of the enterprise’s primary operating cycle, e.g., loans,

should be classified as current assets or liabilities insofar as they are expected to be realised or to be settled within

one year; otherwise they should be classified as non-current assets.

(c) Cash or cash equivalent assets are in principle classified as current assets; deposits are classified as either current

assets or fixed assets depending on when they are expected to be realised.

(d) Securities should be classified as current assets when they are held primarily for trading purposes or for the short

term; otherwise, they are classified as non-current assets (investment and other assets).

Offsetting assets and liabilities

IFRS An entity shall generally not offset assets and liabilities unless required or permitted by a standard. Offsetting maybe

appropriate when it reflects the substance of the transaction or other event or when the right of setoff exists.

Under the guidance, a right of setoff is a debtor’s legal right, by contract or otherwise, to settle or otherwise eliminate all

or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor. Two

conditions must exist for an entity to offset a financial asset and a financial liability (and thus present the net amount on

the statement of financial position). The entity must:

• Currently have a legally enforceable right to set off the recognised amounts; and

• Intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Master netting agreements do not provide a basis for offsetting unless both of the criteria described earlier have been

satisfied.

In unusual circumstances, a debtor may have a legal right to apply an amount due from a third party against the amount

due to a creditor, provided that there is an agreement between the three parties that clearly establishes the debtor’s right

of setoff.

US GAAP The guidance states that “it is a general principle of accounting that the offsetting of assets and liabilities in the balance

sheet is improper except where a right of setoff exists.” A right of setoff is a debtor’s legal right, by contract or otherwise,

to discharge all or a portion of the debt owed to another party by applying against the debt an amount that the other

party owes to the debtor. A debtor having a valid right of setoff may offset the related asset and liability and report the net

amount. A right of setoff exists when all of the following conditions are met:

• Each of two parties owes the other determinable amounts.

• The reporting party has the right to set off the amount owed with the amount owed by the other party.

• The reporting party intends to set off.

• The right of setoff is enforceable by law.

Repurchase agreements and reverse-repurchase agreements that meet certain conditions are permitted, but not

required, to be offset in the balance sheet.

The guidance provides an exception to the previously described intent condition for derivative instruments executed with

the same counterparty under a master netting arrangement.

An entity may offset (1) fair value amounts recognised for derivative instruments and (2) fair value amounts (or amounts

that approximate fair value) recognised for the right to reclaim cash collateral (a receivable) or the obligation to return

cash collateral (a payable) arising from derivative instruments recognised at fair value. Entities must adopt an accounting

policy to offset fair value amounts under this guidance and apply that policy consistently.


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JP GAAP Assets and liabilities cannot be offset, except where specifically permitted by a standard.

However, financial assets and liabilities may be offset when the following three conditions are satisfied: (i) they are

receivable from / payable to the same party; (ii) a legally enforceable right to offset the recognised amounts exists and the

entity is able to offset; and (iii) the entity intends to settle transactions on a net basis or to realise the asset and settle the

liability. Financial assets and liabilities arising from derivatives transactions between the same counterparty valued at fair

value may be offset provided that a legally valid master netting agreement is in place.

Other classification in statement of financial position (balance sheet)

IFRS Non-controlling interests are presented as a component of equity.

US GAAP Similar to IFRS.

JP GAAP Minority interests (non-controlling interests) should be presented as a component of net assets, separately from

shareholders’ equity.

Statement of comprehensive income (Statement of operations)

Each framework requires prominent presentation of a statement of comprehensive income (a statement of operations) as a primary

statement.

Format

IFRS There is no prescribed format for the statement of comprehensive income. The entity should select a method of

presenting its expenses recognised in profit or loss by either function or nature; this can either be, as is encouraged, on

the face of the statement of comprehensive income , or in the separate income statement (if presented). Additional

disclosure of expenses by nature is required if functional presentation is used. Entities should not mix functional and

nature classifications of expenses by excluding certain expenses from the functional classifications to which they relate.

At least the following items have to be presented on the face of the statement of comprehensive income:

• Revenue;

• Finance costs;

• Share of post-tax results of associates and joint ventures accounted for using the equity method;

• Tax expense;

• Post-tax gain or loss attributable to the results and to remeasurement of discontinued operations;

• Profit or loss for the period;

• Each component of other comprehensive income classified by nature;

• Share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and

• Total comprehensive income.

The portion of profit or loss and total comprehensive income attributable to the non-controlling interests and to the

owners of the parent are separately disclosed on the face of the statement of comprehensive income as allocations of

profit or loss and total comprehensive income for the period within that caption.

An entity that discloses an operating result should include all items of an operating nature, including those that occur

irregularly or infrequently or are unusual in amount.

The components of other comprehensive income would include:

(a) Changes in revaluation surplus (on account of PPE and intangibles)

(b) Actuarial gains and losses on defined benefit plans recognised in full in equity, if the entity elects the option available

under IAS 19

(c) Gains and losses arising from translation of a foreign operation

(d) Gains and losses on re-measuring available-for-sale financial assets


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(e) Effective portion of gains and losses on hedging instruments in a cash flow hedge.

Entities should present all items of income and expenses recognised in a period:

• in a single statement of comprehensive income; or

• in two statements: a statement displaying components of profit or loss (separate income statement) and a second

statement beginning with profit or loss and displaying components of other comprehensive income (statement of

comprehensive income).

US GAAP The statement of operations can be presented in either:

• a single-step format, whereby all expenses are classified by function and then deducted from total income to arrive at

income before tax; or

• a multiple-step format separating operating and nonoperating activities before presenting income before tax.

SEC regulations require all registrants to categorise expenses by their function. However, depreciation expense may be

presented as a separate income statement line item. In such instances the caption cost of sales should be accompanied

by the phrase exclusive of depreciation shown below and presentation of a gross margin subtotal is precluded.

In the presentation of comprehensive income, one of three possible formats may be used:

• A single primary statement of income, other comprehensive income and accumulated other comprehensive income

containing both net income, other comprehensive income and a roll-forward of accumulated other comprehensive

income;

• A two-statement approach (a statement of comprehensive income and accumulated other comprehensive income, and

a statement of income); or

• A separate category highlighted within the primary statement of changes in stockholders’ equity.

All components of comprehensive income should be reported in the financial statements in the period in which they are

recognised. A total amount for comprehensive income should be displayed in the financial statement where the

components of other comprehensive income are reported.

Similar to IFRS as to the treatment of other comprehensive income, except for the following:

• Revaluations of land and buildings and intangible assets are prohibited under US GAAP.

• Actuarial gains and losses (when amortised out of accumulated other comprehensive income) are recognised through

the statement of operations under US GAAP.

JP GAAP The income statement must include the following items. Public companies and companies that report under the

Financial Instruments and Exchange Law are further required to present details of the following items in accordance with

the requirements of the Financial Instruments and Exchange Law.

• Revenue

• Cost of sales

• Selling, general and administrative expenses

• Non-operating income

• Non-operating expenses

• Special gains

• Special losses

Gross profit and loss, operating profit and loss, profit and loss from ordinary activities and current net income should be

presented under the multi-step format.

The total of income and expenses recognised in the period comprises net income. Comprehensive income is not

presented in the statement of comprehensive income (income statement) and the following items are recognised directly

in equity :

• Valuation differences arising from the revaluation of securities other than trading securities at fair value


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• Foreign exchange translation differences

• Gains and losses on deferred hedges

• Revaluation differences on land (recognised when permitted by land revaluation method. Recognised only once for a

certain land and cannot be reversed unless disposed of through sale or impaired).

There is no standard for cumulative differences arising from changes in accounting principles and standard for actuarial

gains and losses directly recognised in equity.

Exceptional (significant) items

IFRS The separate disclosure is required of items of income and expense that are of such size, nature or incidence that their

separate disclosure is necessary to explain the performance of the entity for the period. Disclosure may be on the face of

the statement of comprehensive income or in the notes. IFRS does not use or define the term ‘exceptional items’.

US GAAP Although the term ‘exceptional items’ is not used, but significant unusual or infrequently occurring items are disclosed as

components of income separate from continuing operations-either on the face of the statement of operations or in the

notes to the financial statements.

JP GAAP Exceptional items are required to be presented within the ‘special gains and losses’ caption on the face of the income

statement. The definition of ‘special’ is broader compared to IFRS and includes some extraordinary items.

Extraordinary items

IFRS Prohibited.

US GAAP Extraordinary items are defined as being both infrequent and unusual and are rare in practice.

JP GAAP These are presented in exceptional items.

Statement of changes in equity (Statement of changes in shareholders’ equity)

Presentation

IFRS Statement of changes in equity is presented as a primary statement showing: (a) total comprehensive income for the

period; (b) the effects of retrospective application or retrospective restatement for each component of equity; (c) the

amount of transactions with owners in their capacity as owners; and (d) a reconciliation between the carrying amount at

the beginning and the end of the period for each component of equity.

US GAAP SEC rules permit the statement to be presented either as a primary statement or in the notes.

JP GAAP Statement of changes in shareholders’ equity is presented as a primary statement showing; (a) shareholders’ equity, (b)

valuation and translation differences and (c) a reconciliation of carrying amount of stock subscription rights from the

opening balance to year end. There is no standard on cumulative differences arising from changes in accounting principles.


Exemptions

IFRS No exemptions.

US GAAP Limited exemptions for certain investment entities and defined benefit plans and certain other employee benefit plans.

JP GAAP No exemptions.

Direct/indirect method

IFRS Inflows and outflows of ‘cash and cash equivalents’ are reported in the cash flow statement. The cash flow statement

may be prepared using either the direct method (cash flows derived from gross cash receipts and payments associated

with operating activities) or the indirect method (cash flows derived from adjusting profit or loss for transactions of a

non-cash nature such as depreciation). The indirect method is more common in practice. Non-cash investing and

financing transactions are to be disclosed.


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US GAAP The cash flow statement provides relevant information about ‘cash receipts’ and ‘cash payments’. Similar to IFRS, either

the direct method or indirect method may be used. The latter is more common in practice. A reconciliation of net income

to cash flows from operating activities is disclosed if the direct method is used. Significant non-cash transactions are

disclosed.

JP GAAP Similar to IFRS.

Definition of cash and cash equivalents

IFRS Cash is cash on hand, and demand deposits and cash equivalents are short-term, highly liquid investments that are

readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. An investment

normally qualifies as a cash equivalent only when it has a maturity of three months or less from its acquisition date. Cash

and cash equivalent may also include bank overdrafts repayable on demand which form an integral part of an entity’s

cash management but not short-term bank borrowings which are considered to be financing cash flows.

US GAAP The definition of cash equivalents is similar to that in IFRS, except bank overdrafts are not included in cash and cash

equivalents; changes in the balances of overdrafts are classified as financing cash flows, rather than being included

within cash and cash equivalents.


Format

IFRS Cash flows from operating, investing and financing activities are classified separately.

US GAAP Whilst the headings are the same as IFRS, there is more specific guidance on items that are included in each category as

illustrated in the below table.


Classification of specific items

IFRS, US GAAP and JP GAAP require the classification of interest, dividends and tax within specific categories of the cash flow

statement.

ITEM IFRS US GAAP JP GAAP

Interest paid Operating or financing Operating1 Operating or financing3

Interest received Operating or investing Operating Operating or investing3

Dividends paid Operating or financing Financing Financing

Dividends received Operating or investing Operating Operating or investing3

Taxes paid Operating – unless specific identification with financing or investing

Operating1, 2 Operating

1 US GAAP has additional disclosure rules regarding supplemental disclosure of certain non-cash and cash transactions at the foot of the cash flow statement.

2 US GAAP has specific rules regarding the classification of the tax benefit associated with share-based compensation arrangements.

3 JP GAAP permits entities to choose either of the following; • Interests received/ Dividends received/ Interest paid: Operating. Dividends paid: Financing. • Interests received/ Dividends received: Investing. Interest paid/ Dividends paid: Financing.

Changes in accounting policy and other accounting changes

Changes in accounting policy

IFRS Changes in accounting policy upon initial application of a standard or an interpretation that does not include specific

transitional provisions applying to that change, or changes an accounting policy voluntarily are accounted for

retrospectively. Comparative information is restated, and the amount of the adjustment relating to prior periods is

adjusted against the opening balance of retained earnings of the earliest year presented. Effect of retrospective

adjustments on equity items is presented separately in the statement of changes in equity.

When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative

information for one or more prior periods presented, the entity should apply the new accounting policy to the carrying

amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is

practicable.


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When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new

accounting policy to all prior periods, the entity should adjust the comparative information to apply the new accounting

policy prospectively from the earliest date practicable.

Policy changes made on the adoption of a new standard are accounted for in accordance with that standard’s transition

provisions. The method described above is used if transition provisions are not specified.


JP GAAP There is no retrospective restatement in principle. The effect of changes to prior periods is included in net income for the

period, and the nature and effect of the changes need to be disclosed.

Correction of errors

IFRS The same method as for changes in accounting policy applies.

US GAAP Similar to IFRS, reported as a prior-period adjustment; restatement of comparatives is mandatory.

JP GAAP Generally included in net income for the period.

Changes in accounting estimates

IFRS Changes in accounting estimates are accounted for prospectively in profit or loss when identified. To the extent that a

change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be

recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.




Financial Statement Presentation

In October 2008, the IASB and the FASB published for public comment a Discussion Paper on financial statement presentation.

The Discussion Paper contains an analysis of the current issues in financial statement presentation and presents the Boards’ initial

thinking on how those issues could be addressed in a possible future format.

IFRSs and US GAAP provide only limited presentation guidance. In addition, presentation guidelines in US GAAP are dispersed

across standards. Moreover, users of financial statements have often expressed dissatisfaction that information is not linked across

the different statements and that dissimilar items are in some cases aggregated in one number.

To address these issues the IASB and the FASB propose to introduce cohesiveness and disaggregation as the two main objectives

for financial statement presentation to help users assess an entity’s liquidity and financial flexibility. Cohesiveness would ensure

that a reader of financial statements can follow the flow of information through the different statements of an entity; disaggregation

would ensure that items that respond differently to economic events are shown separately. To achieve these main objectives the

Boards have developed a principle-based format that is presented in the Discussion Paper.

Recent proposals – JP GAAP

Accounting Changes

In April 2009, the Accounting Standards Board of Japan issued exposure draft of ‘Proposed Accounting Standard on Accounting

Changes and Prior Errors’ (ED of Statement No. 33) and exposure draft of ‘Proposed Guidance on Accounting Standard for

Accounting Changes and Prior Errors’ (ED of Guidance No.32) to converge with IFRS on accounting changes.

REFERENCES: IFRS: IAS 1 (Revised), IAS 7, IAS 8, IAS 21, IFRS 5US GAAP: ASC 205, ASC 205-20, ASC 230, ASC 260, ASC 280, ASC 360-10, ASC 830, ASC 830-30-40-2 through 40-4, ASC 850JP GAAP: The Discussion Paper issued by Accounting Standards Board of Japan ‘Conceptual Framework of Financial Accounting’, Business Accounting Principle, The Corporate Calculation Regulations, Regulations on Financial Statements, Regulation on Accounting Standards for Consolidated Financial Statement, Accounting Standards for Preparing Consolidated Statement of Cash Flows, Accounting Standard for Presentation of Net Assets Section in the Balance Sheet, Guidance on Accounting Standard for Presentation of Net Assets Section in the Balance Sheet, Accounting Standard for Statement of Changes in Net Assets, Guidance on Accounting Standard for Statement of Changes in Net Assets


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Recent changes – IFRS and US GAAP

IAS 27R (Revised in January 2008)

The IASB issued IAS 27R, ‘Consolidated and separate financial statements’, in January 2008. This standard requires the effects of

all transactions with non-controlling interests to be recorded in equity if there is no change in control. They will no longer result in

goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is

re-measured to fair value and a gain or loss is recognised in profit or loss. This standard is effective for annual periods beginning

on or after 1 July 2009. Earlier application is permitted.

The FASB issued a guidance in December 2007 to establish accounting and reporting guidance for the noncontrolling interest in a

subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership

interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This guidance is

effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008.

IAS 27R and the new US guidance have converged in the broad principles, particularly related to the reporting of noncontrolling

interests in subsidiaries.

Guidance on Consolidation of VIE

The FASB issued guidance on the consolidation of variable interest entities (VIEs) in June 2009. This guidance will be effective as

of the beginning of entity’s first annual reporting period beginning after November 15, 2009. The new guidance requires an entity

with a variable interest in a VIE to qualitatively assess whether it has a financial interest in the entity and, if so, whether it is the

primary beneficiary. This significantly changes previous guidance, moving to a qualitative analysis from a quantitative analysis.

This guideline also requires enhanced disclosures to provide users of financial statements with more transparent information about

an enterprise’s involvement in a VIE.

With the issuance of this guidance, US GAAP does not converge with IFRS. Therefore, differences will still exist between the two

standards.

Investments in subsidiaries

Preparation

IFRS Parent entities prepare consolidated financial statements that include all subsidiaries. An exemption applies to a parent:

• that is itself wholly owned or if the owners of the noncontrolling interests have been informed about and do not object

to the parent not presenting consolidated financial statements;

• when the parent’s debt or equity securities are not publicly traded nor is it in the process of issuing securities in public

securities markets; and

• when the immediate or ultimate parent publishes consolidated financial statements that comply with IFRS.

The guidance applies to activities regardless of whether they are conducted by a legal entity. Subsidiaries are entities

(including special purpose entities “SPE”) that are controlled by another entity. This can be taken the form of a

corporation, trust, partnership or unincorporated entity.

US GAAP There are no exemptions for consolidating subsidiaries in general purpose financial statements. Consolidated financial

statements are presumed to be more meaningful and are required for SEC registrants.

JP GAAP Basically, public companies and companies that report under the Financial Instruments and Exchange Law are required

to prepare consolidated financial statements that include all subsidiaries.

Please also refer to additional guidance on scope exceptions for subsidiaries under ‘Common issues (subsidiaries, associates and

joint ventures)’.

Consolidation model and subsidiaries

The definition of a subsidiary, for the purpose of consolidation, is an important distinction between the three frameworks.


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IFRS Focuses on the concept of control in determining whether a parent/subsidiary relationship exists. Control is the parent’s

ability to govern the financial and operating policies of a subsidiary to obtain benefits from its activities. Control is

presumed to exist when a parent owns, directly or indirectly through subsidiaries, more than one half of an entity’s voting

power.

IFRS specifically requires potential voting rights to be assessed. Instruments that are currently exercisable or convertible

are included in the assessment, together with all facts and circumstances that affect potential voting rights except the

intention of management and the financial ability to exercise or convert).

Control also exists when a parent owns half or less of the voting power of an entity but has legal or contractual rights

with other investors to have the majority of the entity’s voting rights, to govern the entity’s financial and operating

policies, to appoint or remove the majority of the members of the board of directors or equivalent bodies, or to cast

majority votes at their meetings. A parent could have control over an entity in circumstances where it holds less than

50% of the voting rights of an entity and no legal or contractual rights by which to control the majority of the entity’s

voting power or board of directors (de facto control).

Control may exist even in cases where an entity owns little or none of an SPE’s equity but retains a significant beneficial

interest in the SPE’s activities. The application of the control concept requires, in each case, judgment in the context of

all relevant factors.

IFRS does not provide explicit guidance on silos. However, it does create an obligation to consider whether a

corporation, trust, partnership or other unincorporated entity has been created to accomplish a narrow and well-defined

objective. The governing document of such entities may impose strict and sometimes permanent limits on the decision-

making power of their governing board, trustees, etc. IFRS requires the consideration of substance over form and

discrete activities within a much larger operating entity to fall within its scope. When an SPE is identified within a larger

entity (including a non-SPE), the SPE’s economic risks, rewards and design are assessed in the same manner as any

legal entities.

When control of an SPE is not apparent, IFRS requires evaluation of every entity—based on the entity’s characteristics as

a whole—to determine the controlling party. The concept of economic benefit or risk is just one part of the analysis. Other

factors considered in the evaluation are the entity’s design (e.g., autopilot), the nature of the entity’s activities and the

entity’s governance.

The substance of the arrangement would be considered in order to decide the controlling party for IFRS purposes.

IFRS does not address the impact of related parties and de facto agents.

US GAAP Uses a bipolar consolidation model. All consolidation decisions are evaluated first under the variable interest entity (VIE)

model. US GAAP requires an entity with a variable interest in a VIE to qualitatively assess the determination of the primary

beneficiary of a VIE.

In applying the qualitative model an entity is deemed to have a controlling financial interest if it meets both of the

following criteria:

(1) Power to direct activities of the VIE that most significantly impact the VIEs economic performance (“power criterion”)

(2) Obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE

(“losses/benefits criterion”)

In assessing whether an enterprise has a controlling financial interest in an entity, it should consider the entity’s purpose

and design, including the risks that the entity was designed to create and pass through to its variable interest holders.

Only one enterprise, if any, is expected to be identified as the primary beneficiary of a VIE. Although more then one

enterprise could meet the losses/benefits criterion, only one enterprise, if any, will have the power to direct the activities

of a VIE that most significantly impact the entity’s economic performance.

Increased skepticism should be given to situations in which an enterprise’s economic interest in a VIE is disproportionately

greater then its stated power to direct the activities of a VIE that most significantly impact the entity’s economic

performance. As the level of disparity increases, the level of skepticism about an enterprise’s lack of power is expected to

increase.

US GAAP also includes specific guidance on interests held by related parties. A related-party group includes the

reporting entity’s related parties and de facto agents (close business advisers, partners, employees, etc.) whose actions

are likely to be influenced or controlled by the reporting entity.


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Individual parties within a related party group (including de facto agency relationships) are required to first separately

consider whether they meet both the power and losses/benefits criteria. If one party within the related party group meets

both criteria, it is the primary beneficiary of the VIE. If no party within the related party group on its own meets both criteria,

the determination of the primary beneficiary within the related party group is based on an analysis of the facts and

circumstances with the objective of determining which party is most closely associated with the VIE.

If the entity is a VIE, management should follow the US GAAP guidance below, under ‘Special purpose entities’.

Determination of whether an entity is a VIE gets reconsidered either when a specific reconsideration event occurs or, in

the case of a voting interest entity, when voting interests or rights change.

However, the determination of a VIE's primary beneficiary is an ongoing assessment.

While US GAAP applies to legal structures, the FASB has included guidance to address circumstances in which entity

with a variable interest shall treat a portion of the entity as a separate VIE if specific assets or activities (a silo) are

essentially the only source of payment for specified liabilities or specified other interests. A party that holds a variable

interest in the silo then assesses whether it is the silo’s primary beneficiary. The key distinction is that the US GAAP silo

guidance applies only when the larger entity is a VIE.

All other entities are evaluated under the voting interest model. Unlike IFRS, only actual voting rights are considered.

Under the voting interest model, control can be direct or indirect. In certain unusual circumstances, control may exist

with less than 50% ownership when contractually supported. The concept is referred to as effective control.

JP GAAP Under JP GAAP, an entity controlled by another entity (a controlling entity) is defined as a subsidiary of the controlling

entity. ‘Control’ is defined as being ‘an entity controls the decision-making body of another entity’. Control is deemed

effective in the following cases unless any rebuttable presumption exists. The decision making body of an entity is

defined as a body which decides financial and operating policies of the entity.

(1) Parent substantially owns more than half of an entity’s voting power

(2) Parent holds between 40% or more and less than 50% of the voting rights of an entity, but holds more than 50% of

the voting rights of an entity when combining those held by a party having a close relationship with the parent, or

certain facts exist indicating that parent control the decision-making body of the entity.

Special purpose entities

IFRS Special purpose entities (SPEs) are consolidated where the substance of the relationship indicates that an entity controls

the SPE. Control may arise through the predetermination of the activities of the SPE (operating on ‘autopilot’) or

otherwise. Indicators of control arise where:

• the SPE conducts its activities on behalf of the entity;

• the entity has the decision-making power to obtain the majority of the benefits of the SPE;

• the entity has other rights to obtain the majority of the benefits of the SPE and therefore expose to risks incident to the

activities of the SPE; or

• the entity has the majority of the residual or ownership risks of the SPE or its assets.

This guidance is applied to all SPEs, with the exception of post-employment benefit plans or other long-term employee

benefit plans. The guidance above applies to activities regardless of whether they are conducted by legal entity.

US GAAP Consolidation requirements focus on whether an entity is a VIE regardless of whether it would be considered an SPE.

Often, an SPE would be considered a VIE, since they are typically narrow in scope, often highly structured and thinly

capitalized, but this is not always the case. For example, clear SPEs benefit from exceptions to the variable interest

model such as pension, postretirement or postemployment plans.

The guidance above applies only to legal entities.

JP GAAP SPE which are established by the SPE law and other entities operating similar business as SPE in which the change of

operation is restricted are presumed not to be subsidiaries, if their purpose of the establishment is to make the owners

of equity instruments issued by those entities enjoy the return from the assets transferred to them at fair value and their

operation are conducted in accordance with that purpose.

Presentation of non-controlling interest

IFRS Non-controlling interests are presented as a separate component of equity in the statement of financial position. In the


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statement of comprehensive income, the non-controlling interests are presented on the face of the statement, but are not

deducted from profit or loss in the determination of consolidated earnings. A separate disclosure on the face of the

statement of comprehensive income attributing net earnings to the equity holders, i.e., owners of the parent and non-

controlling interests, is required.


JP GAAP Minority interests (non-controlling interests) are presented as a component of net assets separate from equity in the

balance sheet. In the income statement, net income is determined by adding/deducting minority interest income to/from

net income before minority interest income.

Disclosures

IFRS IFRS does not have SPE specific disclosure requirements. IFRS has several consolidation disclosure requirements which

include the following:

• Nature of relationship between parent and a subsidiary when parent does not own, directly or indirectly through

subsidiaries, more than half of voting power;

• Reasons why ownership, directly or indirectly through subsidiaries, of more than half of voting or potential voting power

of an investee does not constitute control;

• Date of financial statements of a subsidiary when such financial statements are used to prepare consolidated financial

statements and are as of a date or for a period that is different from that of the parent’s financial statements, and the

reason for using a different date or period;

• Nature and extent of any significant restrictions (e.g., resulting from borrowing arrangements or regulatory

requirements) on ability of subsidiaries to transfer funds to parent in the form of cash dividends or to repay loans or

advances;

• Schedule that shows effects of changes in a parent’s ownership interest in a subsidiary that do not result in a loss of

control on equity attributable to owners of parent; and

• if control of a subsidiary is lost, the parent shall disclose the gain or loss, if any, and:

(1) Portion of that gain or loss attributable to recognising any investment retained in former subsidiary at its fair value at

date when control is lost; and

(2) Line item(s) in the statement of comprehensive income in which gain or loss is recognised (if not presented separately

in the statement of comprehensive income).

Additional disclosures are required in instances when separate financial statements are prepared for a parent that elects

not to prepare consolidated financial statements, or when a parent, venturer with an interest in a jointly controlled entity

or an investor in an associate prepares separate financial statements.

US GAAP US GAAP requires greater disclosure about an entity’s involvement in VIEs/SPEs and applies to both non-public and

public enterprises. The principal objectives of disclosures are to provide financial statement users with an understanding

of the following:

• Significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or

disclose information about its involvement in a VIE

• The nature of restrictions on a consolidated VIE’s assets and on the settlement of its liabilities reported by an enterprise

in its statement of financial position, including the carrying amounts of such assets and liabilities

• The nature of, and changes in, the risks associated with an enterprise’s involvement with the VIE

• How an enterprise’s involvement with the VIE affects the enterprise’s financial position, financial performance, and cash

flows.

The level of disclosure to achieve these objectives may depend on the facts and circumstances surrounding the VIE and

the enterprise’s interest in that entity.

US GAAP provides additional detailed disclosure guidance in order to meet the objectives described above.

Guidance also calls for certain specific disclosures to be made by (1) a primary beneficiary of a VIE, and (2) an enterprise

that holds a variable interest in a VIE (but is not the primary beneficiary).


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JP GAAP For entities that are presumed not to be a subsidiary (so-called ‘disclosing SPEs’), disclosures are required, including a

general description of the transactions involving the SPE and the amount of transactions with the SPE

Employee share trusts (including employee share ownership plans)

Employee share-based payments are often combined with separate trusts that buy shares to be given or sold to employees.

IFRS The assets and liabilities of an employee share trust are consolidated by the sponsor if the employee share trust is an

SPE of the sponsor in accordance with SIC 12. An entity accounts for its own shares held by such a trust as treasury

shares under IAS 32, Financial Instruments: Presentation.

US GAAP For employee share trusts other than Employee Stock Ownership Plans (ESOPs), the treatment is generally consistent

with IFRS. Specific guidance applies for ESOPs, under ASC 718-40.

JP GAAP No specific guidance exists as employee share trusts are not common.

Investments in associates

Definition

IFRS An associate is an entity, including an unincorporated entity such as partnership, over which the investor has significant

influence – that is, the power to participate in, but not control, an associate’s financial and operating policies.

Participation by an investor in the entity’s financial and operating policies via representation on the entity’s board

demonstrates significant influence. A 20% or more interest by an investor in an entity’s voting rights leads to a

presumption of significant influence unless it can be clearly demonstrated that this is not the case.

US GAAP Similar to IFRS, although the term ‘equity investment’ rather than ‘associate’ is used. US GAAP does not include

unincorporated entities, although these would generally be accounted for in a similar way.

JP GAAP Similar to IFRS. An ‘associate’ is defined as a non subsidiary entity over which the parent company or its subsidiaries

can exert a significant influence on financial and operational or business policy decisions through investment, personnel,

financial, technological, or trade relationships. When a company holds at least 20% of another entity’s voting rights, the

company is presumed to have a significant influence over the entity.

Equity method

IFRS An investor accounts for an investment in an associate using the equity method. The investor presents its share of the

associate’s post-tax profits and losses after the date of acquisition in the statement of comprehensive income. The

investor recognises its proportionate interest in the associate arising from changes in the associate’s other

comprehensive income. The investor, on acquisition of the investment, accounts for the difference between the cost of

the acquisition and investor’s share of fair value of the net identifiable assets as goodwill. The goodwill is included in the

carrying amount of the investment.

The investor’s investment in the associate is stated at cost, plus its share of post-acquisition profits or losses, plus its

share of post-acquisition movements in reserves, less dividends received. Losses that reduce the investment to below

zero are applied against any long-term interests that, in substance, form part of the investor’s net investment in the

associate – for example, preference shares and long-term receivables or loans. Losses recognised in excess of the

investor’s investment in ordinary shares are applied to the other components of the investor’s interest in an associate in

the reverse order of priority in a winding up. Further losses are provided for as a liability only to the extent that the

investor has incurred legal or constructive obligations or made payments on behalf of the associate.

Disclosure of information is required about the revenues, profits or losses, assets and liabilities of associates.

Investments in associates held by venture capital organisations, mutual funds, unit trusts and similar entities including

investment-linked insurance funds can be designated as at fair value through profit or loss or are classified as held for

trading.

US GAAP Similar to IFRS if the equity method is applied. In addition, an entity can elect to adopt the fair value option for any of its

equity method investments. If elected, equity method investments are presented at fair value at each reporting period,

with changes in fair value being reflected in the income statement.

JP GAAP Similar to IFRS if the equity method is applied. Fair value option can not be applied.


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Investments in joint ventures

Definition

IFRS A joint venture is defined as a contractual arrangement whereby two or more parties undertake an economic activity that

is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity.

Unanimous consent of the parties sharing control, but not necessarily all parties in the venture, is required.

US GAAP The term joint venture refers only to jointly controlled entities, where the arrangement is carried on through a separate

entity. A corporate joint venture is defined as a corporation owned and operated by a small group of businesses as a

separate and specific business or project for the mutual benefit of the members of the group.

JP GAAP A joint venture is included in the definition of ‘jointly controlled entities’. ‘Joint control’ is the contractually agreed sharing

of control by multiple independent entities, and ‘jointly controlled entity’ is an entity jointly controlled by multiple

independent entities. Certain requirements should be satisfied for the formation of a ‘jointly controlled entity’. Joint

ventures that do not satisfy these requirements should apply standards for subsidiaries or affiliates.

Types

IFRS Distinguishes between three types of joint venture:

• jointly controlled entities – the arrangement is carried on through a separate entity (company or partnership);

• jointly controlled operations – each venturer uses its own assets for a specific project and the joint venture activities

may be carried out by the venturer’s employees alongside the venturer’s similar activities. The joint venture agreement

usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in

common are shared among the venturers; and

• jointly controlled assets – a project carried on with assets that are jointly owned in order to obtain benefits for the

venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the

expenses incurred.

US GAAP Only refers to jointly controlled entities, where the arrangement is carried on through a separate corporate entity.

Most joint venture arrangement give each venturer (investor) participating rights over the joint venture (with no single

venturer having unilateral control) and each party sharing control must consent to the venture’s operating, investing and

financing decisions.

JP GAAP Similar to US GAAP. Only refers to jointly controlled entities, where the arrangement is carried on through a separate

corporate entity.

Jointly controlled entities

IFRS Either the proportionate consolidation method or the equity method is allowed to account for a jointly controlled entity (a

policy decision that must be applied consistently). Proportionate consolidation requires the venturer’s share of the assets,

liabilities, income and expenses to be either combined on a line-by-line basis with similar items in the venturer’s financial

statements, or reported as separate line items in the venturer’s financial statements. A full understanding of the rights and

responsibilities conveyed in management agreements is necessary.

US GAAP Prior to determining the accounting model, an entity first assesses whether the joint venture is a VIE. If the joint venture is

a VIE, the accounting model discussed in the above section, ‘Special purpose entities’, is applied. Joint ventures often

have a variety of service, purchase and/or sales agreements as well as funding and other arrangements that may affect

the entity’s status as a VIE. Equity interests are often split 50-50 or near 50-50, making non equity interests (i.e., any

variable interests) highly relevant in consolidation decisions. Careful consideration of all relevant contracts and governing

documents is critical in the determination of whether a joint venture is within the scope of the variable interest model and,

if so, whether consolidation is required.

If the joint venture is not a VIE, venturers apply the equity method to recognise the investment in a jointly controlled entity.

Proportionate consolidation is generally not permitted except for unincorporated entities operating in certain industries.

JP GAAP Equity method is applied to jointly controlled entities.

Contributions to a jointly controlled entity

IFRS A venturer that contributes non-monetary assets, such as shares, property, plant and equipment or intangible assets to a

jointly controlled entity in exchange for an equity interest in the jointly controlled entity recognises in its consolidated


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statement of comprehensive income the portion of the gain or loss attributable to the equity interests of the other

venturers, except when:

• the significant risks and rewards of the contributed assets have not been transferred to the jointly controlled entity;

• the gain or loss on the assets contributed cannot be measured reliably; or

• the contribution transaction lacks commercial substance.

US GAAP As a general rule, an investor (venturer) records its contributions to a joint venture at cost (i.e., the amount of cash

contributed and the book value of other nonmonetary assets contributed). When a venturer contributes appreciated

noncash assets and others have invested cash or other hard assets, it may be appropriate to recognise a gain for a

portion of that appreciation. Practice and existing literature vary in this area. As a result, the specific facts and

circumstances affect gain recognition and require careful analysis.

JP GAAP Similar to USGAAP. As a general rule, an investor (venturer) records its contributions to a joint venture at cost.

Jointly controlled operations

IFRS A venturer recognises in its financial statements:

• the assets that it controls;

• the liabilities it incurs;

• the expenses it incurs; and

• its share of income from the sale of goods or services by the joint venture.

US GAAP Equity accounting is appropriate for investments in unincorporated joint ventures. The investor’s pro-rata share of assets,

liabilities, revenues and expenses are included in their financial statements in specific cases where the investor owns an

undivided interest in each asset of a non-corporate joint venture.

JP GAAP There is no specific standard for investments in unincorporated joint ventures.

Jointly controlled assets

IFRS A venturer accounts for its share of the jointly controlled assets, liabilities, income and expenses incurred by the joint

venture, and any liabilities and expenses it has incurred.

US GAAP Not specified. However, proportionate consolidation is used in certain industries to recognise investments in jointly

controlled assets.

JP GAAP There is no specific standard for investments in jojntly controlled assets.

Common issues (subsidiaries, associates and joint ventures)

Scope exclusion : for subsidiaries, associates and joint ventures

IFRS Investment in subsidiary, associate or joint venture that meets, on acquisition, the criteria to be classified as held for sale

in accordance with IFRS 5, applies the presentation for assets held for sale (i.e., separate presentation of assets and

liabilities to be disposed), rather than normal presentation (consolidation, equity method or proportionate consolidation).

A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual

fund, unit trust or similar entity.

US GAAP Investment in subsidiary, associate or joint venture held-for-sale may not be precluded from consolidation or equity

method of accounting. Unconsolidated subsidiaries are generally accounted for using the equity method unless the

presumption of significant influence can be overcome.

Industry-specific guidance precludes consolidation of controlled entities and equity method investees by certain types of

organisations, such as registered investment companies or broker/dealers.

JP GAAP Subsidiaries over which control is deemed temporary or subsidiaries that may significantly mislead stakeholders’

decision-making by the consolidation of those entities are not consolidated.


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Standards specify circumstances that presume that certain special purpose entities are not subsidiaries of investor or

circumstances for which investees for venture capital are not considered as subsidiaries.

Less significant subsidiaries are permitted to be excluded from consolidation and are accounted for under the equity

method.

Uniform accounting policies

IFRS Consolidated financial statements are prepared by using uniform accounting policies for like transactions and events in

similar circumstances for all of the entities in a group

US GAAP Similar to IFRS, with certain exceptions. Consolidated financial statements are prepared by using uniform accounting

policies for all of the entities in a group except when a subsidiary has specialised industry accounting principles.

Retention of the specialised accounting policy in consolidation is permitted in such cases. Further equity method

investee’s accounting policies may not conform to the investor’s accounting policies, if the investee follows an

acceptable alternative US GAAP treatment.

JP GAAP Similar to IFRS. However, when accounting policies applied by foreign subsidiaries are either IFRS or US GAAP, entities

may use them for the preparation of consolidated financial statements. However, reconciliations to JP GAAP are

required for significant items such as amortization of goodwill and others.

Reporting periods

IFRS The consolidated financial statements of the parent and the subsidiary are usually drawn up at the same reporting date.

However, the subsidiary accounts as of a different reporting date can be consolidated, provided the difference between

the reporting dates is no more than three months. The length of the reporting periods and any difference between the

ends of the reporting periods shall be the same from period to period. Adjustments are made for significant transactions

that occur in the gap period.

US GAAP Similar to IFRS, except that adjustments are generally not made for transactions that occur in the gap period. Disclosure

of significant events is required.

JP GAAP Similar to IFRS. The consolidated financial statements of the parent and the subsidiary are usually drawn up at the same

reporting date. However, the subsidiary accounts as of a different reporting date can be consolidated, provided the

difference between the reporting dates is no more than three months. In such case, significant differences in transactions

between consolidated entities, which occurred during the different reporting periods, are adjusted.

Impairment

IFRS Investments in subsidiaries, associates and joint ventures that are carried at cost are tested for impairment under IAS 36,

Impairment of Assets, whenever there is an indication that the carrying amount of the investment may not be recoverable.

IAS 36 provides examples of indicators of impairment, including the situation where the investor recognises a dividend

from the investment and there is evidence that (i) the carrying amount of the investment in the separate financial

statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including

associated goodwill or (ii) the dividend exceeds the total comprehensive income of the subsidiary, associate or jointly

controlled entity in the period the dividend is declared.

For investments in associates and joint ventures accounted for under the equity method, if the investor has objective

evidence of one of the indicators of impairment set out in IAS 39, for example, significant financial difficulty of the

associate or joint venture, the entire carrying amount of the investment is tested for impairment as prescribed under IAS

36, Impairment of Assets. Goodwill on the initial acquisition of the investment is not tested for impairment separately, as

it is not separately recognised.

When testing for impairment under IAS 36, the carrying amount of the investment is tested by comparing its recoverable

amount (higher of value in use and fair value less costs to sell) with its carrying amount as a single asset. In the

estimation of future cash flows for value in use, the investor may use either: its share of future net cash flows expected to

be generated by the investment (including the cash flows from its operations) together with the proceeds on ultimate

disposal of the investment; or the cash flows expected to arise from dividends to be received from the subsidiary,

associate or joint venture together with the proceeds on ultimate disposal of the investment. Under appropriate

assumptions, both methods give the same result.

US GAAP The impairment test under US GAAP is different to IFRS. Equity investments are considered impaired if the decline in

value is considered to be other than temporary. As such, it is possible for the fair value of the equity method investment

to be below its carrying amount, as long as that decline is temporary. If other-than-temporary impairment is determined

to exist, the investment is written down to fair value.


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JP GAAP The impairment is required for investments in subsidiaries, associates and joint ventures as securities. Investments with a

quoted market price are valued at market value when their market value declined significantly, unless market value is

expected to be recoverable. Investments without a quoted market price are impaired when there is a significant decline

in the actual price of the investment due to a deterioration of financial position of the issuing entity. In both cases, the

valuation differences are accounted for as current period losses.

Recent proposals – IFRS

Exposure Draft 9, Joint Arrangements

In September 2007 the IASB issued Exposure Draft 9, Joint Arrangements, which would amend existing provisions of IAS 31. The exposure draft’s core principle is that parties to a joint arrangement recognise their contractual rights and obligations arising from the arrangement. The exposure draft therefore focuses on the recognition of assets and liabilities by the parties to the joint arrangement. The scope of the exposure draft is broadly the same as that of IAS 31. That is, unanimous agreement is required between the key parties that have the power to make financial and operating policy decisions for the joint arrangement.

Exposure Draft 9 proposes two key changes. The first is the elimination of proportionate consolidation for a jointly controlled entity. This is expected to bring improved comparability between entities by removing the policy choice. The elimination of proportionate consolidation would have a fundamental impact on the statement of comprehensive income and statement of financial position for some entities, but it should be straightforward to apply.

The second change is the introduction of a dual approach to the accounting for joint arrangements. Exposure Draft 9 carries forward—with modification from IAS 31—the three types of joint arrangement, each type having specific accounting requirements. The first two types are Joint Operations and Joint Assets. The description and the accounting for them are consistent with Jointly Controlled Operations and Jointly Controlled Assets in IAS 31. The third type of joint arrangement is a Joint Venture, which is accounted for by using equity accounting. A Joint Venture is identified by the party having rights to only a share of the outcome of the joint arrangement. The key change is that a single joint arrangement may contain more than one type. Parties to such a joint arrangement account first for the assets and liabilities of the Joint Assets arrangement and then use a residual approach to equity accounting for the Joint Venture part of the joint arrangement.

At the April 2008 Board Meeting the staff presented a summary of the comment letters received in response to the Exposure Draft ED 9 Joint Arrangements. Many respondents disagreed with the removal of the proportionate consolidation method. The Board is contacting the respondents to gain a better understanding of whether their concerns reflect problems with the wording of the ED or a more fundamental concern with the technical decisions underpinning the proposals. The Board is planning to bring the results of those enquiries and the areas of the ED where modifications or additional clarification are considered needed and highlight how this is expected to affect the final standard.

The Board currently expects to publish a final standard in the forth quarter of 2009.

Exposure Draft 10, Consolidation

In December 2008, the IASB published ED 10, ‘Consolidation’. The exposure draft proposes a single definition of control that would apply to all entities, including SPEs. Concern is that applying the existing requirements of SIC 12 for SPEs and IAS 27 for all other entities may have lead to inconsistencies. The exposure draft also includes additional application guidance on a number of topics such as protective rights, agency relationships, power to direct the activities of an entity without majority of the voting rights (including de facto control and potential voting rights) and structured entities. Finally, it increases the disclosure requirements for both consolidated and unconsolidated entities, in order that investors can assess the extent to which a reporting entity has been involved in setting up special structures and the risks to which these special structures expose the entity.

Groups will need to consider these proposals carefully as the entities presently consolidated may change. The eventual standard will replace IAS 27, and SIC 12.

The Board held roundtables in June 2009 to discuss the proposals and the most contentious issues raised in the respondents’ comment letters. The Board currently expects to publish a final standard in the second half of 2009.


Discussion Paper on Treatment of Special Purpose Entities and Related Matters in Consolidated Financial Statements

In February 2009, ASBJ published ”Discussion Paper on Treatment of Special Purpose Entities and Related Matters in Consolidated Financial Statements” that includes issues on treatment of special purpose entities and related disclosures in consolidated financial statements, definition of control, application of effective control, entities subject to consolidation and issues on subsidiaries over which control is temporary.

REFERENCES: IFRS: IAS 1(Revised in 2007), IAS 27(Revised), IAS 28(Revised), IAS 32, IAS 36, IAS 39, IFRS 5, SIC 12, SIC 13US GAAP: ASC 205-20, ASC 323, ASC 323-10-15-8 through 15-11, ASC 325-20, ASC 360-10, ASC 718-40, ASC 810, ASC 810-10-25-1 through 25-14, ASC 810-10-60-4, ASC 825, ASC 840-10-45-4, SAB Topic 5HJP GAAP: Practical Treatment on Changing the Scope of Subsidiaries and Associated Companies Included in Consolidated Financial Statements, Accounting Standard for Equity Method, Practical Solution on Accounting in Associates Accounted for Using Equity Method, Practical Guidelines on Accounting Under the Equity Method, Accounting Standard for Financial Instruments, Accounting Standards for Business Combinations, Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures, Accounting Standard for Consolidated Financial Statements, Announcement of Guidance on Determining a Subsidiaries and an Affiliate


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Business combinations

Recent changes – IFRS and US GAAP

IFRS 3 (revised January 2008) and a new US standard for business combination

In June 2007, the IASB and FASB voted to approve the issuance of a joint standard on business combinations. Subsequently, the

IASB and FASB issued new standards on business combination in January 2008 and December 2007 respectively to replace the

previous standards. The joint standard resulted in significant changes to the accounting for business combinations under both

IFRS and US GAAP and with greater impact on US GAAP. Many historical differences were eliminated, although certain important

differences remained. There are significant recognition differences, at the acquisition date, with respect to contingent assets and

contingent liabilities. In subsequent accounting, there are significant differences in the requirements for impairment testing and

accounting for deferred taxes.

The IASB’s new standard IFRS 3R applies prospectively to business combinations for which the acquisition date is on or after the

beginning of the first annual reporting period beginning on or after July 1 2009. The new US standard applies prospectively to

business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on

or after Dec. 15, 2008. Early application of IFRS 3R is permitted but early application is prohibited for the new US standard.

This chapter is prepared considering the differences between IFRS 3R and the above new US standard.

Recent changes – JP GAAP

An amended standard for business combination

In December 2008, the Accounting Standards Board of Japan (ASBJ) issued an amended accounting standard for business

combination. The amendment solved a number of differences between IFRS; however several significant differences including

goodwill amortization still remain. The amended standard applies to business combination entered into on and after April 1, 2010

and this chapter is prepared under the revised JP standard.

Definition

Both IFRS and US GAAP define business combination as a transaction or other event in which an acquirer obtains control of one or

more businesses.

IFRS Business combinations within the scope of IFRS 3R are accounted for as acquisitions. The acquisition method of

accounting applies.

A business is defined in IFRS 3R as an integrated set of activities and assets that is capable of being conducted and

managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly

to investors or other owners, members or participants. A business generally consists of inputs, and processes applied

to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required

for an integrated set to qualify as a business. If goodwill is present in a transferred set of activities and assets, the

transferred set shall be presumed to be a business in the absence of evidence to the contrary.

IFRS 3R excludes a presumption that an integrated set in the development stage is not a business merely because it has

not yet commenced its planned principal operations.

US GAAP Similar to IFRS in the definition of a business. The use of purchase method of accounting is required for most business

combinations if the acquired entity meets the definition of a business.

Development-stage enterprises that have no outputs may still be considered businesses.

JP GAAP The purchase method is applied.

Acquisitions

Date of acquisition

IFRS The date on which the acquirer obtains control over the acquiree.


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Identifying the acquirer

IFRS The acquirer is determined by reference to IAS 27R, under which the general presumption is the party that holds greater

than 50% of the voting power has control. In addition, there are several instances where control may exist if less than

50% of the voting power is held by an entity,

IFRS 3R does not have guidance related to primary beneficiaries.

US GAAP The acquirer is determined by reference to ASC 810-10, under which the general guidance is that the party that holds

directly or indirectly greater than 50% of the voting shares has control, unless the acquirer is the primary beneficiary of a

VIE

JP GAAP Similar to IFRS. Controlling party is identified by looking at the proportion of voting rights, rights for appointment and

dismissal of board member, member of board and terms of exchange of shares.

Consideration transferred

The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the

acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the

acquiree, and the equity interests issued by the acquirer.

Share-based consideration

IFRS Shares issued as consideration are recorded at their fair value as at the acquisition date. Where control is achieved in a

single transaction the acquisition date will be the date on which the acquirer obtains control over the acquiree’s net

assets and operations.

US GAAP Similar to IFRS. Shares issued as consideration are measured at their fair values as at the date the acquirer achieves control.

JP GAAP Similar to IFRS. Shares issued as consideration are calculated based on the stock price at business combination in

principle if acquirer’s stocks with a quoted market price are delivered as consideration for acquisition.

Restructuring provisions

IFRS The acquirer may recognise restructuring provisions as part of the acquired liabilities only if the acquiree has an existing

liability at the acquisition date for a restructuring recognised in accordance with IAS 37, Provisions, Contingent Liabilities

and Contingent Assets.

A restructuring plan that is conditional on the completion of the business combination is not recognised in the accounting

for the acquisition. It is recognised post-acquisition and the expenses flow through post-acquisition earnings.

US GAAP Similar to IFRS. Recognised as part of the acquisition only if the acquiree has an existing liability at the acquisition date.

JP GAAP ‘Restructuring provision’ or other related terms are not used in JP GAAP. Expenses or losses corresponding to certain

events expected to occur after acquisition are recognised as liability, if the likelihood of such occurrence is reflected in

the calculation of the consideration for acquisition. Different from IFRS, such liability need not meet the requirements for

provisions.


IFRS If part of the purchase consideration is contingent on a future event, such as achieving certain profit levels, IFRS 3R

requires the contingent consideration be recognised initially at fair value. A right to the return of previously transferred

consideration is recognised as an asset. An obligation to pay contingent consideration is recognised as either a liability or

equity. Financial liabilities are remeasured to fair value at each reporting date. Any changes in estimates of the expected

cash flows outside the measurement period are recognised as profit or loss. Other liabilities should be accounted for in

accordance with IAS 37 or other IFRSs as appropriate. Equity-classified contingent consideration is not remeasured at

each reporting date. Settlement is accounted for within equity.

US GAAP US GAAP requires contingent consideration be measured initially at fair value. In subsequent periods outside the

measurement period, changes in the fair value of contingencies classified as assets or liabilities will be recognised in

earnings. Equity-classified contingent consideration is not remeasured at each reporting date; settlement is accounted

for within equity.


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JP GAAP Contingent consideration shall be accounted for when it becomes transferable or deliverable, and its market price

becomes reasonably determinable. Where contingent consideration is contingent on future performance, additional

consideration payable shall be recognised as acquisition cost and additional goodwill shall be recognised accordingly.

Where contingent consideration is contingent on the market price of specific equity shares or corporate bonds, it shall be

additionally recognised at the fair value as at additional delivery of equity shares or bonds, and shares and bonds

delivered as at business combination are remeasured at fair value and the resulting premiums and discounts for bonds

are amortized prospectively.

Transaction costs

IFRS Transaction costs (e.g., professional fees) are expensed and are not included in the business combination accounting.


JP GAAP Transaction costs regarded as consideration for acquisition are included in acquisition cost, with the remaining

transaction costs recognised as period expenses.

Recognition and measurement of identifiable assets and liabilities acquired

IFRS, US GAAP and JP GAAP require separate recognition, by the acquirer, of the acquiree’s identifiable assets acquired and

liabilities assumed and contingent liabilities that existed at the date of acquisition. Contingent liabilities are assumed in a business

combination if it is a present obligation that arises from past events and its fair value can be measured reliably. These assets and

liabilities are generally recognised at fair value at the date of acquisition with certain exceptions, including deferred tax assets and

liabilities, liabilities related to the acquiree’s employee benefit arrangements, indemnification assets, reacquired rights, share-based

payment awards and non-current assets held for sale.

Intangible assets

IFRS An intangible asset is recognised separately from goodwill if it represents contractual or legal rights or is capable of being

separated or divided and sold, transferred, licensed, rented or exchanged, either individually or together with a related

contract, identifiable asset or liability.

Acquired in-process research and development (IPR&D) is recognised as a separate intangible asset if it is identifiable. In

subsequent periods, the intangible assets would be subject to amortization upon completion or impairment testing.

Non-identifiable intangible assets are subsumed within goodwill.


JP GAAP An intangible asset is recognised if it represents legal rights or is capable of being separately transferred for which an

independent value can be reasonably allocated. Costs for acquired R&D in process are recognised as intangibles similar

to IFRS.

Acquired contingencies

IFRS The acquiree’s contingent liabilities are recognised separately at the acquisition date as part of allocation of the cost,

provided they arise from past event and their fair values can be measured reliably.

The contingent liability is measured subsequently at the higher of the amount initially recognised or, if qualifying for

recognition as a provision, the best estimate of the amount required to settle (under the provisions guidance).

Contingent assets are not recognised.

US GAAP Acquired liabilities and assets subject to contractual contingencies are recognised at fair value if fair value can be

determined during the measurement period. If fair value can not be determined, companies should typically account for

the acquired contingencies using existing guidance.

An acquirer shall develop a systematic and rational basis for subsequently measuring and accounting for assets and

liabilities arising from contingencies depending on their nature.

JP GAAP Generally, contingent liabilities are recognised for the portion satisfying the general accounting standard for provisions.

There is no requirement for recognising contingent assets.

Goodwill

IFRS Goodwill is not amortised but reviewed for impairment annually and when indicators of impairment arise, at the cash-

generating-unit (CGU) level, or group of CGUs, as applicable. CGUs may be aggregated for purposes of allocating


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goodwill and testing for impairment. Groupings of CGUs for goodwill impairment testing cannot be larger than an

operating segment.

US GAAP Similar to IFRS. Goodwill is not amortised but reviewed for impairment at least annually at the reporting unit level.

Goodwill is assigned to one or more of an entity’s reporting units (i.e., an operating segment) or one level below (i.e., a

component). The level of testing may be more different than under IFRS.

JP GAAP Goodwill is amortised regularly, on a straight-line basis, or other reasonable basis, over the period up to 20 years.

Impairment of goodwill is assessed when an indicator of impairment is identified.

Goodwill impairment

IFRS A one-step impairment test is performed. The recoverable amount of the CGU (i.e., the higher of its fair value less costs to

sell and its value in use) is compared to its carrying amount. The impairment loss is recognised in operating results as the

excess of the carrying amount over the recoverable amount. Impairment is allocated first to goodwill. Allocation is made

on a pro rata basis to the CGU’s other assets to the extent that the impairment loss exceeds the book value of goodwill.

US GAAP A two-step impairment test is required:

1) The fair value and the carrying amount of the reporting unit including goodwill are compared. Goodwill is considered to

be impaired if the fair value of the reporting unit is less than the carrying amount; and

2) Goodwill impairment is measured as the excess of the carrying amount of goodwill over its implied fair value. The

implied fair value of goodwill—calculated in the same manner that goodwill is determined in a business combination—

is the difference between the fair value of the reporting unit (or one level below) and the fair value of the various assets

and liabilities included in the reporting unit (or one level below). The impairment charge is included in operating

income. The loss recognised cannot exceed the carrying amount of goodwill.

JP GAAP Impairment test is performed by either of the following two methods since goodwill does not by itself generate cash-

flows.

1) In principle, test by a larger group unit, by adding the goodwill to multiple asset groups related to business to which

the goodwill is attributed.

2) Test by each asset group, when goodwill can be reasonably allocated to each asset group.

Similar to IFRS, impairment is first allocated to goodwill. Allocation is made on a pro rata basis to the CGU’s other assets

to the extent that the impairment loss exceeds the book value of goodwill.

Bargain purchase (“negative goodwill”)

IFRS If the amount of goodwill determined is negative, the acquirer reassesses the identification and measurement of the

acquiree’s identifiable assets, liabilities and contingent liabilities, the non-controlling interests (if any), the acquirer’s

previously held interest (if any) and the consideration transferred. If there is any excess remaining after reassessment, the

resulting gain shall be recognised in profit or loss on the acquisition date. The gain is attributed to the acquirer.



Subsequent adjustments to assets and liabilities

IFRS Adjustments against goodwill to the provisional fair values recognised at acquisition are permitted provided those

adjustments are made within 12 months of the acquisition date to reflect new information obtained about facts and

circumstances that existed as of the acquisition date. Adjustments made after 12 months are recognised in profit or loss.

Measurement-period adjustments to the provisional amounts are recognised as if the accounting for the business

combination had been completed at the acquisition date. Thus, the acquirer should revise comparative information for

prior periods presented in financial statements as needed, including making any change in depreciation, amortisation or

other income effects recognised in completing the initial accounting.


JP GAAP Similar to IFRS and US GAAP, adjustments should be made against goodwill within 12 month subsequent to the date of

the business combination. When adjustments are made in any fiscal year following the first fiscal year of the business

combination, adjustments related to prior years should be charged to profit and loss.


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Noncontrolling interests at acquisition (Minority interests)

IFRS Where an investor acquires less than 100% of a subsidiary, the noncontrolling interests are stated on the investor’s

statement of financial position either at the fair value of their proportion of identifiable net assets or at full fair value, at the

option of the entity on a business combination by business combination basis. In addition, no gains or losses will be

recognised in earnings for further transactions between the parent company and the noncontrolling interests—unless

control is lost.

US GAAP Non-controlling interest is measured at fair value. In addition, no gains or losses are recognised in earnings for

transactions between the parent company and the noncontrolling interests—unless control is lost.

JP GAAP When an investor acquires less than 100% of a subsidiary, the minority interests (noncontrolling interests) are stated on

the investor’s balance sheet (statement of financial position) at the fair value of their proportion of identifiable net assets.

If control is not lost, transactions between parent and minority interests (non-controlling interests) are recognised as

goodwill at additional acquisition and as gain or loss on sales at partial divestitures.

Fair Value

IFRS Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing

parties in an arm’s length transaction.

The fair value definition of a liability uses a settlement concept.

The fair value of financial instruments should reflect the credit quality of the instrument, and generally the entity’s own

credit risk. However, the fair value of nonfinancial liabilities may not necessarily consider the entity’s own credit risk.

US GAAP Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date.

The exchange price represents an exit price under US GAAP, while IFRS does not specifically refer to either an entry or

exit price.

The fair value definition of a liability is based on a transfer concept and reflects nonperformance risk, which generally

considers the entity’s own credit risk.

JP GAAP Similar to IFRS. However, the fair value of the debt instrument should not reflect the entity’s own credit risk.

Pooling (uniting) of interests method

IFRS, US GAAP and JP GAAP prohibit the use of this method of accounting if the transaction meets the definition of a business

combination and the combination is within the scope of the relevant standards.

Business combinations involving entities under common control

IFRS Does not specifically address such transactions. Entities should develop and apply consistently an accounting policy;

management can elect to apply acquisition accounting or merger accounting (otherwise known as ‘predecessor

accounting’ method) to a business combination involving entities under common control. The accounting policy can be

changed only when the criteria in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, are met.

Related-party disclosures are used to explain the impact of transactions with related parties on the financial statements.

US GAAP Specific rules exist for accounting for combinations of entities under common control. Such transactions are generally

recorded at predecessor cost, reflecting the transferor’s carrying amount of the assets and liabilities transferred.

JP GAAP Similar to US GAAP. Basically, transactions under common control are required to be recorded based on book value

measured prior to the transfer.

Step acquisitions (investor obtaining control through more than one purchase)

IFRS When entities obtain control through a series of acquisitions (step acquisitions) the entity will remeasure any previously

held equity interests to fair value, with any gain or loss recorded through profit or loss.


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Employee benefit arrangements, including share-based payments and income tax

Accounting for share-based payments and income taxes in accordance with IFRS and US GAAP, not at fair value, may result in

significantly different results being recorded as part of acquisition accounting.

Under JP GAAP, when an acquirer’s stock warrants are issued in exchange for the acquiree’s stock warrants, the stock warrants are

measured at fair value. Unlike IFRS and US GAAP, deferred taxes are not measured at fair value and are required to be accounted for

separately under JP GAAP.

REFERENCES: IFRS: IAS 12, IAS 27 (Revised), IFRS 3 (Revised), SIC 12, SIC 9US GAAP: ASC 205-20, ASC 350-10, ASC 350-20, ASC 350-30, ASC 360-10, ASC 805JP GAAP: Accounting Standards for Business Combination, Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures. Practical Guidelines on Accounting Standards for Capital Consolidation Procedures in Preparing Consolidated Financial Statements, Accounting Standards for Impairment of Fixed Assets, Guidance on Accounting Standards for Impairment of Fixed Assets


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Revenue recognition

Revenue

Definition

IFRS Income is defined in the IASB’s Framework as including revenues and gains. The standard IAS 18, Revenue, defines

revenue as the gross inflow of economic benefits during the period arising from the ordinary activities of an entity when

the inflows result in an increase in equity, other than increases relating to contributions from equity participants.

US GAAP Revenue is defined by the Concept Statement to represent actual or expected cash inflows (or the equivalent) that have

occurred or will result from the entity’s major ongoing operations.

JP GAAP There is no currently-effective accounting standard which defines “revenue” explicitly. The Discussion Paper ‘Conceptual

Framework of Financial Accounting’ defines revenue as an item which increases net income or minority interest income

and expenses and is, in principle, created along with the increase of assets or the decrease of liabilities.

Measurement

IFRS and US GAAP require measurement of revenues at the fair value of the consideration received or receivable. This is usually the

amount of cash or cash equivalents received or receivable. Discounting to present value is required under IFRS where the inflow of

cash or cash equivalents is deferred, and in limited situations under US GAAP.

Under JP GAAP, there is no written standard which specifies measurement of revenues. Generally, the amount of cash or cash

equivalents received or receivable is used to measure revenue; and the amount is not discounted to present value in accounting

practice.

Revenue recognition

IFRS Specific criteria for the sale of goods, the rendering of services, and interest, royalties, dividends and construction

contracts need to be met in order to recognise revenue. The revenue recognition criteria common to each of these are

the probability that the economic benefits associated with the transaction will flow to the entity and that the revenue and

costs can be measured reliably.

Additional recognition criteria apply to revenue arising from the sale of goods as shown in the table below. Interest

revenue is recognised on a basis that takes into account the asset’s effective yield. Royalties are recognised on an

accrual basis. Dividends are recognised when the shareholder’s right to receive payment is established.

The principles laid out within each of the categories are generally to be applied without significant further rules and/or

exceptions.

US GAAP The guidance is extensive and this may lead to significant differences in practice. Historically, there were a number of

different sources of revenue recognition guidance, such as FASs, SABs, SOPs, and EITFs. While the FASB’s codification

project has put authoritative US GAAP in one place, it has not impacted the volume and/or nature of the guidance. US

GAAP focuses more on revenues being realised (either converted into cash or cash equivalents, or the likelihood of its

receipt being reasonably certain) and earned (no material transaction pending and the related performance has occurred).

Revenue recognition involves an exchange transaction – i.e., there should be no revenue recognition unless and until an

exchange has taken place. Additional guidance for SEC registrants sets out criteria that an entity should meet before

revenue is realised and earned (compared to IFRS in the table below). SEC pronouncements also provide guidance

related to specific revenue recognition situations.

JP GAAP ‘Realisation principles’ for revenue recognition are indicated in accounting standards. However there is no

comprehensive guideline that specifies the concept. It is often interpreted that “completion of transfer of goods or

rendering of services” and “receipt for corresponding consideration (e.g., in the form of cash or receivables)” are the

conditions to meet the concept.

Revenue recognition criteria for the sale of goods

IFRS US GAAP JP GAAP

The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.

Persuasive evidence of an arrangement exists, and delivery has occurred

Goods are transferred.

The entity retains neither continuing managerial involvement nor effective control over the goods.

Delivery has occurred. Goods are transferred.


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The amount of revenue can be measured reliably.

Vendor’s price to the buyer is fixed or determinable.

Consideration is paid.

It is probable that economic benefits will flow to the entity.

Vendor’s price to the buyer is fixed or determinable, and its collectibility is reasonably assured.

Consideration is paid.

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Vendor’s price to the buyer is fixed or determinable, and its collectibility is reasonably assured.

Goods are transferred.

Specific revenue recognition issues


IFRS For the sale of a good, one looks to the general recognition criteria as follows:

• The entity has transferred to the buyer the significant risks and rewards of ownership;

• The entity retains neither continuing managerial involvement to the degree usually asociated wiht ownership nor

effective control over the goods sold;

• The amount of revenue can be measured reliably;

• It is probable that the economic beneifts associated with the transaction will flow to the entity; and

• The costs inclurred or to be incurred in respect of the transaction can be measured reliably.

As such, assuming that the other revenue recognition criteria are met, IFRS specifically calls for consideration of the

probability of the benefits flowing to the entity as well as the ability to reliably measure the associated revenues. If it

were not probable that the economic benefits would flow to the entity or if the amount of revenue could not be reliably

measured, recognition of the contingent portion would be postponed until such time as all of the criteria are met.

US GAAP General guidance associated with contingencies around consideration is addressed within SAB Topic 13 and the concept

of the seller’s price to the buyer being fixed or determinable.

Even when delivery has clearly occurred (or services have clearly been rendered) the SEC has emphasized that revenue

related to contingent consideration should not be recognised until the contingency is resolved. Said another way, it is not

appropriate to recognise revenue based upon the probability of a factor being achieved.

JP GAAP No specific guidance. However, its treatment is similar to IFRS in practice.

Sales of goods - continuous transfer method

IFRS When an agreement is for the sale of goods and is outside the scope of construction accounting, an entity considers

whether or not all of the sale of goods revenue recognition criteria are met continuously as construction progresses.

When all of the continuous transfer criteria are achieved, an entity recognises revenue by reference to the stage of

completion using the percentage of completion method. The requirements of the construction contracts guidance are

generally applicable to the recognition of revenue and the associated expenses for such continuous transfer transactions.

Achieving the continuous transfer requirements is expected to be relatively rare in practice.

US GAAP Other than construction accounting, US GAAP does not have a separate model equivalent to the continuous transfer

notion for sale of goods.

JP GAAP Similar to US GAAP.

Rendering services

IFRS IFRS requires that service transactions be accounted for by reference to the stage of completion of the transaction. This

method is often referred to as the percentage-of-completion method. The stage of completion may be determined by a

variety of methods (including the cost-to-cost method). Revenue may be recognised on a straight-line basis if the

services are performed by an indeterminate number of acts over a specified period of time and no other method better

represents the stage of completion. Revenue may have to be deferred in instances where a specific act is much more

significant than the other acts specified in an arrangement.


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Revenue may be recognised only to the extent of expenses incurred that are recoverable when the outcome of a service

transaction cannot be measured reliably. That is, a zero-profit model would be utilized, as opposed to a completed-

performance model. If the outcome of the transaction is so uncertain that recovery of costs is not probable, revenue

would need to be deferred until a more accurate estimate could be made.

US GAAP US GAAP prohibits the use of the cost-to-cost percentage-of-completion method to recognise revenue under service

arrangements unless the contract is within the scope of specific guidance for construction or certain production-type

contracts.

Generally, companies would have to apply the proportional-performance (based on output measures) model or the

completed-performance model. In limited circumstances where output measures do not exist, input measures, which

approximate progression toward completion, may be used. Revenue is recognised based on a discernible pattern and if

none exists, then the straight-line approach may be appropriate.

Revenue is deferred where the outcome of a service transaction cannot be measured reliably.

JP GAAP There is no standard which explicitly specifies the accounting for service transactions. However, it is a common practice

that revenue is recognised based on passage of time, for services rendered over time pursuant to written arrangements,

otherwise upon completion of the service. In general, the percentage-of-completion method is not applied to those other

than construction contracts or made-to-order software development.

Rendering services – right of refund

IFRS Service arrangements that contain a right of refund must be considered in order to determine whether the outcome of the

contract can be estimated reliably and whether it is probable that the company would receive the economic benefit

related to the services provided.

When reliable estimation is not possible, revenue is recognised only to the extent of the costs incurred that are probable

of recovery.

US GAAP A right of refund may preclude recognition of revenues from a service arrangement until the right of refund expires.

In certain circumstances, companies may be able to recognise revenues over the service period—net of an allowance—if

certain criteria within the guidance are met.

JP GAAP There is no guidance for service arrangements that contain a right of refund. It is generally interpreted that revenues

cannot be recognised where receipt of consideration for rendered services has not been obtained.

Multiple-element arrangements

General

IFRS The revenue recognition criteria are usually applied separately to each transaction. In certain circumstances, however, it

is necessary to separate a transaction into identifiable components in order to reflect the substance of the transaction.

When identifiable components have stand alone value and their fair value can be measured reliably, separation is

appropriate. At the same time, two or more transactions may need to be grouped together when they are linked in such

a way that the whole commercial effect cannot be understood without reference to the series of transactions as a whole.

The price that is regularly charged when an item is sold separately is the best evidence of the item’s fair value. At the

same time, under certain circumstances, a cost-plus-reasonable-margin approach to estimating fair value would be

appropriate under IFRS. Under rare circumstances, a reverse residual methodology may be acceptable.

The use of either the cost-plus or the reverse residual method under IFRS may allow for the separation of more

components/elements than would be achieved under US GAAP.

US GAAP Revenue arrangements with multiple deliverables are separated into different units of accounting if the deliverables in the

arrangement meet all of the specified criteria outlined in the guidance. Revenue recognition is then evaluated for each

separate unit of accounting.

The US GAAP concept of separating potential units of accounting and identifying/measuring the fair value of a potential

unit of accounting looks to market indicators of fair value and generally does not allow, for example, an estimated internal

calculation of fair value based on costs and an assumed or reasonable margin.


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When there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement

consideration should be allocated to the separate units of accounting based on their relative fair values.

When fair value is known for the undelivered items, but not for the delivered item, a residual approach can be used.

The reverse-residual method—when objective and reliable evidence of the fair value of an undelivered item or items does

not exist—is precluded unless other US GAAP guidance specifically requires the delivered unit of accounting to be

recorded at fair value and marked to market each reporting period thereafter.

Refer to the “Recent proposals” section below for proposed changes to US GAAP multiple-element arrangements

guidance.

JP GAAP There is no guidance for revenue recognition of multiple-element arrangements except for software transactions and

construction contracts.

Multiple-element arrangements – software revenue recognition

IFRS No specific software revenue recognition guidance exists. Fees from the development of customised software are

recognised as revenue by reference to the stage of completion of the development, including completion of services

provided for post-delivery customer support service.

US GAAP Unlike IFRS, US GAAP provides specific guidance on software revenue recognition for software vendors, in particular for

multiple-element arrangements. A value is established for each element of a multiple-element arrangement, based on

vendor-specific objective evidence (VSOE) or other evidence of fair value. VSOE is generally limited to the price charged

when elements are sold separately. Consideration is allocated to separate units based on their relative fair values;

revenue is recognised as each unit is delivered.

JP GAAP In software transactions, when the contents and the amounts of each component of a contract (e.g., goods to sell,

services to render) are agreed with customers (users), entities should appropriately separate the contractual

consideration, and recognise revenues for goods (e.g., hardware or software) upon delivery, and recognise revenues for

services as rendered. For multiple-deliverable arrangements when one component is to another primary component of

the arrangement, revenues for that supplemental component can be recognised upon the revenue recognition of the

primary component.

Multiple-element arrangements – customer loyalty programmes

IFRS IFRS requires that award, loyalty or similar programs whereby a customer earns credits based on the purchase of goods

or services be accounted for as multiple-element arrangements. As such, IFRS requires that the fair value of the award

credits (otherwise attributed in accordance with the multiple-element guidance) be deferred and recognised separately

upon achieving all applicable criteria for revenue recognition.

The above-outlined guidance applies whether the credits can be redeemed for goods or services supplied by the entity

or whether the credits can be redeemed for goods or services supplied by a different entity. In situations where the

credits can be redeemed through a different entity, a company should also consider the timing of recognition and

appropriate presentation of each portion of the consideration received given the entity’s potential role as an agent versus

as a principal in each aspect of the transaction.

US GAAP Currently, divergence exists under US GAAP in the accounting for customer loyalty programs. There are two very different

models that are generally employed.

Some companies utilize a multiple-element accounting model wherein revenue is allocated to the award credits based on

relative fair value. Other companies utilize an incremental cost model wherein the cost of fulfilment is treated as an

expense and accrued for as a “cost to fulfil,” as opposed to deferred based on relative fair value.

The two models can drive significantly different results.

JP GAAP There is no specific guidance on the accounting for customer loyalty programmes. However, it is common to apply the

provision method by recognising the full amount of revenue at initial recognition including the awards credit and the

estimated future expense for goods and services.


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Multiple-element arrangements – contingencies

IFRS IFRS maintains its general principles and would look to key concepts including, but not limited to, the following:

• Revenue should not be recognised before it is probable that economic benefits would flow to the entity.

• The amount of revenue can be measured reliably.

When a portion of the amount allocable to a delivered item is contingent on the delivery of additional items, IFRS might

not impose a limitation on the amount allocated to the first item. A thorough consideration of all factors would be

necessary so as to draw an appropriate conclusion. Factors to consider would include the extent to which fulfillment of

the undelivered item is within the control of and is a normal/customary deliverable for the selling party as well as the

ability and intent of the selling party to enforce the terms of the arrangement. In practice, the potential limitation is often

overcome.

US GAAP US GAAP generally looks to contingencies around pricing to be resolved such that price to the buyer is fixed or

determinable. The guidance on multiple-element arrangements includes a strict limitation on the amount of revenue

otherwise allocable to the delivered element in such an arrangement.

Specifically, the amount allocable to a delivered item is limited to the amount that is not contingent on the delivery of

additional items. That is, the amount allocable to the delivered item or items is the lesser of the amount otherwise

allocable in accordance with the standard or the noncontingent amount.

JP GAAP There is no guidance on treatment of contingent consideration in multiple-deliverable arrangements.


Scope

IFRS The guidance applies to the fixed-price and cost-plus-construction contracts of contractors for the construction of a

single asset or a combination of assets that are interrelated or interdependent in terms of their design, technology and

function or their ultimate purpose or use. The guidance is not limited to certain industries. Assessing whether a contract

is within the scope of the construction contract standard or revenue standard has been an area of recent focus. A

buyer’s ability to specify the major structural elements of the design (either before and/or during construction) is a key

factor (although not, in and of itself, determinative) of construction contract accounting. At the same time, with the

aforementioned scope focus on the construction of a single asset or a combination of interrelated or interdependent

assets to a buyer›s specifications, the construction accounting guidance is generally not applied to the recurring

production of goods.

US GAAP The guidance applies to accounting for performance of contracts for which specifications are provided by the customer

for the construction of facilities or the production of goods or the provision of related services. The scope of the guidance

has generally been limited to certain specific industries and types of contracts.

JP GAAP Similar to IFRS. Among contract agreements, guidance is applied to construction contracts such as civil engineering,

architecture, shipbuilding, manufacturing of certain machinery, in which basic specification and operation are based on

customers’ requirements.

Recognition method

Percentage-of-completion method

IFRS When the outcome of the contract can be measured reliably, revenue and costs are recognised by reference to the stage

of completion of the contract activity at the end of the reporting period. The criteria necessary for a cost-plus contract to

be reliably measurable are less restrictive than for a fixed-price contract. The zero-profit method is used when the final

outcome cannot be estimated reliably. This recognises revenue only to the extent of contract costs incurred that are

expected to be recovered. When it is probable that total contract costs will exceed total contract revenue, the expected

loss is recognised as an expense immediately. IFRS provides limited guidance on the use of estimates.

US GAAP Two different approaches are allowed:

• the revenue approach (similar to IFRS) multiplies the estimated percentage of completion by the estimated total

revenues to determine earned revenues; and multiplies the estimated percentage of completion by the estimated total


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contract costs to determine the cost of earned revenue; and

• the gross-profit approach (different from IFRS) multiplies the estimated percentage of completion by the estimated

gross profit to determine the estimated gross profit earned to date.

Losses are recognised when incurred or when the expected contract costs exceed the expected contract revenue,

regardless of which accounting method is used. US GAAP provides detailed guidance on the use of estimates.

JP GAAP Similar to IFRS, if the certainty of outcome for the portion progressed can be confirmed, revenue and costs are

recognised with reference to the stage of completion of the contract activity at the balance sheet date. However, if the

certainty of outcome cannot be confirmed, the completed contract method is applied.

Completed contract method

IFRS The completed-contract method is prohibited.

US GAAP While the percentage-of-completion method is preferred, the completed-contract method is also required in certain

situations (e.g., inability to make reliable estimates).

For circumstances in which reliable estimates can not be made, but there is an assurance that no loss will be incurred on

a contract (e.g., when the scope of the contract is ill defined, but the contractor is protected from an overall loss), the

percentage-of-completion method based on a zero-profit margin, rather than the completed-contract method, is

recommended until more-precise estimates can be made.

JP GAAP If the total amount of construction revenue, the total amount of construction costs, and the percentage of completion at

closing date can not be reliably and reasonably estimated, the completed contract method is applied.

Combining contracts and segmenting a contract

IFRS A group of contracts is combined and treated as a single contract when they are negotiated as part of a package and

other specified conditions are met. Where a contract relates to the construction of more than one asset, the construction

of each asset is treated as a separate construction contract if it is part of a separate proposal that could be accepted or

rejected separately and revenues and costs for that asset can be clearly identified.

US GAAP Combining and segmenting contracts is permitted provided certain criteria are met, but is not required, so long as the

underlying economics of the transaction are fairly reflected.

JP GAAP If a contract document doesn’t properly reflect the substantial transaction unit agreed between transacting parties, the

contract should be combined or segmented. A characteristic for the substantial transaction unit is that construction

contractors obtain definitive claim rights for the consideration from customers by performing their construction

obligation.

Barter transactions

Non-advertising-barter transactions

IFRS IFRS requires companies to look first to the fair value of items received to measure the value of a barter transaction.

When that value is not reliably determinable, the fair value of goods or services surrendered can be used to measure the

transaction.

US GAAP US GAAP generally requires companies to use the fair value of goods or services surrendered as the starting point for

measuring a barter transaction. The fair value of goods or services received can be used if the value surrendered is not

clearly evident.

JP GAAP There is no separate guidance on measuring barter trading.

Accounting for advertising-barter transactions

IFRS Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising

services received. However, a seller can reliably measure revenue at the fair value of the advertising services it provides

if certain criteria are met.


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US GAAP If the fair value of assets surrendered in an advertising-barter transaction is not determinable, the transaction should be

recorded based on the carrying amount of advertising surrendered, which likely will be zero.

JP GAAP There is no guidance on measuring barter trading with advertising services.

Accounting for barter-credit transactions

IFRS There is no further/specific guidance for barter-credit transactions. The broader principles outlined/referred to above

should be applied.

US GAAP It should be presumed that the fair value of the nonmonetary asset exchanged is more clearly evident than the fair value

of the barter credits received.

However, it is also presumed that the fair value of the nonmonetary asset does not exceed its carrying amount unless

there is persuasive evidence supporting a higher value. In rare instances, the fair value of the barter credits may be

utilized (e.g., if the entity can convert the barter credits into cash in the near term, as evidenced by historical practice).

JP GAAP There is no guidance on measuring barter-credit transactions.

Extended warranties

IFRS If an entity sells an extended warranty, the revenue from the sale of the extended warranty should be deferred and

recognised over the period covered by the warranty.

In instances where the extended warranty is an integral component of the sale (i.e., bundled into a single transaction), an

entity should attribute relative fair value to each component of the bundle.

US GAAP Revenue associated with separately priced extended warranty or product maintenance contracts should generally be

deferred and recognised as income on a straight-line basis over the contract life. An exception exists where historical

experience indicates that the cost of performing services is incurred on an other-than-straight-line basis.

The revenue related to separately priced extended warranties is determined by reference to the selling price for

maintenance contracts that are sold separately from the product. There is no relative fair market value allocation in this

instance.

JP GAAP There is no guidance on sales of extended warranties. General income recognition principles for service provision are

applied.

Recent proposals– IFRS and US GAAP

Joint FASB / IASB Discussion Paper: Preliminary Views on Revenue Recognition in Contracts with Customers

In December 2008, a joint discussion paper entitled Preliminary Views on Revenue Recognition in Contracts with Customers was

issued. The model outlined in the discussion paper would have a significant impact on current revenue recognition policies under

both IFRS and US GAAP. Every industry within the scope of the project may be impacted to some extent. Some entities,

particularly those that have historically followed industry-specific guidance, will see pervasive changes. A single contract-based,

asset and liability model is proposed, where revenue is recognised based on increases in contract assets or decreases in contract

liabilities.

A few of the changes under the proposed model are as follows. The percentage-of-completion method historically used for both

construction contracts and, where applicable, service arrangements, may no longer exist as a separate model. Rather, revenue in

those arrangements will be recognised based on the transfer of control. The definition of a performance obligation may result in

separation of more obligations within an arrangement. For example, under current guidance, warranty obligations are recorded as

a cost accrual at the time of sale. Such warranties would be a separate performance obligation under the proposed model and

would result in revenue deferral as opposed to cost accrual. The increase in identification and separation of performance

obligations may also require greater use of estimates than is the case under current practice. Industries where the use of fair value

estimates is restricted, such as software accounting under US GAAP which requires VSOE of fair value, will be particularly

impacted. Sales-type incentives such as free products or customer loyalty programmes are currently recognised as marketing

expense in some circumstances. The proposed model requires that those incentives be considered performance obligations and

revenue deferred until such obligations are satisfied, as when a customer redeems loyalty points. This change would align US

GAAP with the guidance for customer loyalty programs under IFRS.


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IFRIC 18: Transfers of Assets from Customers

In January 2009 the IFRIC issued IFRIC 18, Transfers of Assets from Customers. The interpretation addresses the diversity in prac-

tise that arises when entities receive from a customer an item of property plant and equipment that the entity must then use either

to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services, or both. The

interpretation also applies to agreement in which an entity receives cash from a customer and the cash must be used in certain

specified manners. The impact of the IFRIC may be relatively broad as it includes guidance around assessing when an entity

controls an asset as well as when a component of a revenue transaction should be separately identified and accounted for.

DRAFT EITF Issue No. 08-1: Revenue Arrangements with Multiple Deliverables

The Emerging Issues Task Force (EITF) recently issued a draft abstract of Issue No. 08-1, Revenue Arrangements with Multiple

Deliverables (Issue 08-1). This Issue will supersede ASC 605-25 and will become the standard guidance under US GAAP for many

multiple-element arrangements. It is currently anticipated that the Issue will allow the use of an estimated selling price for the

undelivered unit of accounting in transactions in which VSOE or TPE (third-party evidence) of fair value does not exist. The Issue

specifies that the estimated selling price shall not exceed the selling price of the delivered unit(s) of accounting based on VSOE or

TPE, if known. Given that entities will be able to use estimated selling price to determine the fair value of an element, the Issue

also eliminates the use of the residual method. The first key change - permitting the use of estimated selling prices - will align US

GAAP more closely to IFRS on this point. However, Issue 08-1 retains the principle that the amount allocable to a delivered item is

limited to the amount that is not contingent on the delivery of additional items. That is, the amount allocable to the delivered item

or items is the lesser of the amount otherwise allocable in accordance with the standard or the noncontingent amount. IFRS does

not include this requirement. The second key change - eliminating the residual method - will have a significant impact on entities

that currently use that method to estimate fair value. This creates a new difference as IFRS permits the residual method. This

guidance is expected to be issued in late 2009 and to be effective for new or materially modified arrangements in fiscal years

beginning on or after June 15, 2010.

DRAFT EITF Issue No. 08-9: Milestone Method of Revenue Recognition

The EITF also recently issued a draft abstract of EITF Issue No. 08-9, Milestone Method of Revenue Recognition (Issue 08-9). This

issue serves to codify a method that has been used in practice to recognise the revenue related to additional contingent

consideration in an arrangement. In certain revenue arrangements, such as a collaboration agreement between a large

pharmaceutical company and a smaller biotechnology company, early fixed payments from one party to the other for services are

supplemented by additional payments that might be made contingent upon the achievement of goals or milestones. Under the

milestone method, the additional consideration from achievement of the event (or milestone) is considered indicative of the value

provided to the customer through either (a) the vendor’s performance or (b) a specific outcome resulting solely or in part from the

vendor’s performance (for example, performance of research and development services by a biotechnology company that leads to

U.S. Food and Drug Administration approval). This Issue defines a milestone as an event for which there is substantial uncertainty

at the date the arrangement is entered into that the event will be achieved when that event can only be achieved based in whole or

in part on the vendor’s performance or a specific outcome resulting from the vendor’s performance and, if achieved, would result in

additional payments being due to the vendor. The Issue specifies that a vendor shall recognise the arrangement consideration that

is contingent upon the achievement of a milestone in its entirety in the period in which the milestone is achieved, provided the

milestone is substantive. This guidance is expected to be issued in late 2009 and to be effective for new or materially modified

arrangements in fiscal years beginning on or after June 15, 2010.

General

As evidenced by the Standards described above, US GAAP and IFRS continue to evolve in the area of revenue recognition. As a

further example, the EITF is considering whether to modify the scope of ASC 985-605 to exclude certain software-enabled tangible

products currently accounted for under ASC 985-605 because they contain software that is “more than incidental”. We expect

that this evolution will continue.

REFERENCES: IFRS: IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, SIC 31US GAAP: ASC 605-20-25-1 through 25-6, ASC 605-20-25-14 through 25-18, ASC 605-25, ASC 605-35, ASC 605-50, ASC 985-605, CON 5, SAB Topic 13JP GAAP: Business Accounting Principles, Accounting Standards for Research and Development Costs, Practical Solution on Revenue Recognition of Software Transactions, Accounting Standard for Construction Contracts, Research Report on Revenue Recognition in Japan (Interim Report) – Discussion in light of IAS 18, Revenue


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Expense recognition

Specific expense recognition issues

Interest expense

IFRS Interest expense is recognised on an accrual basis using the effective interest method. Directly attributable transaction

costs and any discount or premium arising on the issue of a debt instrument is amortised using the effective interest

method. The effective interest rate is the rate that discounts the estimated future cash payments through the expected

life of the debt instrument to the initial carrying amount of the debt instrument.

US GAAP Similar to IFRS; however, the contractual life of the debt instrument is generally used in practice.

JP GAAP Interest expense is recognised on an accrual basis. Generally, interest expense for each period is allocated using the

effective interest method.

Employee benefits – pensions

All three frameworks require the cost of providing these benefits to be recognised on a systematic and rational basis over the period

during which employees provide services to the entity. All three frameworks separate pension plans into defined contribution plans

and defined benefit plans.

Defined contribution plan


Defined contribution plan An arrangement qualifies as a defined contribution plan if a company’s legal or constructive obligation is limited to the amount it contributes to a separate entity (generally, a fund or an insurance company). There is no requirement for individual participant accounts.

A defined contribution plan is any arrangement that provides benefits in return for services rendered, that establishes an individual account for each participant and that specifies how recurring periodic contributions to the individual’s account should be determined.

Similar to IFRS.

Defined benefit plan

The methodology for accounting for defined benefit plans is based on similar principles; however, detailed differences exist in

application. The key features are outlined below.


Determination of pension and other post-retirement obligation and expense

Projected unit credit method used. Similar to IFRS. Similar to IFRS. However small companies (with 300 or fewer employees) are allowed to apply the simplified method, which is based on the amount of retirement benefits that would be payable assuming all the employees voluntarily retired at the end of the period.


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Recognition of actuarial gains and losses

Recognised immediately or amortised into profit or loss over expected remaining working lives of participating employees.

At a minimum, a net gain/loss in excess of 10% of the greater of the defined benefit obligation or the fair value of plan assets at the beginning of the year is amortised over expected remaining working lives (the ‘corridor’ method).

An entity can adopt a policy of recognising actuarial gains and losses in full in the period in which they occur, and recognition may be in other comprehensive income or in profit or loss if this option is chosen.

An entity also can adopt any systematic method that results in faster recognition of actuarial gains and losses, provided that the basis is applied consistently from period to period.

Amounts recognised within AOCI in order to reflect the funded status of defined benefit plan on the balance sheet are amortised out of AOCI into the income statement on a basis that is similar to IFRS, except that gains and losses are amortised over the remaining life expectancy of the plan participants if all or almost all plan participants are inactive.

US GAAP permits companies to either (1) record expense for actuarial gains/losses in the period incurred within the statement of operations or (2) defer such costs through the use of the corridor approach (or any systematic method that results in faster recognition than the corridor approach).

Whether actuarial gains/losses are recognised immediately or are amortized in a systematic fashion, they are ultimately recorded within the statement of operations as components of net periodic pension expense.

Recognised immediately or allocated over a certain number of years within the average remaining service period starting from the period in which they were incurred or a period after.

Basically, straight-line method is applied. Declining-balance method is also permitted.

The corridor approach is not applied, however in the event that there is no significant change in the discount rate or other assumptions, the assumptions need not to be revised.

Bases of charge to statement of comprehensive income (statement of operation)

The expense will be made up of service cost, interest cost, expected return on assets, recognised actuarial gains/losses, recognised past service costs, curtailment or settlement gains/losses and any impact of the asset ceiling.

Actuarial gains/losses and the impact of the asset ceiling will be recognised either in the profit or loss or other comprehensive income depending on the chosen policy for actuarial gains/losses.

There is no requirement to present the various components of net pension cost as a single item or a set of items all presented on a net basis within profit or loss. Rather, the guidance allows for the potential disaggregation of the component pieces of pension cost.

All components of net pension cost must be aggregated and presented as a net amount in the income statement.

While it is appropriate to allocate a portion of net pension expense to different line items (such as cost of goods sold if other employee costs are included in this caption), the disaggregation and separate reporting of different components of net pension expense are precluded.

Service cost and interest cost are expensed as pension cost and expected return on plan assets is deducted from the cost. The allocation of past service cost and actuarial gains/losses are included in the pension cost.

Past-service cost Prior-service cost should be recognised, in income, on a straight-line basis over the average period until the benefits become vested.

To the extent that benefits are vested as of the date of the plan amendment, the cost of those benefits should be recognised immediately in profit or loss.

Negative prior-service cost is recognised over the average period until the benefits vest. If the reduced benefits are vested at the date of the negative plan amendment, the associated negative prior-service cost should be recognised immediately in profit or loss.

Prior-service cost should be recognised in other comprehensive income at the date of the adoption of the plan amendment and then amortized into income over the participants’ (1) remaining years of service (for pension plans with all or almost all active employees), (2) service to full eligibility date (for other postretirement benefit plans with all or almost all active employees) or (3) life expectancy (for plans that have all or almost all inactive employees).

Negative prior-service cost should be recognised as a prior service credit to other comprehensive income and used first to reduce any remaining positive prior-service cost included in accumulated other comprehensive income. Any remaining prior-service credits should then be amortized over the remaining service period of the active employees unless all or almost all plan participants are inactive, in which case the amortization period would be the plan participants’ life expectancies.

Past-service cost is the portion of increase or decrease of retirement benefit obligation due to amendment of retirement benefit levels, and is amortized over a certain number of years within the average remaining service period starting from the year incurred.


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Discount rate for obligations The discount rate should be determined by reference to market yields on high-quality corporate bonds of equivalent currency and term to the benefit obligation.

Where a deep market of high-quality corporate bonds does not exist, companies are required to look to the yield on government bonds of equivalent currency and term when selecting the discount rate.

The discount rate is based on the rate at which the pension obligation could be effectively settled. Companies may look to the rate of return on high-quality, fixed-income investments with similar durations to those of the benefit obligation, to establish the discount rate. The SEC has stated that the term high-quality means that a bond has received one of the two highest ratings given by a recognised ratings agency (e.g., Aa or higher by Moody’s).

The guidance does not specifically address circumstances where a deep market in high-quality corporate bonds does not exist. However, in practice, a hypothetical high quality bond yield is determined based on a spread added to representative government bond yields

The discount rate is based on market yields of high-quality long-term debt securities, such as long-term government bonds, debt securities issued by government agencies or high-grade corporate bonds.

Expected return on plan assets

Fair value should be used to determine the expected return on plan assets as well as asset gains and losses subject to recognition.

For the purposes of determination of the expected return on plan assets and the related accounting for asset gains and losses, plan assets can be measured by using either fair value or a calculated value that recognises changes in fair value over a period of not more than five years.

Similar to IFRS.

Valuation of plan assets Plan assets should always be measured at fair value, which is defined as the amount for which an asset could be exchanged in an arm’s-length transaction between knowledgeable and willing parties.

For securities quoted in an active market, the bid price should be used.

Discounted cash flows may be used if market prices are unavailable.

Plan assets should be measured at fair value less cost to sell. Fair value should reflect an exit price at which the asset could be sold to another party.

For markets in which dealer-based pricing exists, the price that is most representative of fair value—regardless of where it falls on the fair value hierarchy—should be used. As a practical expedient, the use of midmarket pricing is permitted.

Plan assets are measured at fair value at the end of the period. Fair value is the amount agreed on in sales transactions negotiated voluntarily between sellers and buyers who have sufficient knowledge and information.

Statement of financial position (balance sheet) presentation

Entities are required to recognise on the statement of financial position the defined benefit obligation (as defined) plus or minus any unrecognised actuarial gains/losses or prior-service costs and the fair value of plan assets.

Entities are required to record on the balance sheet the full funded status (i.e., the difference between fair value of the plan assets and the projected benefit obligation) of pension plans or the accumulated postretirement benefit obligation of other postretirement plans with the offset to other comprehensive income. This guidance does not have an impact on the recognition of net periodic pension costs.

Similar to IFRS.

Substantive commitment to provide pension or other postretirement benefits

In certain circumstances, a history of regular increases may indicate (1) a present commitment to make future plan amendments and (2) that additional benefits will accrue to prior-service periods. In such cases, the substantive commitment (to increased benefits) is the basis for determination of the obligation.

The determination of whether a substantive commitment exists to provide pension or other postretirement benefits for employees beyond the written terms of a given plan’s formula requires careful consideration. Although actions taken by an employer can demonstrate the existence of a substantive commitment, a history of retroactive plan amendments is not sufficient on its own.

Generally, clearly presented written terms of the pension plan is the basis for the determination of the obligation, and substantive commitment is not included in the consideration. A temporary pension whose payment could not be presumed beforehand and pension payments exceeding recognised pension liability are expensed when paid.


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Statement of financial position (Balance sheet) asset limitation

Under the guidance, an asset ceiling test limits the amount of the net pension asset that can be recognised to the lower of (1) the amount of the net pension asset or (2) the sum of any cumulative unrecognised net actuarial losses, unrecognised prior-service cost, and the present value of any economic benefits available in the form of refunds or reductions in future contributions to the plan. The guidance also governs the treatment and disclosure of amounts, if any, in excess of the asset ceiling.

There is no limitation on the size of the pension asset that can be recorded.

No similar requirement.

Multiemployer plans For multiemployer plans, the accounting treatment used is based on the substance of the terms of the plan. If the plan is a defined benefit plan in substance, it should be accounted for as such unless insufficient information to do so is available, in which case it is accounted for as a defined contribution plan.

Multiemployer plans are treated similarly to defined contribution plans.

For multiemployer plans, the pension assets attributable to an entity are allocated to the entity by a reasonable basis such as the proportion of the retirement benefit obligation of the entity. When the pension assets cannot be allocated on a reasonable basis, the contribution payable for the period is expensed. The latest full fund status, the proportion of each entity to the whole plan and supplementary information is disclosed in the notes.

Subsidiary’s defined benefit pension plan forming part of a group plan

Plans with participating entities under common control are not multi-employer plans. If there is a contractual arrangement between the subsidiary and the parent, the subsidiary accounts for the benefit costs on that basis; otherwise, the contribution payable for the period is recognised as an expense, except for the sponsoring employer, which must apply defined benefit accounting for the plan as a whole.

The subsidiary accounts for its participation in an overall group plan as a participant in a defined contribution (multi-employer) plan.

Each entity shall apply defined benefit accounting individually on a plan-by-plan basis. When multiple entities are under the same pension plan, each entity shall apply the defined benefit accounting following the requirements of multi-employer plans.

Curtailment definition A curtailment occurs when an entity either:

• is demonstrably committed to make a significant reduction in the number of employees covered by a plan; or

• Amends the terms of a defined benefit plan so that a significant element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.

Curtailment gains should be recorded when the entity is demonstrably committed to making a material reduction (as opposed to once the terminations have occurred).

IFRS requires that the curtailment gain/loss include any related actuarial gains/losses and prior service cost previously not recognised.

A curtailment is defined as an event that significantly reduces the expected years of future service of present employees or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future service.

Curtailment gains are recognised when realized—that is, only once the terminations have occurred.

The guidance permits certain offsets of unamortised gains/losses but does not permit pro rata recognition of remaining unamortised gains/losses in a curtailment.

Curtailment is not explicitly defined; however, similar treatment of curtailment under IFRS is applied for the significant reduction of post-retirement benefit plans or significant reduction of number of employee implemented due to a large-scale restructuring plan.

Deferred compensation arrangements

The liability associated with deferred compensation contracts is measured by the projected-unit-credit method (similar to post-employment benefits), with the exception that all prior-service costs and actuarial gains and losses are recognised immediately in profit or loss.

Deferred compensation liabilities are measured at the present value of the benefits expected to be provided in exchange for an employee’s service to date. If expected benefits are attributed to more than an individual year of service, the costs should be accrued in a systematic and rational manner over the relevant years of service in which the employee earns the right to the benefit (to the full eligibility date).

A number of acceptable attribution models are used in practice. Examples include the sinking-fund model and the straight-line model. Gains and losses are recognised immediately in the income statement.

There is no guidance for deferred compensation liabilities associated with deferred compensation arrangements. When requirements for provisions are met, corresponding expenses and provisions are recognised.


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Termination benefits

IFRS Termination benefits are recorded when the entity is demonstrably committed to the reduction in workforce.

Termination indemnities are generally payable regardless of the reason for the employee’s departure. The payment of

such benefits is certain (subject to any vesting or minimum service requirements), but the timing of their payment is

uncertain. Termination indemnities are accounted for consistently with pension obligations (i.e., the liability is measured

as the actuarial present value of benefits).

US GAAP Specific guidance is provided on postemployment benefits − for example, salary continuation, termination benefits,

training and counselling. As a result of US GAAP distinguishing between four types of termination benefits (with three

timing methods for recognition), this could lead to differences when compared to IFRS:

• Special termination benefits – generally additional benefits offered for a short period of time to certain employees

electing to accept an offer of voluntary termination, recognised at the date on which the employees accept the offer

and the amount can be reasonably estimated;

• Contractual termination benefits – benefits provided to employees when employment is terminated due to the

occurrence of a specified event under an existing plan, recognised at the date when it is probable that employees will

be entitled to the benefits and the amount can be reasonably estimated;

• Termination benefits that are paid for normal severances pursuant to an ongoing termination benefit plan − costs are

recognised for probable and reasonably estimable payments as employee services are rendered, if the benefit

accumulates or vests, or when the obligating event occurs; and

• One-time benefit arrangement established by a termination plan that applies for a specified termination event or for a

specified future period − recognised as a liability when the termination plan meets certain criteria and has been

communicated to employees.

Termination indemnity plans are considered defined benefit plans under US GAAP. Entities may choose whether to

calculate the vested benefit obligation as the actuarial present value of the vested benefits to which the employee is

entitled if the employee separates immediately, or as the actuarial present value of the benefits to which the employee is

currently entitled, based on the employee’s expected date of separation or retirement.

JP GAAP Additional payments (premiums) for voluntary retirement are expensed when such early retirement program is

implemented to the employees and when the amount can be reasonably estimated. Other termination benefits are

treated under the general accounting rule for provisions.


Preliminary views on Amendments to IAS 19 Employee Benefits

In March 2008, the IASB issued a discussion paper that starts the process of revising IAS 19. Based on the paper, the two major

proposed changes to the Standard are to remove the option for deferred recognition of actuarial gains and losses (the corridor) and

to introduce new classifications for defined benefit programs. The discussion paper represents part of the ongoing process (by

both the IASB and the FASB) to amend employee benefit accounting.

The Board is working towards two separate exposure drafts based on the proposals and the responses to them as follows:

a. Part 1: Recognition and presentation of changes in the defined benefit obligation and in plan assets, disclosures, and other

issues raised in the comment letters that can be addressed expeditiously.

b. Part 2: Contribution-based promises, potentially as part of a comprehensive review of pension accounting.

If there are no unexpected delays, the IASB staff estimates that the redeliberations on Part 1 will be completed by July 2009 and

an Exposure Draft of the Board’s proposals will be published in the fourth quarter of 2009.

REFERENCES: IFRS: IAS 19, IAS 39, IAS 37, IFRIC 14US GAAP: ASC 420, ASC 710, ASC 712, ASC 715, ASC 715-30, ASC 820, ASC 835-30, ASC 958-605 JP GAAP: Accounting Standards for Retirement Benefits, Practical Guidelines on Accounting Standards for Retirement Benefits, Q&A on Accounting for Retirement Benefits, Accounting Standards for Transfer between Retirement Benefit Plans, Practical Solution on Accounting for Transfer between Retirement Benefit Plans


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Share-based payment transactions

Recent changes – IFRS

Amendments to IFRS 2 Share-based Payment: Vesting Conditions and Cancellations

In January 2008, the IASB issued an amendment to IFRS 2, Share-based Payment, clarifying that only service conditions

(requirements to complete a specified service period) and performance conditions (requirements to meet specified performance

targets) are considered vesting conditions under IFRS. All other conditions within an award are considered non-vesting conditions

and their impact should be included in grant date fair value. As such, these items would not impact the number of awards

expected to vest or the valuation subsequent to grant date. The amendment also specifies that all cancellations, whether by the

entity or by other parties, should receive the same accounting treatment. The amendment will be applicable for periods beginning

on or after January 1, 2009, with early application permitted.

Scope

IFRS Applies to the accounting for all employee and non-employee arrangements. Definition of an employee is broader than

the US GAAP definition.

US GAAP Applies to awards granted to employees and non-employees, but does not amend the existing guidance on ESOPs and

determining the measurement date for equity classified non-employee instruments.

JP GAAP Applies to the accounting for employee and non-employee share-based payment transactions.

Scope of employee stock purchase plans

IFRS There is no compensation cost exemption for employee stock purchase plans.

US GAAP Employee stock purchase plans that (1) provide employees with purchase discounts no greater than 5%, (2) permit

participation by substantially all employees who meet limited employment criteria and (3) incorporates only certain limited

option features may be treated as non compensatory.

JP GAAP Similar to IFRS. There is no compensation cost exemption for employee stock purchase plans.

Classification of awards – equity versus liability

IFRS Broadly, share-based payment transactions may be classified as either:

• Equity-settled share based payment transactions

• Cash-settled share based payment transactions

Shares that are puttable to entity for cash are always classified as cash-settled.

Share-settled awards are classified as equity-settled awards even if there is variability in the number of shares due to a

fixed monetary value to be achieved.

Share-settled awards that contain vesting conditions other than service, performance or market conditions would still

qualify for classification as equity-settled.

Awards that offer employees the choice of settlement in stock or settlement in cash should be bifurcated and treated as a

compound instrument.

US GAAP In certain situations, puttable shares may be classified as equity awards.

Liability classification is required when an award is based on a fixed monetary amount settled in a variable number of

shares.

Share-settled awards that contain conditions that do not qualify as service, performance or market conditions result in

liability classification.

Single awards that offer employees the choice of settlement in stock or settlement in cash should be classified as

liabilities. Tandem awards may have both a liability and an equity component.

JP GAAP Accounting standards specify only equity-settled share based payment transactions. Cash-settled share based payment

transactions are not common in practice, the general requirement for provision is applied to the transaction. Puttable


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shares (shares with claim right for acquisition) are also not common, and they are classified in equity or liability by legal

form. There is no guidance on share-settled awards that offer employees the choice of settlement in stock or cash. They

are accounted for based on their business practices.

Grant date – employee award

IFRS Grant date is the date at which the entity and an employee reach a mutual understanding of the terms and conditions of

the arrangement and the entity confers on the employee the right to equity instruments or assets of the entity, subject to

specified vesting conditions, if any.

If that agreement is subject to an approval process (for example, by shareholders), grant date is the date when that

approval is obtained.

There is no requirement that an employee either begin to benefit from, or be adversely affected by, subsequent changes

in the price of the employer’s equity shares in order to establish a grant date.

US GAAP One of the criteria in identifying the grant date for an award of equity instruments is the date at which the employee

begins to either benefit from, or be adversely affected by, subsequent changes in the price of the employer’s equity

shares. This may differ from the service inception date (the date at which an employee begins to provide service under a

share-based-payment award).

JP GAAP The corporate law requires the grant date to be specified in the provisions of subscription warrant and to be approved at

the general shareholders’ (or board of directors’) meeting.

There is no requirement that an employee either begin to benefit from, or be adversely affected by, subsequent changes

in the price of the employer’s equity shares in order to establish a grant date.

Recognition

IFRS The value of services received is recognised over the vesting period, depending upon the terms of the awards (service,

performance, market condition or a combination of conditions).


JP GAAP Similar to IFRS, stock-based compensation is recognised as an expense over the period from the option grant date to

the option award vesting date. It is accounted for as compensation cost for the period.

Measurement

IFRS The fair value of employee services received is measured by reference to (i) grant-date fair value for equity-settled awards

except in rare circumstance where fair value is not reliably measurable in which case intrinsic value is used or (ii) fair value

of liability incurred for cash-settled awards.

In case of cash-settled awards, the fair value of the liability is remeasured at each reporting date through settlement, with

any change in fair value recognised to profit or loss over the vesting period.

US GAAP Similar to IFRS, however, the intrinsic value method could only be used by a non-public company if the terms of the

award are sufficiently complex.

JP GAAP Similar to IFRS (policies only for equity-settled transactions).

Reversal of compensation cost

IFRS The compensation cost is determined based on the best estimate of number of awards expected to vest and is revised

on receipt of additional information, and finally adjusted for awards that eventually vest.

Previously recognised compensation cost shall not be reversed for the amount recognised for services received from an

employee if the vested equity instruments are later forfeited or, in the case of share options, the options are not

exercised.

If the terms and conditions of an option or share grant are modified (e.g., an option is re-priced) or replaced with another

grant of equity instruments, the entity accounts for the incremental fair value (if any), at the modification date, over the

remaining vesting period.

If a grant is cancelled or repurchased, the entity treats it as accelerated vesting and recognised immediately the

unamortised compensation cost that otherwise would have been recognised for services received over the remainder of


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the vesting period. The payment made on cancellation or repurchase should be considered as repurchase of the equity

interest (reduced in equity), except to the extent the payment exceeds the fair value of the equity instruments at the

repurchase date; recognised as an expense.

Irrespective of any modification, cancellation or settlement of a grant of equity instruments to employees, IFRS generally

requires the entity to recognise, as a minimum, the services received measured at the grant-date fair value of the equity

instruments granted.


JP GAAP Similar to IFRS in terms of accounting for change in conditions. If the equity instruments are forfeited after the vesting

date, the corresponding amount included in the subscription right will be recorded in profit. There is no explicit standard

for cancellation.

Other vesting triggers

IFRS An award that becomes exercisable based on the achievement of either a service condition or a market condition is

treated as two awards with different service periods, fair values, etc. Any compensation cost associated with the service

condition would be reversed if the service was not provided. The compensation cost associated with the market

condition would not be reversed.

US GAAP An award that becomes exercisable based on the achievement of either a service condition or a market condition is

treated as a single award. Because such an award contained a market condition, compensation cost associated with the

award would not be reversed if the requisite service period were met.

JP GAAP An award that is vested based on the achievement of either a service condition or a stock price condition should be

treated as a single award. Even if an award is vested when a stock price condition is achieved without waiting for the

achievement of service condition, only the service condition is considered as vesting condition when entities do not

consider the expectation of vesting date for a stock price condition. Compensation costs associated with the award may

not be reversed.

Graded vesting

IFRS IFRS requires each instalment of a graded vesting award to be treated as a separate grant. This requires separately

measuring and attributing expense to each tranche of the award, thereby accelerating the overall expense recognition.

Separate measurement of each tranche will normally result in a different total expense as compared with a methodology

wherein the four tranches are valued as a single award.

As an example of the attribution methodology, an award that vests 25% each year over a four-year period the expense

related to the first tranche would be fully recognised at the end of year one along with half of the expense for the second

tranche, one-third of the expense for the third tranche and one-fourth of the expense for the fourth tranche.

US GAAP Companies have a policy choice, whereby expense recognition for share-based payment awards with only service

conditions and graded vesting schedules can be recognised either over the requisite service period for each tranche of

the award or on a straight-line basis over the life of the entire award. (The amount of compensation cost recognised at

any point should minimally equal the portion of the grant-date value of the award vested at that date.)

There is also an option to value the award in total as a single award or to value the individual tranches separately.

JP GAAP Similar to IFRS, basically JP GAAP requires each instalment of a graded vesting award to be treated as a separate grant.

There is also an option to value the award in total as a single award.

Improbable to probable modifications

IFRS Modifications of this nature would continue to reference/utilize the original grant date fair value of the individual

instruments. Any change would be treated as a change in estimate of the number of awards that will vest, rather than a

change in the fair value of each award.

US GAAP Modifications of this nature would result in an updated fair value measurement as of the award modification date.

JP GAAP JP GAAP does not specify the modification of this nature.

Non-employee share-based payment transactions

IFRS IFRS focuses on the nature of the services provided and treats awards to employees and others providing employee-type

services similarly. Awards for goods from vendors or for non-employee-type services are treated differently.


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IFRS requires measurement of fair value to occur when the goods are received or as non-employee-type services are

rendered (neither on a commitment date nor solely upon completion of services).

There is a rebuttable presumption that awards granted for goods or non-employee-type services can be measured by

reference to the fair value of the goods or services received by the entity (not the equity instrument offered/provided).

However, if the fair value of the equity instruments granted is greater than the fair value of goods or services received,

that difference is typically an indication that unidentifiable goods or services have been or will be received.

Unidentifiable goods or services are measured at the grant date (for equity-settled awards) as the difference between the

fair value of the equity instruments granted and the identifiable goods or services received. By their nature, vesting

conditions generally do not exist for unidentifiable goods or services, therefore, the expense related to unidentifiable

goods or services would normally be recognised immediately.

Companies are required to estimate forfeitures and adjust for the effect of the changes as they occur.

US GAAP The guidance is focused on/driven by the legal definition of an employee, with certain specific exceptions/exemptions.

The fair value of instruments issued to non employees is, with some exceptions, measured at the earlier of the date on

which a performance commitment is reached or the date on which performance is completed.

In measuring the expense, companies should look to the fair value of the instruments issued (not the fair value of the

goods or services received).

Upon vesting, an award is likely to fall into the scope of separate detailed guidance, which may drive further differences

such as changes in classification of equity-classified awards to classification as liability-classified awards.

JP GAAP Similar to US GAAP. It shall be based on the fair value of the share option or the fair value of the goods and services

received, whichever is more reliably measurable.

Employer’s payroll tax payable on exercise of share options by employees

IFRS Under IFRS, payroll taxes levied on the employer in connection with share-based payment plans and calculated based

on the amount of recognised compensation expense, are expensed in profit or loss when the corresponding share-based

payment charge is recognised.

US GAAP Employer payroll taxes due on employee stock-based compensation are recognised as an expense on the date of the

event triggering the measurement and payment of the tax to the taxing authority (generally the exercise date and vesting

date for options and restricted stock respectively).

JP GAAP Not applicable, as employer payroll taxes for share options are not generally imposed.

Deferred taxes on share-based payments

IFRS Deferred tax benefits are recognised in income only for those awards that currently have an intrinsic value that would be

deductible for tax purposes.

Additionally, valuation of the deferred tax asset is revisited each reporting period. Adjustments to the deferred tax asset

balance are recorded, within limits, through earnings. Application of this model results in greater variability of income tax

expense/benefit recorded within the income tax provision.

US GAAP Deferred tax benefits are recorded for share-based payment awards that are expected to be deductible for tax purposes

(such as nonqualified stock options in the US) based on the amount of compensation expense recorded for the share

award.

This benefit is recognised even if the award has no intrinsic value. The accounting is then largely stagnant until the

associated award is exercised regardless of share price movements.

On exercise of the award, the difference between cash taxes to be paid and the tax expense recorded to date is adjusted

based on the actual excess intrinsic value of the award, with adjustments generally being recorded through equity

(subject to certain limitations, pools, etc.).

JP GAAP Deferred tax benefits are recognised for share-based payment awards that are expected to be deductible for tax

purposes (such as nonqualified stock options) based on the amount of compensation expense recorded for the share

award.


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Classification of awards – cash flows

IFRS Guidance requires cash flows from excess tax benefits (i.e., windfalls) associated with share-based-payment transactions

to be presented as cash flows from operating activities in the statement of cash flows.

US GAAP Guidance requires gross excess tax benefits (i.e., windfalls) to be classified as financing in the statement of cash flows.

JP GAAP JP GAAP does not specify the treatment of windfalls as gross excess tax benefits are generally not created.

REFERENCES: IFRS: IAS 19, IAS 37, IFRS 2, IFRIC 8, IFRIC 11US GAAP: ASC 505, ASC 505-50, ASC 718, ASC 718-10, ASC 718-50, ASC 815-40, SAB Topic 14-DJP GAAP: Accounting Standard for Share-based Payment, Guidance on Accounting Standard for Share-based Payment


Ass

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Assets*


IFRS Historical cost is the primary basis of accounting. However, IFRS permits the revaluation to fair value of intangible assets;

property, plant and equipment; and investment property and inventories in certain industries (e.g., commodity broker/

dealer). IFRS also requires that certain categories of financial instruments and certain biological assets be reported at fair

value.

US GAAP US GAAP generally utilizes historical cost and prohibits revaluations except for certain categories of financial instruments,

which are carried at fair value.

JP GAAP Historical cost is the accounting convention, and the revaluation of assets is not permitted in principle. Certain categories

of financial instruments are required be valued at market price. Inventories held for trading are measured at market value.

Intangible assets

Recognition – separately acquired intangibles

IFRS General IFRS definition of assets applies, i.e., it is controlled by the entity and probable that future economic benefits are

expected to flow to the entity. In addition, an intangible asset must be identifiable, which is either separable or arises

from contractual or other legal rights. An acquired intangible is recognised if future economic benefits attributable to the

asset are probable and the cost of the asset can be measured reliably.

US GAAP Similar to IFRS. Intangible assets may be recognised even though they do not meet the contractual-legal criterion or the

separability criterion (for example, specifically-trained employees or a unique manufacturing process). Such transactions

commonly are bargained exchange transactions conducted at arm’s length, which provides reliable evidence about the

existence and fair value of those assets.

JP GAAP There is no specific accounting standard.

Recognition – additional criteria for internally generated intangibles

IFRS Costs associated with the creation of intangible assets are classified into research phase costs and development phase

costs. Costs in the research phase are always expensed as the entity cannot demonstrate that it is probable to generate

future economic benefits. Costs in the development phase are capitalized if all of the following six criteria are

demonstrated:

• The technical feasibility of completing the intangible asset.

• The intention to complete the intangible asset.

• The ability to use or sell the intangible asset.

• How the intangible asset will generate future economic benefits (the entity should demonstrate the existence of a

market or, if for internal use, the usefulness of the intangible asset).

• The availability of adequate technical, financial and other resources to complete the development.

• The ability to measure reliably the expenditure attributable to the intangible asset during its development.

Expenditures on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance

cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised

as intangible assets.

Development costs initially recognised as expenses cannot be capitalized in a subsequent period.

US GAAP In general, both research costs and development costs are expensed as incurred, making the recognition of internally

generated intangible assets rare.

* See p.35 for accounting for intangible assets acquired in a business combination.


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However, separate, specific rules apply in certain areas. For example, there is distinct guidance governing the treatment

of costs associated with the development of software for sale to third parties. Separate guidance governs the treatment

of costs associated with the development of software for internal use.

The guidance for the two types of software varies in a number of significant ways. There are, for example, different

thresholds for when capitalization commences, and there are also different parameters for what types of costs are

permitted to be capitalized.

JP GAAP As research and development costs are expensed as incurred, making the recognition of internally generated intangible

assets is rare. However, the Accounting Standard for Research and Development Costs is applied to software to be sold.

Costs for product masters, where an intention for sales become clear by means of numbering product codes or costs

incurred for modification and/or reinforcement of purchased software, as long as such modification is not significant,

should be capitalized. There is no detailed requirement for the cease of capitalization. Software developed for internal

use shall be capitalized when earning of revenue or cost saving by utilizing it is considered certain. Capitalization ceases

when the production of software is substantially completed and there is evidence supporting the completion.

Recognition – website development costs

IFRS Costs incurred during the planning stage are expensed. Costs incurred for activities during the website’s application and

infrastructure development stages are capitalised, and costs incurred during the operation stage are expensed as

incurred.


JP GAAP There is no specific accounting standard. In practice, costs incurred during the planning stage are expensed. Similar to

IFRS, costs incurred for activities during the website’s application and infrastructure development stages are capitalised,

and costs incurred during the operation stage are expensed as incurred.

Recognition – advertising costs

IFRS Costs of advertising are expensed as incurred. The guidance does not provide for deferrals until the first time the

advertising takes place, nor is there an exception related to the capitalization of direct response advertising costs or

programs.

Prepayment for advertising may be recorded as an asset only when payment for the goods or services is made in

advance of the entity’s having the right to access the goods or receive the services.

The cost of sales materials, such as brochures and catalogues, is recognised as an expense when the entity has the right

to access those goods.

US GAAP The costs of other than direct response advertising should be either expensed as incurred or deferred and then expensed

the first time the advertising takes place. This is an accounting policy decision and should be applied consistently to

similar types of advertising activities.

Certain direct response advertising costs are eligible for capitalization if, among other requirements, probable future

economic benefits exist. Direct response advertising costs that have been capitalized are then amortized over the period

of future benefits (subject to impairment considerations).

Aside from direct response advertising related costs, sales materials, such as brochures and catalogues, may be

accounted for as prepaid supplies until they no longer are owned or expected to be used, in which case their cost would

be a cost of advertising.

JP GAAP There is no guidance for advertising costs. Generally, costs incurred for advertising are expensed based on the term of

advertising or the distribution of catalogue and others.

Initial measurement – acquired intangibles

IFRS Recognised initially at cost. The cost of a separately acquired intangible asset at the date of acquisition is usually self-

evident, being the fair value of the consideration paid. The cost of a separately acquired intangible asset comprises its

purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;

and any directly attributable cost of preparing the asset for its intended use.




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Initial measurement – internally generated intangibles

IFRS The cost comprises all expenditures that can be directly attributed or allocated to creating, producing and preparing the

asset from the date when the recognition criteria are met.

US GAAP Costs of internally developing, maintaining or restoring intangible assets that are not specifically identifiable and that

have indeterminable lives, or that are inherent in a continuing business and related to an entity as a whole, are recognised

as an expense when incurred.

JP GAAP There is no recognition criteria for internally generated intangibles (except for software) and generally they are not

recognised in practice.

Subsequent measurement – acquired and internally generated intangibles

IFRS Intangible assets subject to amortisation are carried at historical cost less accumulated amortisation / impairment losses.

Intangible assets not subject to amortisation are carried at historical cost unless impaired. Subsequent revaluation of

intangible assets to their fair value is based on prices in an active market. Revaluations are performed regularly and at the

same time for all assets in the same class if an entity adopts this treatment. Revaluations are extremely rare in practice.

US GAAP Similar to the cost method under IFRS, intangible assets subject to amortisation are carried at amortised cost less

impairment. Intangible assets not subject to amortisation are carried at historical cost less impairment. Revaluation of

intangible assets is not allowed under US GAAP.

JP GAAP Revaluation is not allowed. Intangible assets subject to amortisation are carried at amortised cost less impairment.

Amortisation – acquired and internally generated intangibles

IFRS Amortised if the asset has a finite life; not amortised if the asset has an indefinite life but should be tested at least

annually for impairment. There is no presumed maximum life.


JP GAAP In general, assets are amortised over the period stipulated by corporate tax law on a straight line basis.

Impairment – acquired and internally generated intangibles

IFRS Impairment reviews are required whenever changes in events or circumstances indicate that an intangible asset’s

carrying amount may not be recoverable. Annual reviews are required for intangible assets with indefinite useful lives and

for assets not yet ready for use. Reversals of impairment losses are allowed under specific circumstances (excluding

goodwill).

US GAAP Similar to IFRS, except reversals of impairment losses are prohibited.

JP GAAP Similar to IFRS. However, there is no requirement for an annual review of intangible assets. Reversals of impairment

losses are prohibited.

REFERENCES: IFRS: IAS 36, IAS 38, SIC 32US GAAP: ASC 350-10, ASC 350-20, ASC 350-30, ASC 350-40, ASC 985JP GAAP: Business Accounting Principle, the Corporate Calculation Regulations, Regulations on Financial Statements. Accounting Standards for Business Combination, Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures


Recognition

IFRS General IFRS asset recognition criteria apply. PPE is recognised if future economic benefits attributable to the asset are

probable and the cost of the asset can be measured reliably.


JP GAAP There is no specific requirement.


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Initial measurement

IFRS PPE, at initial measurement, comprises the purchase price plus costs directly attributable to bringing the asset to the

location and working condition necessary for it to be capable of operating in the way management intends. It also

includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which PPE is

located. Start-up and pre-production costs are not capitalised unless they are a necessary part of bringing the asset to

its working condition. The following costs are also included in the initial measurement of the asset:

• the costs of site preparation;

• initial delivery and handling costs;

• installation and assembly costs;

• costs of employee benefits arising from construction or acquisition of the asset;

• costs of testing whether the asset is functioning properly;

• professional fees; and

• fair value gains/losses on qualifying cash flow hedges relating to the purchase of PPE in a foreign currency.

Further, an entity must include borrowing costs incurred during the period of acquiring, constructing or producing a

qualifying asset for its intended use or sale (see p.66).

Government grants received in connection with acquisition of PPE may be offset against the cost (see p.86).

US GAAP Similar to IFRS, except that hedge gains/losses on qualifying cash flow hedges are not included. Relevant borrowing

costs are included if certain criteria are met. Consistent with IFRS, the fair value of a liability for an asset retirement

obligation is recognised in the period incurred if a reasonable estimate of fair value can be made. The associated asset

retirement costs are capitalised as part of the asset’s carrying amount.

JP GAAP Similar to IFRS. PPE is initially measured at cost (including set up costs). Gains/losses on qualifying cash flow hedges

are included in the initial measurement of the asset. Borrowing costs satisfying certain criteria may be included in the

initial measurement. Similar to IFRS, the fair value of a liability for asset retirement obligation is included in the initial

measurement when a reasonable estimate of the fair value can be made. The related asset retirement costs are

capitalized as part of the asset’s carrying amount.

Subsequent expenditure

IFRS Subsequent maintenance expenditure is expensed as incurred. Replacement of parts may be capitalised when general

recognition criteria are met. The cost of a major inspection or overhaul occurring at regular intervals is capitalised where

the recognition criteria are satisfied. The net book value of any replaced component would be expensed at the time of

overhaul.


JP GAAP There is no standard for subsequent expenditure. In practice, costs attributable to extending the useful life or to

improving the performance capability of PPE are capitalised as ‘capital expenditure’.

Asset retirement obligations

IFRS IFRS requires that management’s best estimate of the costs of dismantling and removing the item or restoring the site on

which it is located be recorded when an obligation exists. The estimate is to be based on a present obligation (legal or

constructive) that arises as a result of the acquisition, construction or development of a long-lived asset. If it is not clear

whether a present obligation exists, the entity may evaluate the evidence under a more-likely-than-not threshold. This

threshold is evaluated in relation to the likelihood of settling the obligation.

The guidance uses a pretax discount rate that reflects current market assessments of the time value of money and the

risks specific to the liability.

Changes in the measurement of an existing decommissioning, restoration or similar liability that result from changes in

the estimated timing or amount of the cash outflow or other resources or a change in the discount rate adjust the carrying

value of the related asset under the cost model. Adjustments may not increase the carrying amount of an asset beyond

its recoverable amount or reduce it to a negative value. The periodic unwinding of the discount is recognised in profit or

loss as a finance cost as it occurs.


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US GAAP US GAAP requires that the fair value of an asset retirement obligation be recorded when a reasonable estimate of fair

value can be made. The estimate is to be based on a legal obligation that arises as a result of the acquisition,

construction or development of a long-lived asset.

The use of a credit-adjusted, risk-free rate is required for discounting purposes when an expected present-value

technique is used for estimating the fair value of the liability.

The guidance also requires an entity to measure changes in the liability for an asset retirement obligation due to passage

of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The

interest rate used for measuring that change would be the credit-adjusted, risk-free rate that existed when the liability, or

portion thereof, was initially measured.

In addition, changes to the undiscounted cash flows are recognised as an increase or a decrease in both the liability for

an asset retirement obligation and the related asset retirement cost. Upward revisions are discounted by using the

current credit-adjusted, risk-free rate. Downward revisions are discounted by using the credit-adjusted, risk-free rate that

existed when the original liability was recognised. If an entity cannot identify the prior period to which the downward

revision relates, it may use a weighted-average, credit-adjusted, risk-free rate to discount the downward revision to

estimated future cash flows.

JP GAAP When an asset retirement obligation is incurred, the liability should be recognised at the discounted value based on the

estimated undiscounted future cash flows for dismantling properties. Discount rate should be risk free rate before tax that

reflects time value of money.

If the estimate for undiscounted future cash flows is significantly changed, the adjustment for this change is provided to

the carrying amounts of asset retirement obligations and related properties.

Depreciation

IFRS The depreciable amount of an item of PPE (cost or valuation less residual value) is allocated on a systematic basis over

its useful life, reflecting the pattern in which the entity consumes the asset’s benefits. Additionally, an entity is required to

depreciate separately the significant parts of PPE if they have different useful lives. For example, it may be appropriate to

depreciate separately the airframe and engines of an aircraft. Any change in the depreciation method used is treated as a

change in accounting estimate, reflected in the depreciation charge for the current and prospective periods. The

depreciation methods are reviewed periodically; residual values and useful lives are reviewed at each reporting date.

US GAAP Similar to IFRS, however, US GAAP generally does not require a component approach for depreciation. Like IFRS, US

GAAP requires that a change in depreciation method be accounted for as a change in accounting estimate effected by a

change in accounting principle.

While it would generally be expected that the appropriateness of significant assumptions within the financial statements

would be reassessed each reporting period, there is no requirement for an annual review of residual values.

JP GAAP The cost of PPE is depreciated over its useful life using the straight line method, or the declining method, etc. Changes in

depreciation method are treated as changes in accounting policy. As with IFRS, a change in useful life is generally

treated as a change in accounting estimate.

Subsequent measurement

IFRS PPE is accounted for under either the cost model or the revaluation model. Under the cost model, PPE is carried at cost

less accumulated depreciation and impairment losses.

Under the revaluation model, PPE is carried at fair value at the date of revaluation less depreciation and impairment

losses. The revaluation model should be applied to an entire class of assets. Revaluations have to be kept sufficiently

up-to-date to ensure that the carrying amount does not differ materially from fair value.

The increase of an asset’s carrying amount as a result of a revaluation is credited directly to equity under the heading

‘revaluation surplus’, unless it reverses a revaluation decrease for the same asset previously recognised as an expense.

In this case it is recognised in the income statement. A revaluation decrease is charged directly against any related

revaluation surplus for the same asset; any excess is recognised as an expense.

US GAAP PPE is carried at cost less accumulated depreciation and impairment losses. Revaluations are not permitted. Consistent

with IFRS, impairment testing is performed whenever events or changes in circumstances suggest the carrying value of

an asset is not recoverable.

JP GAAP PPE is carried at cost less accumulated depreciation and impairment losses. Revaluations are not permitted. Consistent


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with IFRS, impairment testing is performed whenever changes in facts and circumstances suggest that the carrying value

of an asset may not be recoverable.

REFERENCES: IFRS: IAS 16, IAS 23, IAS 36, IAS 37, IFRIC 1, SIC 32US GAAP: ASC 205-20, ASC 250, ASC 330, ASC 360-10, ASC 410-20, ASC 410-20-25, ASC 835-20JP GAAP: Business Accounting Principle, Accounting Opinion Series No.3, Accounting Standards for Impairment of Fixed Assets, Guidance on Accounting Standards for Impairment of Fixed Assets

Non-current assets held for sale

IFRS A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale

transaction rather than through continuing use. The asset should be available for immediate sale in its present condition,

and its sale should be highly probable. Specific criteria must be met to demonstrate that the sale is highly probable.

Once classified as held for sale, the asset is measured at the lower of its carrying amount and fair value less costs to sell

with any loss being recognised in the income statement. These assets are not depreciated or amortised during the selling

period. They are presented separately from other assets in the statement of financial position.


JP GAAP There is no accounting standard for non-current assets held for sale or disposal group. Non-current assets held for sale

are presented in the appropriate account.

REFERENCES: IFRS: IFRS 5US GAAP: ASC 205-20, ASC 360-10 JP GAAP: There is no standard.


Lease classification—general

The lease classification concepts are similar in all three frameworks, IFRS, US GAAP and JP GAAP. Substance rather than legal form,

however, is applied under IFRS, while extensive form-driven requirements are present in US GAAP. Under JP GAAP, two

requirements, i.e., non-cancellable and practically receiving economic benefit and bearing cost, are specified.

A finance (capital) lease exists if the agreement transfers substantially all the risks and rewards associated with ownership of the asset

to the lessee. IFRS and US GAAP provide guidance on determining when an arrangement contains a lease. All three frameworks

provide indicators for determining the classification of a lease; these are presented in the table below.

INDICATOR IFRS US GAAP JP GAAP

Normally leads to a finance lease

Ownership is transferred to the lessee at the end of the lease term

Indicator of a finance lease. Finance lease accounting required. Finance lease accounting required.

A bargain purchase option exists

Indicator of a finance lease. Finance lease accounting required. Finance lease accounting required.

The lease term is for the majority of the leased asset’s economic life

Indicator of a finance lease. Specified as equal to or greater than 75% of the asset’s life; finance lease accounting required.

Specified as approximately equal to or greater than 75% of the asset’s life; finance lease accounting required.

The present value of minimum lease payments is equal to substantially all the fair value of the leased asset

Indicator of a finance lease. Specified as 90% of the fair value of the property less any investment tax credit retained by the lessor; finance lease accounting required.

When the present value of the gross lease income exceeds approximately 90% of the estimated cash purchase price; finance lease accounting required.

The leased assets are of a specialised nature such that only the lessee can use them without major modification

Indicator of a finance lease. Not specified. Indicator of a finance lease.

Could lead to a finance lease

On cancellation, the lessor’s losses are borne by the lessee

Indicator of a finance lease. Not specified. Not specified.

Gains and losses from the fluctuation in the fair value of the residual fall to the lessee



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INDICATOR IFRS US GAAP JP GAAP

The lessee has the ability to continue the lease for a secondary period at below market rental


Lease classification—other

IFRS The initial lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with

any further terms for which the lessee has the option to continue to lease the asset, with or without further payment,

when at inception of the lease it is reasonably certain that the lessee will exercise the option. If the period covered by the

renewal option was not considered to be part of the initial lease term, but the option is ultimately exercised based on the

contractually stated terms of the lease, the original lease classification under the guidance continues into the extended

term of the lease; it is not revisited.

The guidance does not permit leveraged lease accounting. Leases that would qualify as leveraged leases under US

GAAP would typically be classified as finance leases under IFRS. Any nonrecourse debt would be reflected gross on the

statement of financial position.

The guidance does not have a similar provision as US GAAP for immediate income recognition by lessor on leases of real

estate. Accordingly, a lessor of real estate (e.g., a dealer) will recognise income immediately if a lease is classified as a

finance lease (i.e., if it transfers substantially all the risks and rewards of ownership to the lessee).

US GAAP The renewal or extension of a lease beyond the original lease term, including those based on existing provisions of the

lease arrangement, normally triggers a fresh lease classification.

The lessor can classify leases that would otherwise be classified as direct-financing leases as leveraged leases if certain

additional criteria are met. Financial lessors sometimes prefer leveraged lease accounting, because it often results in

faster income recognition. It also permits the lessor to net the related nonrecourse debt against the leveraged lease

investment in the balance sheet.

Under the guidance, income recognition for an outright sale of real estate is appropriate only if certain requirements are

met. By extension, such requirements also apply to a lease of real estate. Accordingly, a lessor is not permitted to classify

a lease of real estate as a sales-type lease unless ownership of the underlying property automatically transfers to the

lessee at the end of the lease term, in which case the lessor must apply the guidance appropriate for an outright sale.

JP GAAP The renewal of a lease is generally within a year and the lease payment is normally a small amount. Therefore, except for

cases when there is an explicit intention to extend the lease term at the initial of the lease contract, lease payment for the

extended term is expensed when incurred, in principle.

Similar to IFRS in terms of leveraged leases. However, leveraged lease arrangements are not common for legal entities

as there are no tax advantages.

Similar to IFRS in terms of lessor on real estate (i.e. dealer).

Recognition of the investment in the lease

All three frameworks, IFRS, US GAAP and JP GAAP, require the amount due from a lessee under a finance lease to be recognised as

a receivable at the amount of the net investment in the lease. This will comprise, at any point in time, the total of the future minimum

lease payments and the unguaranteed residual value less earnings allocated to future periods. Minimum lease payments for a lessor

under IFRS and JP GAAP include guarantees from the lessee or a party related to the lessee or a third-party unrelated to the lessor.

US GAAP excludes third-party residual value guarantees that provide residual value guarantees on a portfolio basis. The interest rate

implicit in the lease would, under IFRS, US GAAP and JP GAAP, generally be used to calculate the present value of minimum lease

payments.

The rentals are allocated between receipt of the capital amount and receipt of finance income to provide a constant rate of return.

Initial direct costs are amortised over the lease term. All three frameworks require the use of the net investment method to allocate

earnings; this excludes the effect of cash flows arising from taxes and financing relating to a lease transaction. An exception to this is

for leveraged leases under US GAAP where tax cash flows are included.


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Operating lease

All three frameworks require an asset leased under an operating lease to be recognised by a lessor according to its nature − for

example, as PPE − and depreciated over its useful life. Rental income is generally recognised on a straight-line basis over the lease

term.

IFRS and US GAAP require the lessor to recognise the aggregate cost of incentives given as a reduction of rental income over the

lease term on a straight-line basis.

Under JP GAAP, there is no guidance for incentives.

Sale-leaseback arrangements

IFRS When a sale-leaseback transaction results in a lease classified as an operating lease, the full gain on the sale would

normally be recognised if the sale was executed at the fair value of the asset. It is not necessary for the leaseback to be

minor.

If the sale price is below fair value, any profit or loss should be recognised immediately, except that if the favorable price

is compensated for by future lease payments at below-market rates, the impact thereof should be deferred and

amortized in proportion to the lease payments over the lease period. If the sale price is above fair value, the excess over

fair value should be deferred and amortized over the period for which the asset is expected to be used.

When a sale-leaseback transaction results in a finance lease, the gain is amortized over the lease term irrespective of

whether the lessee will reacquire the leased property.

There are no real estate specific rules equivalent to the US guidance. Accordingly, almost all sale-leaseback transactions

result in sale-leaseback accounting. The property sold would be removed from the statement of financial position and if

the leaseback is classified as an operating lease, the property would not come back onto the seller-lessee’s statement of

financial position.

US GAAP The gain on a sale-leaseback transaction is generally deferred and amortized over the lease term. Immediate recognition

of the full gain is normally appropriate only when the leaseback is minor, as defined.

If the leaseback is more than minor, but less than substantially all of the asset life, a gain is recognised immediately to the

extent that the gain exceeds the present value of the minimum lease payments.

If the lessee provides a residual value guarantee, the gain corresponding to the gross amount of the guarantee is deferred

until the end of the lease; such amount is not amortized during the lease term.

When a sale-leaseback transaction results in a capital lease, the gain is amortized in proportion to the amortization of the

leased asset.

There are onerous rules for determining when sale-leaseback accounting is appropriate for transactions involving real

estate. If the rules are not met, the sale leaseback will be accounted for as a financing. As such, the real estate will

remain on the seller-lessee’s balance sheet and the sales proceeds will be reflected as debt. Thereafter, the property will

continue to be depreciated and the rent payments will be recharacterised as debt service.

JP GAAP The gain on a sale-leaseback transaction, when the lease contract is a finance lease, is generally deferred and amortized

over the lease term. There is no accounting standard for sale-leaseback transactions that are operating leases.

Leases involving land and buildings

IFRS Land and building elements must be considered separately, unless the land element is not material. This means that

nearly all leases involving land and buildings should be bifurcated into two components, with separate classification

considerations and accounting for each component.

In 2009 lease accounting was amended to provide guidance for classifying the land element of a lease. Previously, the

land element of a lease was required to be classified as an operating lease unless title to the land was expected to pass

to the lessee by the end of the lease term. That rule has been eliminated. Going forward, the lease of the land element

should be classified based on a consideration of all of the risks and rewards indicators that apply to leases of other

assets. Accordingly, a land lease would normally be classified as a finance lease if the lease term were long enough to

cause the present value of the minimum lease payments to be at least substantially all of the fair value of the land. The

new lease classification should be applied retrospectively at the effective date if the entity has the information to do so. If

not, the new lease classification shall be applied as of the effective date.

In determining whether the land element is an operating or a finance lease, an important consideration is that land

normally has an indefinite economic life. A lessee is required to reassess the classification of land elements of unexpired


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leases at the date it adopts the amendment noted above on the basis of information existing at the inception of those

leases.

US GAAP Land and building elements are generally accounted for as a single unit, unless the land represents 25% or more of the

total fair value of the leased property.

JP GAAP Land and building elements are, in principle, accounted for separately based on a reasonable method. The land element

of a lease is considered to be an operating lease, except for cases when land ownership will pass to the lessee before

the end of the lease term or a bargain purchase option is reliably expected to be exercised.

Recent proposals – IFRS/US GAAP

In March 2009, the IASB and FASB have issued a discussion paper Leases: Preliminary Views in response to concerns raised by

investors and other users of financial statements regarding the current accounting treatment of leases under both IFRS and US

GAAP. The discussion paper deals mainly with lessee accounting. However, it also describes some of the issues that need to be

addressed in a future proposed standard on lessor accounting. The discussion paper proposes a new approach to lease

accounting which removes the distinction between finance and operating leases and instead requires all leases to be recognised

as an asset representing a right to use the leased item for the lease term (the ‘right-of-use’ asset) and a liability for an obligation to

pay rentals.

REFERENCES: IFRS: IAS 17, IFRIC 4US GAAP: ASC 360-20, ASC 840, ASC 840-40, ASC 976JP GAAP: Accounting Standards for Lease Transaction, Guidance on Accounting Standards for Lease Transactions


Recognition and measurement

IFRS An entity should assess at each reporting date whether there are any indications that an asset may be impaired. The

asset is tested for impairment if there is any such indication based on internal and/or external sources of information.

Goodwill, indefinite intangible lived assets and intangibles not yet ready for use are required to be tested annually even if

there are no indications of impairment. In practice, individual assets do not usually meet the definition of a cash

generating unit. As a result assets are rarely tested for impairment individually but are tested within a group of assets.

Goodwill impairment testing is performed at the lowest level at which it is monitored for internal management purposes

and may not be larger than an operating segment before aggregation.

IFRS uses a one-step impairment test. The carrying amount of an asset is compared with the recoverable amount. The

recoverable amount is the higher of (1) the asset’s fair value less costs to sell or (2) the asset’s value in use. Value in use

represents the future cash flows to be derived from the particular asset or group of assets, discounted to present value

using a pre-tax market rate that reflects the current assessment of the time value of money and the risks specific to the

asset or group of assets for which the cash flow estimates have not been adjusted. Fair value less cost to sell represents

the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction between

knowledgeable, willing parties, less the costs of disposal.

An impairment loss is recognised in profit or loss when a non-revalued asset’s carrying amount exceeds its recoverable

amount. Where the asset is carried in accordance with the principles of the revaluation model, the impairment loss is

recognised directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed

the amount of the revaluation surplus for that same asset and any excess is recognised in profit or loss.

US GAAP Like IFRS, long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their

carrying amount may not be recoverable.

US GAAP requires a two-step impairment test and measurement model as follows:

1. The carrying amount is first compared with the undiscounted cash flows. If the carrying amount is lower than the

undiscounted cash flows, no impairment loss is recognised, although it may be necessary to review depreciation (or

amortization) estimates and methods for the related asset.

2. If the carrying amount is higher than the undiscounted cash flows, an impairment loss is measured as the difference

between the carrying amount and fair value. Fair value is defined as the price that would be received to sell an asset or

that would be paid to transfer a liability in an orderly transaction between market participants at the measurement

date. The IFRS reference to knowledgeable, willing parties is generally viewed as being consistent with the market


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participant assumption noted under US GAAP.

If the asset is recoverable based on undiscounted cash flows, the discounting or fair value type determinations are not

applicable. Changes in market interest rates are not considered impairment indicators.

JP GAAP Similar to US GAAP, assets are assessed for impairment by first comparing the carrying amount with the undiscounted

cash flows that are expected to result from the use and eventual disposal of the asset. The impairment loss is

recognised in the income statement when an asset’s carrying amount exceeds its recoverable amount (the higher of net

selling value or value in use).

Reversal of impairment loss

IFRS Impairment losses are reversed when there has been a change in economic conditions or in the expected use of the

asset. Reversal of impairment losses is prohibited as long as it relates to goodwill.

US GAAP Impairment losses cannot be reversed for assets to be held and used.

JP GAAP Similar to US GAAP. Impairment losses cannot be reversed.

REFERENCES: IFRS: IAS 16, IAS 36US GAAP: ASC 205-20, ASC 360-10, ASC 410-20JP GAAP: Accounting Standards for Impairment of Fixed Assets, Guidance on Accounting Standards for Impairment of Fixed Assets

Capitalisation of borrowing costs

Recognition

IFRS Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are

required to be capitalized as part of the cost of that asset.

The guidance acknowledges that determining the amount of borrowing costs that are directly attributable to an otherwise

qualifying asset may require professional judgment. Having said that, the guidance first requires the consideration of any

specific borrowings and then requires consideration of all general borrowings outstanding.

In broad terms, a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended

use or sale. Investments accounted for under the equity method would not meet the criteria for a qualifying asset.

US GAAP Capitalization of interest costs while a qualifying asset is being prepared for its intended use is required. The guidance

does not require that all borrowings be included in the determination of a weighted-average capitalization rate. Instead,

the requirement is to capitalize a reasonable measure of cost for financing the asset’s acquisition in terms of the interest

cost incurred that otherwise could have been avoided.

An investment accounted for by using the equity method meets the criteria for a qualifying asset while the investee has

activities in progress necessary to commence its planned principal operations, provided that the investee’s activities

include the use of funds to acquire qualifying assets for its operations.

JP GAAP Borrowing costs are required to be expensed. However, interest paid on borrowings to finance self-constructed fixed

assets and work in process for real estate development business may be capitalised.

REFERENCES: IFRS: IAS 23RUS GAAP: ASC 835-20JP GAAP: Accounting Opinion Series for Coordination between Business Accounting Principles and its Related Regulations No.3 Depreciation of Tangible Fixed Assets, Accounting Opinion Series for Coordination between Business Accounting Principles and its Related Regulations No.4 Evaluation of Inventories, and Audit Treatment for Interest Paid for Real Estate Development Business

Investment property

Definition

IFRS Property (land and/or buildings – or part of a building) held (by the owner or by the lessee under a finance lease) in order

to earn rentals and/or for capital appreciation. It would include property being constructed or developed for future use as

investment property (from periods beginning on or after 1 January 2009 or from earlier dates if the fair values for such

properties were determined at those dates). The definition does not include owner – or lessee-occupied property or,


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property held for sale in the ordinary course of business or property being constructed or developed for sale or on behalf

of third parties.

US GAAP There is no specific definition of investment property.


Initial measurement

IFRS An investment property is measured initially at its cost. The cost of a purchased investment property comprises its

purchase price and any directly attributable costs, such as professional fees for legal services, property transfer taxes

and other transaction costs. Over the period of construction, the costs of construction of a self-constructed investment

property are capitalised as part of its cost. Costs that may be capitalised are similar to those permitted for PPE.

The initial cost of a property interest held under a lease and classified as an investment property is as prescribed for a

finance lease under IAS 17.

US GAAP The historical cost model is used for most real-estate companies and operating companies holding investment-type

property. Investor entities − such as many investment companies, insurance companies separate accounts, bank-

sponsored real-estate trusts and employee benefit plans that invest in real estate − carry their investments at fair value.



IFRS The entity can choose between the fair value and depreciated cost models for all investment property. When fair value is

applied, the gain or loss arising from a change in the fair value is recognised in profit or loss. The carrying amount is not

depreciated. Where the fair value model is applied, investment property in the course of construction is measured at fair

value, unless its fair value is not reliably measurable. In this case, the property is measured at cost until the earlier of the

date construction is completed or the date at which fair value becomes reliably measurable.

An investment property held under an operating lease must be measured under the fair value model.

US GAAP The depreciated cost model is applied for real estate companies and operating companies holding investment-type

property. Investor entities measure their investments at fair value.

The fair value alternative for leased property does not exist.

JP GAAP Only depreciated cost model is allowed.

REFERENCES: IFRS: IAS 40US GAAP: ASC 330JP GAAP: Business Accounting Principles, Accounting Opinion Series for Coordination between Business Accounting Principles and its Related Regulations No.3 Depreciation of Tangible Fixed Assets

Inventories

Definition

All three frameworks, IFRS, US GAAP and JP GAAP, define inventories as assets that are: held for sale in the ordinary course of

business; in the process of production or for sale in the form of materials; or supplies to be consumed in the production process or in

rendering services.

Measurement

IFRS Inventories are carried at the lower of cost or net realisable value (sale proceeds less all further costs to bring the

inventories to completion). Reversal (limited to the amount of the original write-down) is required for a subsequent

increase in value of inventory previously written down.

US GAAP Broadly consistent with IFRS, in that the lower of cost and market value is used to value inventories. Market value is defined

as being current replacement cost subject to an upper limit of net realisable value (i.e., estimated selling price in the

ordinary course of business less reasonably predictable costs of completion and disposal) and a lower limit of net realisable

value less a normal profit margin. Reversal of a write-down is prohibited, as a write-down creates a new cost basis.


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JP GAAP Similar to IFRS. For write downs, the entity can choose to apply either the reversal method or the non-reversal method,

provided the method is consistently applied. An election can be made applicable to each separate asset class. Reversal

of a write-down is limited to the amount written down in previous periods.

Formula for determining cost

METHOD IFRS US GAAP JP GAAP

LIFO Prohibited Permitted Prohibited *1

FIFO Permitted Permitted Permitted

Weighted average cost Permitted Permitted Permitted

*1 Applicable for fiscal years beginning on and after April 1, 2010.

REFERENCES: IFRS: IAS 2US GAAP: ASC 330JP GAAP: Business Accounting Principles, Accounting Opinion Series for Coordination between Business Accounting Principles and its Related Regulations No.4 Evaluation of Inventories, Accounting Standard for Measurement of Inventories

Insurance recoveries

IFRS A contingent asset is recognised only when realization of the associated benefit, such as an insurance recovery, is

virtually certain.

US GAAP Contingent assets are generally recognised when virtually certain. However, the threshold for recognising insurance

recoveries is lower than under IFRS (i.e., probable).

JP GAAP There is no accounting standard for contingent assets.

Biological assets

IFRS The accounting treatment for biological assets requires measurement at fair value less estimated costs to sell at initial

recognition of biological assets and at each subsequent reporting date, unless fair value cannot be measured reliably (in

which case it should be measured at cost less accumulated depreciation and impairment losses if any).

All changes in fair value are recognised in profit or loss in the period in which they arise.

US GAAP Historical cost is generally used for biological assets. These assets are tested for impairment in the same manner as

other long-lived assets.

JP GAAP Not specified − historical cost is generally used.

REFERENCES: IFRS: IAS 41

Nonmonetary assets

IFRS Accounting for the distribution of nonmonetary assets to owners of an entity should be based on the fair value of the

nonmonetary assets to be distributed. A dividend payable is measured at the fair value of the nonmonetary assets to be

distributed. Upon settlement of a dividend payable, an entity will recognise the difference, if any, between the carrying

amount of the assets to be distributed and the carrying amount of the dividend payable in profit or loss.

US GAAP Accounting for the distribution of nonmonetary assets to owners of an enterprise should be based on the recorded

amount (after reduction, if appropriate, for an indicated impairment of value) of the nonmonetary assets distributed.

Upon distribution those amounts are reflected as a reduction of owner’s equity.

JP GAAP The accounting for the distribution of nonmonetary assets is based on the fair value of the nonmonetary assets; and

deducted from other capital surplus or other retained earnings (retained earnings carries forward). The difference

between the fair value and the appropriate carrying value of the nonmonetary assets as of the effective date of

distribution (i.e., actual distribution date) is recognised in net income for the period of that date and presented

appropriately in accordance with the type of nonmonetary assets.


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Financial assets

Recent changes – IFRS

Amendments to IAS 39 and IFRS 7: Reclassification of Financial Assets

This amendment to the Standard, issued in October 2008, permits an entity to reclassify non-derivative financial assets (other than

those designated at fair value through profit or loss by the entity upon initial recognition) out of the held for trading category in

particular circumstances. The amendment also permits an entity to transfer from the available-for-sale category to the loans and

receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset had not

been designated as available for sale), if the entity has the intention and ability to hold that financial asset for the foreseeable

future.

For details, refer to the discussion under “Reclassification of assets between categories” above.

Recent changes – US GAAP

ASC 860: Accounting for Transfers of Financial Assets

This amends the guidance on transfers of financial assets in order to address practice issues highlighted most recently by events

related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept (QSPE),

(2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting,

(3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of

recognised gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the

transferor, and (5) extensive new disclosures.

Calendar year-end companies will have to apply this guidance to new transfers of financial assets occurring from January 1, 2010.

Companies will need to assess how their financial statements and future transfers of financial assets will be affected.

This guidance is intended to address certain perceived flaws in US GAAP and is not intended to converge US GAAP with IFRS in

this area although the elimination of the QSPE concept could be viewed as a step closer to convergence because IFRS does not

have this concept). However, the FASB intends to work with the IASB in considering comment letters on its exposure draft and

developing a final converged derecognition standard.

ASC 820-10-65: Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

This provides additional guidance for estimating fair value in accordance with fair value instruments when the volume and level of

activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that

indicate a transaction is not orderly.

This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or

liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced

liquidation or distressed sale) between market participants at the measurement date under current market conditions.

This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.

ASC 320-10: Recognition and Presentation of Other-Than-Temporary Impairments

This guidance amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more

operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in

the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-

temporary impairments of equity securities.

The objective of an other-than-temporary impairment analysis under existing U.S. GAAP is to determine whether the holder of an

investment in a debt or equity instrument for which changes in fair value are not regularly recognised in earnings (such as securities

classified as held-to-maturity or available-for-sale) should recognise a loss in earnings when the investment is impaired. An

investment is impaired if the fair value of the investment is less than its amortized cost basis (as discussed in the table above in the

impairment section).

This is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods

ending after March 15, 2009.

For details, refer to the discussion under “Impairment principles: available-for-sale debt instruments” and “Impairment principles:

held-to-maturity debt instruments.”


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IFRS outlines the recognition and measurement criteria for all financial assets defined to include derivatives. The guidance in IFRS is

broadly consistent with US GAAP and JP GAAP.

Definition

IFRS, US GAAP and JP GAAP define a financial asset in a similar way, to include:

• cash;

• a contractual right to receive cash or another financial asset from another entity or to exchange financial instruments with another

entity under conditions that are potentially favourable; and

• an equity instrument of another entity.

Recognition and initial measurementIFRS, US GAAP and JP GAAP require an entity to recognise a financial asset only when the entity becomes a party to the contractual

provisions of the instrument. A financial asset is typically recognised initially at its fair value (which is normally the transaction price),

plus, in the case of a financial asset that is not recognised at fair value with changes in fair value recognised in the income statement

(IFRS: the statement of other comprehensive income), transaction costs that are directly attributable to the acquisition of that asset.

The following table outlines the classification requirements for various financial assets.

CLASSIFICATION IFRS US GAAP JP GAAP

Financial assets at fair value through profit or loss

Two sub-categories: financial assets held for trading (see below), and those designated to the category at inception.

An irrevocable decision at inception to classify a financial asset at fair value, with changes in fair value recognised in profit or loss, provided it results in more relevant information because either:

• it eliminates or significantly reduces a measurement or recognition inconsistency;

• a group of financial assets, financial liabilities or both is managed and performance is evaluated on a fair value basis; or

• the contract contains one or more ‘substantive’ embedded derivatives.

Irrevocable decision to designate financial assets at fair value with changes in fair value recognised in the income statement.

Unlike IFRS, this decision is not restricted to specific circumstances.

The concept of fair value options is not introduced. Therefore, a group of financial instruments cannot be designated as ‘financial asset at fair value through profit or loss’.

Held-for-trading financial assets

Debt and equity instruments (securities) held for sale in the short term. Includes non-qualifying hedging derivatives.

The intention should be to hold the financial asset for a relatively short period, or as part of a portfolio for the purpose of short-term profit-taking.

Subsequent measurement at fair value. Changes in fair value are recognised in profit or loss.

Frequent buying and selling usually indicates a trading instrument. However, the category is not limited to those securities held for short-term profit taking.

Similar to IFRS.

Similar to IFRS. Financial assets held for the purposes of short-term profit-taking from change in market prices are measured at fair value, with changes in fair value recognised in the income statement.

Similar to IFRS.

Held-to-maturity investments

Financial assets held with a positive intent and ability to hold to maturity. Includes assets with fixed or determinable payments and maturities. Does not include equity instruments (securities), as they have an indefinite life.

An entity should have the ‘positive intent and ability’ to hold a financial asset to maturity, not simply a present intention.

When an entity sells more than an insignificant amount of assets (other than in limited circumstances), classified as held to maturity, it is prohibited from using the held-to-maturity classification for two full annual reporting periods (known as tainting). The entity should also reclassify all its held-to-maturity assets as available-for-sale assets.

Measured at amortised cost using the effective interest rate method.

Similar to IFRS, although US GAAP is silent about when assets cease to be tainted. For listed companies, the SEC states that the tainting period for sales or transfers of held-to-maturity securities should be two years.

Similar to IFRS, although only securities are included in this classification.


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CLASSIFICATION IFRS US GAAP JP GAAP

Loans and receivables

There are classification differences between IFRS and US GAAP. The potential classification differences drive subsequent measurement differences under IFRS and US GAAP for the same debt instrument.

Financial assets with fixed or determinable payments not quoted in an active market. May include loans and receivables purchased, provided their intention is similar, but not interests in pools of assets (for example, mutual funds).

Loans and receivables are measured at amortised cost.

Does not define a loan and receivable category. Industry-specific guidance may also apply.

This category does not apply to investments in debt securities.

Similar to IFRS in the classification of receivables. Financial assets are classified by their legal form.

Measured at acquisition cost or amortized cost after deducting allowances for bad debts.

Available-for-sale financial assets

Includes debt and equity instruments designated as available for sale, except those classified as held for trading, and those not covered by any of the above categories.

Measured at fair value.

Changes in fair value are recognised net of tax effects in other comprehensive income (i.e., presented in a statement of changes in shareholder’s equity) and recycled to profit or loss when sold, impaired or collected.

Foreign exchange gains and losses on debt instruments are recognised in profit or loss.

Similar to IFRS, except unlisted equity securities are generally carried at cost. Exceptions apply for specific industries.

Changes in fair value are reported in other comprehensive income, though impairment recognition is different compared to IFRS.

Foreign exchange gains and losses on debt securities are recognised in equity.

Similar to IFRS. Only marketable securities fall under this category.

Foreign exchange gains and losses on securities are recognised in net assets in principle, but an option exists to recognise them in the income statement.

Available-for-sale financial assets: fair value versus cost of unlisted equity instruments (securities)

IFRS There are no industry-specific differences in the treatment of investments in equity instruments that do not have quoted

market prices in an active market. Rather, all available-for-sale assets, including investments in unlisted equity

instruments, are measured at fair value (with rare exceptions only for instances where fair value cannot be reasonably

estimated).

Fair value is not reliably measurable when the range of reasonable fair value estimates is significant and the probability of

the various estimates within the range can not be reasonably assessed.

In those instances where an entity demonstrates that fair value cannot be reasonably estimated, extensive disclosures

are required, including (1) the fact that the instruments are not reflected at fair value, (2) reasons that the fair value could

not be measured, (3) information about the market for the instruments and (4) whether and how the entity plans to

dispose of the instruments.

US GAAP Unlisted equity investments are generally carried at cost (unless either impaired or the fair value option is elected).

Certain exceptions requiring that investments in unlisted equity securities be carried at fair value do exist for specific

industries (e.g., broker/dealers, investment companies, insurance companies, defined benefit plans).

JP GAAP Investments in unlisted equity instruments are recorded at cost when it is extremely difficult to measure at fair value

(except when there is an impairment).

Available-for-sale debt financial assets: foreign exchange gains/losses

IFRS For monetary available-for-sale financial instruments (e.g., a debt instrument) the total change in fair value is bifurcated,

with the portion associated with foreign exchange gains/losses calculated on an amortised cost basis separately

recognised in profit or loss. The remaining portion of the total change in fair value is recognised in a separate component

of other comprehensive income, net of tax effect.

US GAAP The total change in fair value of available-for-sale debt securities—net of associated tax effects—is recorded within other

comprehensive income.

Any component of the overall change in fair market value that may be associated with foreign exchange gains and losses

on an available-for-sale debt security is treated in a manner consistent with the remaining overall change in the

instrument’s fair value.

JP GAAP The total changes in fair value of available-for-sale debt instruments net of associated tax effects are recognised in net

assets. However, foreign exchanges gains or losses associated with debt securities may be recognised in the income

statement.


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Effective interest rates: expected versus contractual cash flows

IFRS For financial assets where amortized cost is required, the calculation of the effective interest rate is generally based on

the estimated cash flows over the expected life of the asset.

Contractual cash flows over the full contractual term of the financial asset are used only in those rare cases when it is not

possible to reliably estimate the expected cash flows over the expected life of a financial asset.

US GAAP For financial assets where amortized cost is required, the calculation of the effective interest rate is generally based on

contractual cash flows over the asset’s contractual life.

The expected life, under US GAAP, is typically used only for (1) loans if the entity holds a large number of similar loans

and the prepayments can be reasonably estimated, (2) certain structured notes, (3) certain beneficial interests in

securitized financial assets and (4) certain loans or debt securities acquired in a transfer.

JP GAAP For financial assets where amortized cost is required, the calculation of the effective interest rate is generally based on

contractual cash flows over the asset’s contractual life.

Effective interest rates: changes in expectations

IFRS If an entity revises its estimates of payments or receipts, the entity adjusts the carrying amount of the financial asset (or

group of financial assets) to reflect both actual and revised estimated cash flows.

Frequent revisions of the estimated life or of the estimated future cash flows may exist, for example, in connection with

debt instruments that contain a put or call option that doesn’t need to be bifurcated or whose coupon payments vary,

because of an embedded feature that does not meet the definition of a derivative because its underlying is a nonfinancial

variable specific to a party to the contract (e.g., cash flows that are linked to earnings before interest, taxes, depreciation

and amortization; sales volume; or the earnings of one party to the contract).

The entity recalculates the carrying amount by computing the present value of estimated future cash flows at the financial

asset’s original effective interest rate. The adjustment is recognised as income or expense in profit or loss (i.e., by the

cumulative-catch-up approach).

US GAAP Different models apply to the ways revised estimates are treated depending on the type of financial asset involved (e.g.,

structured notes, beneficial interests, loans or debt acquired in a transfer).

Depending on the nature of the asset, changes may be reflected prospectively or retrospectively. None of the US GAAP

models are the equivalent of the IFRS cumulative-catch-up-based approach.

JP GAAP Calculation of effective interest rate is based on contractual cash flows and expected cash flows are not usually reflected

in the calculation.

Fair value option for equity-method investments

IFRS IFRS permits venture capital organizations, mutual funds and unit trusts (as well as similar entities, including investment-

linked insurance funds) that have investments in associates (entities over which they have significant influence) to

measure their investments at fair value, with changes in fair value reported in earnings (provided certain criteria are met)

in lieu of applying equity method of accounting.

US GAAP The fair value option exists for US GAAP entities under ASC 825 wherein the option may be applied to investments

regardless of the type of investor.

JP GAAP There is no accounting standard for the fair value option.

Fair value measurement: bid/ask spreads

IFRS The appropriate quoted market price for an asset held or a liability to be issued is the current bid price and, for an asset

to be acquired or a liability held, is the ask price. However, when the entity has assets and liabilities with offsetting market

risks, the entity may use the midprice for the offsetting risk positions and apply the bid or ask price to the net open

position.

US GAAP If an input used for measuring fair value is based on bid and ask prices, the price within the bid-ask spread that is most

representative of fair value in the circumstances is used. At the same time, US GAAP does not preclude the use of

midmarket pricing or other pricing conventions as practical expedients for fair value measurements within a bid-ask

spread. As a result, financial assets may, in certain situations, be valued at a bid or ask price, at the last price, at the

mean between bid and ask prices or at a valuation within the range of bid and ask prices.


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JP GAAP Accounting standards do not specify the bid/ask spreads. However, for unlisted derivatives, an entity may use the mean

between bid and ask prices if the range of bid and ask prices is small. If the range is large, it is preferable to use bid price

for assets and ask price for liabilities.

Fair value measurement: Day One gains and losses

IFRS The best evidence of fair value of a financial instrument at initial recognition is the transaction price unless comparison

with other observable current market transactions in the same instrument demonstrates otherwise. Similarly, a valuation

technique that only uses observable inputs may demonstrate that the transaction price is not the best evidence of fair

value. Where fair value is determined from other observable current market transactions in the same instrument or by

using a measurement model that only uses inputs from observable sources, a Day One gain or loss on fair value

measurement of the instrument is recognised in profit or loss. Day One gains and losses are not recognised unless all

inputs to a measurement model are observable.

US GAAP If supported by the facts and circumstances, entities may recognise Day One gains and losses on financial instruments

reported at fair value even when some inputs in the measurement model are not observable.

JP GAAP As a general conception, a transaction between independent third parties that includes financial instruments is

considered as an exchange of equivalents based on market value. Therefore, for cases where there are differences

between transaction prices at initial recognition and fair value, there is no specific guidance. In such cases, the

accounting should be on the substance of the transaction

Reclassification of assets between categories

IFRS Financial assets may be reclassified between categories, albeit with conditions.

More significantly, debt instruments may be reclassified from held for trading or available-for-sale into loan and

receivable, if the debt instrument meets the definition of loans and receivables and the entity has the intent and ability to

hold for the foreseeable future.

Also, a financial asset can be transferred from trading to available-for-sale in rare circumstances.

Reclassification is prohibited for instruments where the fair value option is elected.

US GAAP Changes in classification between trading, available-for-sale and held-to-maturity categories occur only when justified by

the facts and circumstances within the concepts of ASC 320. Given the nature of a trading security, transfers into or from

the trading category should be rare, though they do occur.

JP GAAP Reclassification of assets between categories is prohibited in principle.

Similar to IFRS in terms of reclassification of debt securities from held-to-maturity and the “tainted” concept.

Only in rare cases, transfer from available-for-sale to trading is allowed for debt securities. In addition to the rare case,

when managements’ intent and ability to hold securities to maturity is determinable, transfer from trading or available-for-

sale to held-to-maturity investment is allowed.

Loans and receivables

IFRS IFRS defines loans and receivables as nonderivative financial assets with fixed or determinable payments not quoted in

an active market and that are other than:

• Those that the entity intends to sell immediately or in the near term, which are classified as held for trading and those

that the entity upon initial recognition designates as at fair value through profit or loss;

• Those that the entity upon initial recognition designates as available for sale; and

• Those for which the holder may not recover substantially all of its initial investment (other than, because of credit

deterioration) and that shall be classified as available for sale.

An interest acquired in a pool of assets that are not loans or receivables (i.e., an interest in a mutual fund or a similar fund)

is not a loan or receivable.

Instruments that meet the definition of loans and receivables are carried at amortized cost in the loan and receivable

category unless classified into either the fair value through profit-or-loss category or the available-for-sale category. In

either of the latter two cases, they are carried at fair value.


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IFRS does not have a category of loans and receivables that is carried at the lower of cost or market.

US GAAP The classification and accounting treatment of nonderivative financial assets depends on whether the asset in question

meets the definition of a debt security under ASC 320. If the asset meets that definition, it is generally classified as either

trading, available for sale or held to maturity.

To meet the definition of a debt security under ASC 320, the asset is required to be of a type commonly available on

securities exchanges or in markets or, when represented by an instrument, is commonly recognised in any area in which

it is issued or dealt in as a medium for investment.

Loans and receivables that are not within the scope of ASC 320 fall within the scope of either ASC 310 or ASC 835-30.

As an example, mortgage loans are either:

• Classified as loans held for investment, in which case they are measured at amortized cost;

• Classified as loans held for sale, in which case they are measured at the lower of cost or fair value (market); or

• Fair value if the fair value option is elected.

JP GAAP Similar to IFRS. Financial assets are classified as receivables by their legal form.

Impairment principles: available-for-sale debt instruments (securities)

IFRS A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as the

result of one or more events that occurred after initial recognition of the asset (a loss event) and if that loss event has an

impact on the estimated future cash flows of the financial asset that can be estimated reliably. In assessing the objective

evidence of impairment, an entity considers the following factors:

• Significant financial difficulty of the issuer.

• High probability of bankruptcy.

• Granting of a concession to the issuer.

• Disappearance of an active market, because of financial difficulties.

• Breach of contract, such as default or delinquency in interest or principal.

• Observable data indicating there is a measurable decrease in the estimated future cash flows since initial recognition.

The disappearance of an active market, because an entity’s securities are no longer publicly traded or the downgrade of

an entity’s credit rating is not, by itself, evidence of impairment, although it may be evidence of impairment when

considered with other information.

At the same time, a decline in the fair value of a debt instrument below its amortized cost is not necessarily evidence of

impairment. (For example, a decline in the fair value of an investment in a corporate bond that results solely from an

increase in market interest rates is not an impairment indicator and would not require an impairment evaluation under

IFRS.) An impairment analysis under IFRS focuses only on the triggering events that affect the cash flows from the asset

itself and does not consider the holder’s intent.

Once impairment of a debt instrument is determined to be triggered, the loss in equity due to changes in fair value is

released into profit or loss.

US GAAP An investment in debt securities is assessed for impairment if the fair value is less than cost. An analysis is performed to

determine whether the shortfall in fair value is temporary or other than temporary.

In a determination of whether impairment is other than temporary, the following factors are assessed for available for sale

securities:

Step 1- Can management assert (a) it does not have the intent to sell and (b) it is more likely than not that it will not have

to sell before recovery of cost? If no, then impairment is triggered. If yes, then move to Step 2.

Step 2 - Does management expect recovery of the entire cost basis of the security? If yes, then impairment is not

triggered. If no, then impairment is triggered.

Once it is determined that impairment is other than temporary, the impairment loss recognised in the income statement

depends on the impairment trigger:


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If impairment is triggered as a result of Step 1, the cumulative loss deferred in equity is released into the income

statement.

If impairment is triggered in Step 2, impairment loss is measured by calculating the present value of cash flows expected

to be collected from the impaired security. The determination of such expected credit loss is not explicitly defined; one

method could be to discount the best estimate of cash flows by the original effective interest rate. The difference

between the fair value and the post impairment amortized cost is recorded within other comprehensive income.

JP GAAP Securities with fair value are impaired when its fair value has significantly declined unless there is a possibility to recover.

For debt instruments where it is extremely difficult to determine fair value, the expected unrecoverable amount is based

on the calculation of the bad debt allowance taking into account credit risk.

Impairment principles: held-to-maturity debt instruments

IFRS Impairment is triggered for held-to-maturity investments based on objective evidence of impairment described above for

available-for-sale debt instruments.

Once impairment is triggered, the loss is measured by discounting the estimated future cash flows (adjusted for incurred

loss) by the original effective interest rate. As a practical expedient, impairment may be measured based on the

instrument’s observable fair value.

US GAAP The two step impairment test mentioned above is also applicable to investments classified as held-to-maturity. It would

be expected that held-to-maturity investments would not trigger Step 1 (as tainting would result). Rather, evaluation of

Step 2 may trigger impairment.

Once triggered, impairment is measured with reference to expected credit losses as described for available-for-sale debt

securities. The difference between the fair value and the post impairment amortized cost is recorded within other

comprehensive income (OCI) and accreted from OCI to the amortized cost of the debt security over its remaining life

prospectively.

JP GAAP Debt instruments with fair value are impaired when its fair value has significantly declined unless there is a possibility to

recover. For debt instruments where it is extremely difficult to determine fair value, the expected unrecoverable amount

is based on the calculation of the of bad debt allowance taking into account credit risk.

Impairment of available-for-sale equity instruments

IFRS Similar to debt investment, impairment of available for sale equity investments is triggered by objective evidence of

impairment. In addition to examples of events discussed above, objective evidence of impairment of AFS equity

includes:

• Significant decline in fair value below cost;

• Prolonged decline in fair value below; or

• Significant adverse changes in technological, market, economic or legal environment.

For example, if a decline has persisted for more than twelve consecutive months, then the decline is likely to be

considered “prolonged”.

Each factor on its own could trigger impairment (i.e., the decline in fair value below cost does not need to be both

significant and prolonged).

Whether a decline in fair value below cost is considered as significant must be assessed on an instrument-by-instrument

basis and should be based on both qualitative and quantitative factors.

US GAAP US GAAP looks to whether the decline in fair value below cost is other-than-temporary. The factors to consider include:

• The length of the time and the extent to which the market value has been less than cost;

• The financial condition and near-term prospects of the issuer, including any specific events that may influence the

operations of the issuer, such as changes in technology that may impair the earnings potential of the investment or the

discontinuance of a segment of the business that may affect the future earnings potential; and

• The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any

anticipated recovery in market value.


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The evaluation of the OTTI trigger requires significant judgment in assessing the recoverability of decline in fair value

below cost. Generally, the longer the decline and the greater the decline, the more difficult it is to overcome that the AFS

equity is other than temporarily impaired.

JP GAAP Impairment loss is recognised when there is significant decline in fair value. “Significant decline” is determined by the

level of decline in fair value below cost. If the decline rate is 50% and above, the decline is presumed not to be

recoverable unless there are reasonable rebuttals and impairment loss must be recognised. If the decline rate is less than

30%, the decline is considered not significant and recognition of impairment loss is not required. If the decline rate is

from 30% to 50%, entities should establish a reasonable basis for the determination of impairment and judge whether

recognition of impairment loss is necessary or not. For equity securities where it is difficult to determine fair value,

impairment is accounted when the substantive price has declined significantly.

Losses on available-for-sale equity instruments (securities) subsequent to initial impairment recognition

IFRS Impairment charges do not establish a new cost basis. As such, further reductions in value below the original impairment

amount are recorded within profit or loss for the current-period

US GAAP Impairment charges establish a new cost basis. As such, further reductions in value below the new cost basis may be

considered temporary (when compared with the new cost basis).

JP GAAP Similar to US GAAP.

Impairments: reversal of losses

IFRS For financial assets carried at amortized cost, if in a subsequent period the amount of impairment loss decreases and the

decrease can be objectively associated with an event occurring after the impairment was recognised, the previously

recognised impairment loss is reversed. The increased carrying amount attributable to the reversal of an impairment loss,

however, does not exceed what the amortized cost would have been had the impairment not been recognised.

For available-for-sale debt instruments, if in a subsequent period the fair value of the debt instrument increases and the

increase can be objectively related to an event occurring after the loss was recognised, the loss may be reversed through

profit or loss.

Reversals of equity investment impairments are prohibited.

US GAAP Impairments of loans held for investment measured under ASC 310-10-35 and ASC 450 are permitted to be reversed;

however, the carrying amount of the loan can at no time exceed the recorded investment in the loan.

One-time reversals of impairment losses for debt securities classified as available-for-sale or held-to-maturity securities,

however, are prohibited. Rather, any expected recoveries in future cash flows are reflected as a prospective yield

adjustment.

Like IFRS, reversals on impairments of equity investments are prohibited.

JP GAAP Impairment losses on equity instruments and debt instruments are not reversed.

As for receivables, the allowances for bad debt recognised in prior periods can be reversed based on the change of

estimates. However, impairment losses directly deducted from specific loans are not reversed regardless of the increase

of possibility for recoverability.

Derecognition

IFRS The guidance focuses on evaluation of whether a qualifying transfer has taken place, whether risks and rewards have

been transferred and, in some cases, whether control over the asset(s) in question has been transferred.

The transferor first applies the consolidation guidance and consolidates any and all subsidiaries or special purpose

entities (SPEs) it controls.

Under IAS 39, full derecognition is appropriate once both of the following conditions have been met:

• The financial asset has been transferred outside the consolidated group.

• The entity has transferred substantially all of the risks and rewards of ownership of the financial asset.

The first condition is achieved in one of two ways:

• When an entity transfers the contractual rights to receive the cash flows of the financial asset; or


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• When an entity retains the contractual rights to the cash flows, but assumes a contractual obligation to pass the cash

flows on to one or more recipients (referred to as a pass-through arrangement).

Many securitizations do not meet the strict pass-through criteria to recognise a transfer of the asset outside of the

consolidated group and as a result fail the first condition for derecognition.

As for the risks and rewards criterion, many securitization transactions include some ongoing involvement by the

transferor that causes the transferor to retain substantial risks and rewards, thereby failing the second condition for

derecognition, even if the pass through test is met.

When an asset transfer has been accomplished, but the entity has neither retained nor transferred substantially all risks

and rewards, an assessment as to control becomes necessary. The transferor assesses whether the transferee has the

practical ability to sell the asset transferred to a third party. The emphasis is on what the transferee can do in practice

and whether it is able, unilaterally, to sell the transferred asset. If the transferee does not have the ability to sell the

transferred asset, control is deemed to be retained by the transferor and the transferred asset may require a form of

partial derecognition called continuing involvement. Under continuing involvement, the transferred asset continues to be

recognised with an associated liability.

When the entity has continuing involvement in the transferred asset, the entity must continue to recognise the transferred

asset to the extent of its exposure to changes in the value of the transferred asset. Continuing involvement is measured

as either the maximum amount of consideration received that the entity could be required to repay (in the case of

guarantees) or the amount of the transferred asset that the entity may repurchase (in the case of a repurchase option).

US GAAP The guidance focuses on an evaluation of the transfer of control. The evaluation is governed by three key considerations:

• Legal isolation of the transferred asset from the transferor.

• The ability of the transferee (or if the transferee is a securitization vehicle, the beneficial interest holder) to pledge or

exchange the asset (or the beneficial interest).

• No right or obligation of the transferor to repurchase.

As such, derecognition can be achieved even if the transferor has significant ongoing involvement with the assets, such

as the retention of significant exposure to credit risk.

ASC 860 is applied before consolidation guidance is considered. Therefore, even if the transfer criteria are met, the

transferor may not achieve derecognition as the assets may be, in effect, transferred to the consolidated entity.

When accounting for a transfer of an individual financial asset or a group of financial assets that qualifies as a sale, the

assets transferred in the sale must be derecognised from the transferor’s balance sheet. The total carrying amount of the

asset is derecognised and any assets and liabilities retained are recognised at fair value. The transferor should

separately recognise any servicing assets or servicing liabilities retained in the transfer at their fair values. A gain or loss

on the transfer is calculated as the difference between the net proceeds received and the carrying value of the assets

sold.

JP GAAP Financial assets must be derecognised when the contractual rights of the financial assets are exercised, when those

rights are lost or when the control of those rights has passed to other parties.

Control is deemed to have transferred when all three categories below are met, and the financial assets must be

derecognised.

1) The contractual rights of the transferee over the transferred financial assets are secured legally from transferors and

their creditors.

2) Transferee can enjoy contractual rights on financial assets directly and indirectly in normal way,

3) The transferor does not have the right or the obligation to repurchase the transferred financial assets before their

maturity date.


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Financial Instruments: Replacement of IAS 39

In March 2008 the IASB released a discussion paper that discusses the main causes of complexity in reporting financial

instruments. It also discusses possible intermediate and long-term approaches to improving financial reporting and reducing

complexity. The IASB has noted that many preparers of financial statements, their auditors and users of financial statements find

the requirements for reporting financial instruments complex. The IASB and the FASB have been urged by many to develop new

standards of financial reporting for financial instruments that are principles based and less complex than today’s requirements.

As a result of the financial crisis, work on this project was accelerated to change the accounting for financial instruments. The

replacement of IAS 39 project is being broken down into three stages, (1) classification and measurement of financial assets and

liabilities, (2) impairment and (3) hedge accounting. The IASB is expected to release exposures drafts over the remainder of 2009

with classification and measurement already released in July 2009, impairment in October 2009 and hedge accounting in

December 2009 with final standards in time for year end financial statements for 2009 (classification and measurement) and during

2010 (impairment and hedge accounting). The classification and measurement project is expected to eliminate the requirement to

evaluate embedded derivatives in the financial instruments.

This project has the potential to create significant differences when compared to current US GAAP. However, both the IASB and

FASB are coordinating efforts in their projects to reduce complexity in reporting financial instruments, although the ultimate

standards may not be fully converged.

Exposure Draft, Derecognition: Proposed Amendments to IAS 39 and IFRS 7

In March 2009 the IASB issued Exposure Draft 2009/3, Derecognition, which would amend existing provisions of IAS 39. The main

purpose of the exposure draft was to address the perceived complexities within IAS 39 and the resulting difficulty of application in

practice. In addition, the exposure draft was to potentially bring IFRS closer to US GAAP in this area.

The ED includes two approaches to the derecognition of financial assets: the ‘proposed model’ based on control is favoured by the

majority of the Board; the ‘alternative view’ is supported by the remaining five members. A failed sale results in the asset remaining on

the statement of financial position under both approaches, with the proceeds received recognised as a financial liability.

The existing model in IAS 39 is primarily ‘risks and rewards’, with a secondary ‘control’ test where risks and rewards have neither

been substantially transferred nor retained. ‘Control’ takes centre-stage in the ‘proposed model’, with a risks and rewards overlay

in the form of a test for continuing involvement in the transferred asset.

Derecognition under the alternative approach is also based on control. If the entity has given up control over any of the cash flows

of the asset, it no longer controls that asset and hence the asset is derecognised in its entirely. The concept of partial derecognition

does not exist in this model. A new asset/liability is recognised for any continuing involvement in the asset retained.

If either of the models proposed in the amendment were adopted, the differences to US GAAP would remain.

Exposure Draft, Fair Value Measurements

In May 2009 the IASB issued Exposure Draft 2009/5, which would create a new standard on fair value measurement, and would

amend the provisions of several existing standards. The proposed IFRS defines fair value, establishes a framework for measuring

fair value and requires disclosures about fair value measurements.

The Board’s objectives for publishing the proposed IFRS are:

(a) to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity

and improve consistency in their application;

(b) to clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly;

and

(c) to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used

and to inform them about the inputs used to derive those fair values.

The proposed IFRS does not require additional fair value measurements.

The draft IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date (an exit price). In the absence of an actual transaction at the

measurement date, a fair value measurement assumes a hypothetical transaction in the most advantageous market for the asset or

liability.


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A fair value measurement requires an entity to determine:

(a) the particular asset or liability that is the subject of the measurement (consistently with its unit of account).

(b) for an asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use).

(c) the most advantageous market for the asset or liability.

(d) the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs

that represent the assumptions that market participants would use in pricing the asset or liability and the level of the fair value

hierarchy within which the inputs are categorized.

As drafted the exposure draft would eliminate some but not all of the current US GAAP differences in this area.


In March 2008, ASBJ released the “Accounting Standard for Financial Instruments” and the “Implementation Guidance on

Disclosures about Fair Value of Financial Instruments” that require disclosure of fair values regarding financial instruments for the

purpose of convergence with IFRS. These standards apply in the fiscal year beginning on and after April 1, 2009.

Note

The foregoing discussion captures a number of the more significant GAAP differences. It is important to note that the discussion is

not inclusive of all GAAP differences in this area.

REFERENCES: IFRS: IAS 39, SIC 12 US GAAP: ASC 310, ASC 310-10-35, ASC 310-20, ASC 310-30, ASC 320, ASC 325-40, ASC 815, ASC 815-15-25-4, ASC 820, ASC 825, ASC 860

JP GAAP: Accounting Standards for Financial Instruments, Guidance on Accounting for Other Compound Financial Instruments (Compound Financial Instruments Other than Those with an Option to increase Paid-in Capital), Practical Guidelines on Accounting Standards for Financial Instruments, and Q&A on Financial Instruments Accounting


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Liabilities

Provisions

IFRS has a specific standard on accounting for various types of provisions. US GAAP has several different aspects to the authoritative

literature addressing specific types of provisions – for example, environmental liabilities and restructuring costs. IFRS and US GAAP

prohibit recognition of provisions for future costs, including costs associated with proposed but not yet effective legislation. Under JP

GAAP, there is no specific standard, whereas only general rules are specified.

Recognition

IFRS A provision is recognised when:

• the entity has a present obligation to transfer economic benefits as a result of past events;

• it is probable (more likely than not) that such a transfer will be required to settle the obligation; and

• a reliable estimate of the amount of the obligation can be made.

A present obligation arises from an obligating event. It may take the form of either a legal obligation or a constructive

obligation. An obligating event leaves the entity no realistic alternative to settle the obligation created by the event.

The term probable is used for describing a situation in which the outcome is more likely than not to occur. Generally, the

phrase more likely than not denotes any chance greater than 50%.

US GAAP Similar to IFRS, although ‘probable’ is a higher threshold than ‘more likely than not’. Guidance uses the term probable to

describe a situation in which the outcome is likely to occur. While a numeric standard for probable does not exist,

practice generally considers an event that has a 75% or greater likelihood of occurrence to be probable.

JP GAAP Similar to IFRS. A provision shall be recognised when expense or loss will be probably incurred as a result of past events,

and a reliable estimate can be reasonably made. However, no common practice or definition exist in terms of any specific

quantitative threshold for the likelihood of occurrence of losses.

Measurement

IFRS The amount recognised should be the best estimate of the expenditure required (the amount an entity would rationally

pay to settle the obligation at the end of the reporting period).

Where there is a continuous range of possible outcomes and each point in that range is as likely as any other, the

midpoint of the range is used

The anticipated cash flows are discounted using a pre-tax discount rate (or rates) that reflect(s) current market

assessments of the time value of money and the risks specific to the liability (for which the cash flow estimates have not

been adjusted) if the effect is material .

US GAAP A single standard does not exist to determine the measurement of obligations. Instead, entities must refer to guidance

established for specific obligations (e.g., environmental or restructuring) to determine the appropriate measurement

methodology.

Pronouncements related to provisions do not necessarily have settlement price or even fair value as an objective in the

measurement of liabilities and the guidance often describes an accumulation of the entity’s cost estimates.

When no amount within a range is a better estimate than any other amount, the low end of the range is accrued.

Generally, a provision is only discounted when the timing of the cash flows is fixed or reliably determinable. There are

certain instances that meet this criteria, for example in the accounting for asset retirement obligations, where discounting

is required by the associated guidance.

JP GAAP There are no detailed guidelines concerning the measurement of provisions. In practice, the amount recognised as a

provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting

period. The liabilities are basically not discounted, however discounting is required for asset retirement obligations.


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Restructuring provisions

IFRS A provision for restructuring costs is recognised when, among other things, an entity has a present obligation.

A present obligation exists when, among other conditions, the company is demonstrably committed to the restructuring.

A company is usually demonstrably committed when there is legal obligation or when there is a constructive obligation. A

constructive obligation exists when the entity has a detailed formal plan for the restructuring and a valid expectation in

those affected that it will carry out the restructuring.

To record a liability, the company must be unable to withdraw the plan, because either it has started to implement the

plan or it has announced the plan’s main features to those affected (constructive obligation). A current provision is

unlikely to be justified if there will be a delay before the restructuring begins or if the restructuring will take an

unreasonably long time to complete. . As long as an entity is ‘demonstrably committed’ to a plan, for example one which

requires future service, a liability would be recognised.

Liabilities related to offers for voluntary terminations are recorded when the offer is made to employees and are measured

based on the number of employees expected to accept the offer.

US GAAP The guidance prohibits the recognition of a liability based solely on an entity’s commitment to an approved plan.

Recognition of a provision for onetime termination benefits requires communication of the details of the plan to

employees who could be affected. The communication is to contain sufficient details about the types of benefits so that

employees have information for determining the types and amounts of benefits they will receive.

Further guidance exists for different types of termination benefits (i.e., special termination benefits, contractual

termination benefits, severance benefits and onetime benefit arrangements). For example, one-time termination benefits

provided in exchange for an employees’ future service are considered a ‘stay bonus’ and are recognised over the

employees’ future service period.

Inducements for voluntary terminations are to be recognised when (1) employees accept offers and (2) the amounts can

be estimated.

JP GAAP There are no detailed guidelines concerning restructuring provisions. Such provisions are recognised in accordance with

general principles for provisions.

Onerous contracts

IFRS A provision shall be recognised for contracts that are onerous. An onerous contract is a contract in which the

unavoidable costs of meeting the obligation under the contract exceed the economic benefits expected to be received

under it. Provisions are recognised when a contract becomes onerous regardless of whether the entity has ceased using

the rights under the contract. When an entity commits to a plan to exit a lease property, sublease rentals are considered

in the measurement of an onerous lease provision only if management has the right to sublease and such sublease

income is probable.

US GAAP There is no general guidance for recognition of provisions for onerous contracts. Provisions are not recognised for

unfavourable contracts unless the entity has ceased using the rights under the contract (i.e., the cease-use date). One of

the most common examples of an unfavourable contract has to do with leased property that is no longer in use. With

respect to such leased property, estimated sublease rentals are to be considered in a measurement of the provision to

the extent such rentals could reasonably be obtained for the property, even if it is not management’s intent to sublease or

if the lease terms prohibit subleasing. Incremental expense in either instance is recognised as incurred.

JP GAAP There are no detailed guidelines concerning onerous contracts. Such provisions are recognised in accordance with

general principles for provisions.

REFERENCES: IFRS: IAS 37US GAAP: ASC 410-20, ASC 410-30, ASC 420, ASC 450-10, ASC 450-20, ASC 460-10, ASC 944-40JP GAAP: Business Accounting Principles

Contingencies

Contingent asset

IFRS A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the

occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control. An asset is


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recognised only when the realisation of the associated benefit, such as an insurance recovery, is virtually certain.

US GAAP Similar to IFRS, but the threshold for recognising insurance recoveries for recognised expenses is lower. The recovery is

required to be probable (the future event or events are likely to occur) rather than virtually certain as under IFRS.

JP GAAP There are no detailed guidelines concerning contingent assets. However, in practice similar to IFRS.

Contingent liability

IFRS A contingent liability is defined as a possible obligation whose outcome will be confirmed only by the occurrence or

nonoccurrence of one or more uncertain future events outside the entity’s control. It can also be a present obligation that

is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required

to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability.

A contingent liability becomes a provision and is recorded when three criteria are met: (1) that a present obligation from a

past event exists, (2) that the obligation is probable and (3) that a reliable estimate can be made.

US GAAP An accrual for a loss contingency is required if it is probable that there is a present obligation resulting from a past event

and that an outflow of economic resources is reasonably estimable.

JP GAAP Contingent liability is an obligation that is not currently incurred but is possible to be incurred by an entity in the future.

The provision cannot be provided if the probability of the contingent liability is low.

REFERENCES: IFRS: IAS 37US GAAP: ASC 410-30, ASC 450-10, ASC 450-20, ASC 460-10, ASC 944-40JP GAAP: Regulation on the Terminology, Format and Preparation of Financial Statements, Audit Treatment for Accounting and Presentation of Debt Guarantee and Similar Guarantee Obligations

Deferred tax

All three frameworks require a provision for deferred taxes, but there are differences in the methodologies, as set out in the table

below.

ISSUE IFRS US GAAP JP GAAP

General considerations

General approach Full provision. Similar to IFRS. Similar to IFRS.

Basis for deferred tax assets and liabilities

Temporary differences – i.e., the difference between carrying amount and tax base of assets and liabilities (see exceptions below).

Similar to IFRS. Similar to IFRS.

Exceptions from accounting for temporary differences (i.e., deferred tax is not provided on the temporary difference)

An exemption exists in the accounting for deferred taxes from the initial recognition of an asset or liability in a transaction that neither (1) is a business combination nor (2) affects accounting profit (or taxable profit) at the time of the transaction. No special treatment of leveraged leases exists under IFRS.

An exemption exists from the initial recognition of temporary differences in connection with transactions that qualify as leveraged leases under lease accounting guidance.

Generally, no exemption exists for the initial recognition of temporary differences other than goodwill.

No special treatment of leveraged leases exists under JP GAAP.

Measurement of deferred tax

Tax rates Tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting period.

Rate used is the applicable rate for expected manner of recovery − e.g., dependent on whether asset is to be used or sold − or a combination of these.

US GAAP requires the use of enacted rates when calculating current and deferred taxes.

Deferred tax liabilities and assets are measured using enacted tax rates applicable to capital gains, ordinary income, and so forth, based on the expected type of taxable or deductible amounts in future years.

Calculate based on the tax rate applicable in the period in which the tax refund or payment is expected.

Must use future applicable tax rate according to the tax law effective as of the end of the reporting period. When the tax law is revised and enacted prior to the end of the reporting period and the revised future tax rate is determined, the revised tax rate must be used.


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Recognition of deferred tax assets

Deferred tax assets are recognised to the extent that it is probable (defined as more likely than not) that sufficient taxable profits will be available to utilize the 　temporary difference. Valuation allowances are not used.

Deferred taxes are recognised in full, but are then reduced by a valuation allowance if it is considered more likely than not that some portion of the deferred taxes will not be realized.

A deferred tax asset is recognised to the extent that it is expected to be recoverable based on the following considerations:

(1) Sufficiency of taxable income based on profitability

(2) Existence of tax planning

(3) Sufficiency of future taxable differences

Discounting Prohibited. Prohibited. Prohibited.

Presentation of deferred tax

Current/non-current Deferred tax assets and liabilities are classified as noncurrent on the statement of financial position. Supplemental note disclosures are included to describe the components of temporary differences as well as the recoverable amount bifurcated between amounts recoverable less than or greater than one year from the end of the reporting period.

Interest and penalties are classified in either interest expense or other operating expenses when they can be clearly identified and separated from the related tax liability.

The classification of deferred tax assets and deferred tax liabilities follows the classification of the related, nontax asset or liability for financial reporting (as either current or noncurrent). If a deferred tax asset is not associated with an underlying asset or liability, it is classified based on the anticipated reversal periods. Any valuation allowances are allocated between current and noncurrent deferred tax assets for a tax jurisdiction on a pro rata basis.

The classification of interest and penalties related to uncertain tax positions (either in income tax expense or as a pretax item) represents an accounting policy decision that is to be consistently applied and disclosed.

Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related assets and liabilities. A deferred tax asset related to tax loss carry forwards, which is not related to specific assets and liabilities, is classified as current or non-current depending on the timeframe of the expected recovery.

Specific applications

Unrealised intra-group profits Any tax impacts to the seller as a result of the intercompany transaction are recognised as incurred.

Deferred taxes resulting from the intragroup sale are recognised at the buyer’s tax rate.

Any tax impacts to the seller as a result of the intercompany sale are deferred and are realized upon the ultimate third-party sale.

The buyer is prohibited from recognising deferred taxes resulting from the intragroup sale.

Similar to US GAAP.

Revaluation of PPE and intangible assets

Deferred tax recognised in equity. Not applicable, as revaluation is prohibited.

Similar to US GAAP.

Intra-period tax allocation (backwards tracing)

Subsequent changes in deferred tax balances are recognised in the statement of comprehensive income—except to the extent that the tax arises from a transaction or event that is recognised, in the same or a different period, directly in equity.

Subsequent changes in deferred tax balances due to enacted tax rate and tax law changes are taken through the statement of operations regardless of whether the deferred tax was initially created through the income statement, through equity or in purchase accounting.

Subsequent changes in deferred tax assets (by reducing valuation allowance) due to changes in assessment about realization in future periods are generally taken through the statement of operations, with limited exceptions for certain equity-related items and acquired deferred tax assets.

Subsequent changes in deferred tax balances are recognised in the corporate income tax adjustment account in profit or loss. However, when the valuation difference resulting from the revaluation of asset is charged directly in net assets and the corresponding amount of deferred tax related to the valuation differences is adjusted, the adjusted tax differences are recognised in the valuation differences of the asset in net assets.


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Investments in subsidiaries – treatment of undistributed

profit

With respect to undistributed profits and other outside basis differences related to investments in subsidiaries, branches and associates, and joint ventures, deferred taxes are recognised except when a parent company (investor or venturer) is able to control the timing of the reversal of the temporary difference; and it is probable that the temporary difference will not reverse in the foreseeable future.

With respect to undistributed profits and other outside basis differences, different requirements exist depending on whether they involve investments in subsidiaries, in joint ventures or in equity investees.

As it relates to investments in domestic subsidiaries, deferred tax liabilities are required on undistributed profits arising after 1992 unless the amounts can be recovered on a tax-free basis and unless the entity anticipates utilizing that method.

As it relates to investments in domestic corporate joint ventures, deferred tax liabilities are required on undistributed profits that arose after 1992.

Deferred tax liabilities are not required for the undistributed profits of foreign subsidiaries or foreign corporate joint ventures if the earnings are indefinitely reinvested, unless it is apparent that the undistributed profit would be taxable in the foreseeable future.

Deferred taxes are generally recognised on temporary differences related to investments in equity investees.

Deferred tax assets for investments in subsidiaries and corporate joint ventures may be recorded only to the extent they will reverse in the foreseeable future.

Similar to IFRS.

Uncertain tax positions Accounting for uncertain tax positions is not specifically addressed within IFRS. The tax consequences of events should follow the manner in which an entity expects the tax position to be resolved (through either payment or receipt of cash) with the taxation authorities at the end of the reporting period.

Practice has developed such that uncertain tax positions may be evaluated at the level of the individual uncertainty or group of related uncertainties. Alternatively, they may be considered at the level of the total tax liability to each taxing authority.

Acceptable methods by which to measure tax positions include (1) the expected-value/probability-weighted-average approach and (2) the single-best-outcome/most-likely-outcome method. Use of the cumulative probability model required by US GAAP is not supported by IFRS.

Uncertain tax positions are recognised and measured using a two-step process, first determining whether a benefit may be recognised and subsequently measuring the amount of the benefit. Tax benefits from uncertain tax positions can be recognised only if it is more likely than not that the tax position is sustainable based on its technical merits.

Uncertain tax positions are evaluated at the individual tax position level.

The tax position is measured by using a cumulative probability model: the largest amount of tax benefit that is greater than 50% likelihood of being realized upon ultimate settlement.

There is no specific guidance for uncertain tax positions. Generally, recorded as liability when requirements for provisions are met.


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Share-based payments Deferred tax benefits are recognised in income only for those awards that currently have an intrinsic value that would be deductible for tax purposes.

Additionally, valuation of the deferred tax asset is revisited each reporting period. Adjustments to the deferred tax asset balance are recorded, within limits, through earnings. Application of this model results in greater variability of income tax expense/benefit recorded within the income tax provision.

If a tax deduction exceeds cumulative share-based compensation expense, deferred tax calculations based on the excess deduction are recorded directly in equity. If the tax deduction is less than or equal to cumulative share-based compensation expense, deferred taxes arising are recorded in income. The unit of accounting is an individual award.

If changes in the stock price impact the future tax deduction, the measurement of the deferred tax asset is based on the current stock price.

Deferred tax benefits are recorded for share-based payment awards that are expected to be deductible for tax purposes (such as nonqualified stock options in the US) based on the amount of compensation expense recorded for the share award.

This benefit is recognised even if the award has no intrinsic value. The accounting is then largely stagnant until the associated award is exercised regardless of share price movements.

On exercise of the award, the difference between cash taxes to be paid and the tax expense recorded to date is adjusted based on the actual excess intrinsic value of the award, with adjustments generally being recorded through equity (subject to certain limitations, pools, etc.).

If the tax benefit available to the issuer exceeds the deferred tax asset recorded, the excess benefit (known as a ‘windfall’ tax benefit) is credited directly to shareholders’ equity. If the tax benefit is less than the deferred tax asset, the shortfall is recorded as a direct charge to shareholders’ equity to the extent of prior windfall tax benefits, and as a charge to tax expense thereafter.

Changes in the stock price do not impact the deferred tax asset or result in any adjustments prior to settlement or expiration. They will, however, affect the actual future tax deduction (if any).

For tax non-qualified stock options in which the salary income for individuals including employees is taxed, the expense related to the service is deductible from taxable income on the date a taxable event on the salary occurred (execution date) if the salary for individuals is taxed. As the timing difference between the recognition of the expense for accounting purposes and the deduction for tax purposes results in a future deductible difference, deferred tax is recognised.

No excess tax benefit is not accounted for, as the tax deduction is allowed only to the extent of the expense recognised for accounting purposes and there is no difference between the recognition of the expense for accounting purposes and the deduction for tax purposes.

Business combinations – acquisitions

Step-up of acquired assets/liabilities to fair value

Deferred tax is recorded unless the tax base of the asset is also stepped up.


Previously unrecognised tax losses of the acquirer

A deferred tax asset is recognised if the recognition criteria for the deferred tax asset are met as a result of the acquisition. Offsetting credit is recorded in income, not goodwill.


Deferred taxes in business combinations

Under I IFRS 3R, the initial recognition of acquired tax benefits, subsequent to the date of acquisition (that does not qualify as a measurement period adjustment) will be reflected in profit or loss with no change to goodwill.

Under ASC 805 (aside from true-ups during the measurement period), the resolution of income tax uncertainties will be recognised in the statement of operations. The release of a valuation allowance for acquired deferred tax assets will also be recognised in the income tax provision if occurring outside the measurement period (which will not be permitted to exceed one year).

Similar to IFRS.

REFERENCES: IFRS: IAS 1, IAS 12, IFRS 3 (revised in 2008)US GAAP: ASC 740JP GAAP: Accounting Standards for Tax Effect Accounting, Practical Guidelines on Accounting Standards for Tax Effect Accounting in Consolidated Financial Statements, Practical Guidelines on Accounting Standards for Tax Effect Accounting in Non-Consolidated Financial Statements, Audit Treatment related to Judgement for Recoverability of Deferred Assets, Q&A on Tax Effect Accounting, Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures


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Deferred Tax

In March 2009, the IASB released an exposure draft that proposes changes to its income tax accounting standard. If adopted as

proposed, the revised income tax standard would more closely align IFRS and US GAAP in some areas, including: tax basis,

presentation, recognition of deferred tax assets, the deferred tax consequences of investments in other entities (i.e., outside basis

differences) and in the treatment of undistributed profits. In other areas, such as stock-based compensation and intercompany

transactions, differences between the two standards will remain. Finally, the revised standard would change the nature of other

existing differences such as the accounting for income tax uncertainties. The exposure draft proposes to eliminate the probable

recognition threshold as well as the single best estimate approach. These changes would have a significant impact on the

accounting for uncertain tax positions under IFRS (while significant differences to US GAAP would still be present).

Government grants

IFRS Government grants are recognised once there is reasonable assurance that both (1) the conditions for their receipt will be

met and (2) the grant will be received. Revenue-based grants are deferred in the statement of financial position and

released to the statement of comprehensive income to match the related expenditure that they are intended to

compensate. Capital-based grants are deferred and matched with the depreciation on the asset for which the grant

arises.

Grants that involve recognised assets are presented in the statement of financial position either as deferred income or by

deducting the grant in arriving at the asset’s carrying amount, in which case the grant is recognised as a reduction of

depreciation.

US GAAP If conditions are attached to the grant, recognition of the grant is delayed until such conditions have been fulfilled.

Contributions of long-lived assets or for the purchase of long-lived assets are to be credited to income over the expected

useful life of the asset for which the grant was received.

JP GAAP Government grants are not directly recognised in the capital surplus of net assets. Both capital-based grants and

revenue-based grants should be recognised as profit when they are received. However, there is also a shortcut

compressed entry (‘Asshukukicyou’) method system provided by income tax law and special taxation measures law,

whereby government grants are offset against acquired assets. This treatment is also acceptable for accounting

purposes.

REFERENCES: IFRS: IAS 20US GAAP: ASC 958-605JP GAAP: Business Accounting Principles, Audit Treatment for Compressed Entry


Classification

See ‘Classification’ section under ‘Leases – lessor accounting’.

Finance leases

IFRS Requires recognition of an asset held under a finance lease (see classification criteria on p.62) with a corresponding

obligation for future rentals, at an amount equal to the lower of the fair value of the asset and the present value of the

future minimum lease payments (MLPs) at the inception of the lease. The asset is depreciated over its useful life or the

lease term if shorter, unless there is reasonable certainty that the lessee will obtain ownership of the asset at the end of

the lease term in which case depreciation should be over its useful life. The interest rate implicit in the lease is normally

used to calculate the present value of the MLPs. The lessee’s incremental borrowing rate may be used if the implicit rate

is unknown. Rental payments are allocated between repayment of capital and interest expense. Interest is calculated to

give a constant periodic rate of interest on the remaining balance of the liability. The guidance acknowledges that in

allocating the finance charge, a lessee may use some form of approximation to simplify the calculation.

US GAAP Similar to IFRS, except that the lessee’s incremental borrowing rate is used to calculate the present value of the MLPs,

excluding the portion of payments representing executory costs, unless it is practicable to determine the rate implicit in

the lease and the implicit rate is lower than the incremental borrowing rate. If the incremental borrowing rate is used, the

amount recorded as the asset and obligation is limited to the fair value of the leased asset. Asset amortisation is


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consistent with IFRS.

JP GAAP Similar to IFRS. However, in the case of finance leases, the asset and lease obligation are primarily recorded at the

amount of the purchase price paid by the lessor. An alternative treatment of recording at the lesser of (i) the present value

of the gross lease payments discounted by the appropriate discount rate or (ii) the estimated cash purchase price is also

acceptable if the lessee has no information on the purchase price paid by the lessor. In principle, leased assets are

depreciated over their estimated economic useful life. The discount rate used to determine the present value of total

minimum lease payments should principally be the implied interest rate used by the lesser, however, using the additional

borrowing rate is an acceptable method when the lessee has no information on the implied interest rate used by the

lesser.

Operating leases

The rental expense (net of any incentives received) under an operating lease is generally recognised on a straight-line basis over the

lease term under IFRS, US GAAP and JP GAAP.

Sale and leaseback transactions

The seller-lessee sells an asset to the buyer-lessor and leases the asset back in a sale and leaseback transaction. There are

differences among three frameworks in the accounting for profits and losses arising on sale and leaseback transactions. These are

highlighted in the table below.


Finance lease

Profit or loss on sale Deferred and amortised over the lease term.

Timing of profit or loss recognition depends on whether the seller relinquishes substantially all or a minor part of the use of the asset. If substantially all, profit/loss is generally recognised at date of sale. If seller retains more than a minor part, but not substantially all of the use of the asset, any profit in excess of either the present value of MLPs (for operating leases) or the recorded amount of the leased asset (for finance leases) is recognised at date of sale. A loss on a sale-leaseback is recognised immediately by the seller-lessee to the extent that net book value exceeds fair value. Specific rules apply for sale-leasebacks relating to continuing involvement and transfer of risks and rewards of ownership.

Similar to IFRS. The lessee defers the gain or loss on the sale of the asset subject to the lease as either a long-term prepaid expense or long-term deferred income and records it in profit or loss by adjusting to the depreciation expenses according to the proportion of the recognition for the leased asset’s depreciation expense. If it is evident that the loss on the sale arose from the decrease in the reasonably estimated market price of the assets over the carrying amount, that loss should not be deferred but recorded as a loss on sale.

Operating lease

Sale at fair value Immediate recognition. See above. No specific guidance. However, similar to IFRS in practice.

Sale at less than fair value Immediate recognition, unless the difference is compensated by lower future rentals. In such cases, the difference is deferred over the period over which the asset is expected to be used.

See above. No specific guidance. However, similar to IFRS in practice.

Sale at more than fair value The difference is deferred over the period for which the asset is expected to be used.

See above. No specific guidance. However, similar to IFRS in practice.


Leases

See ‘Assets-lease’ section for details of recent proposals on Leases.

REFERENCES: IFRS: IAS 17, SIC 15US GAAP: ASC 840, ASC 976JP GAAP: Accounting Standard for Lease Transaction, Guidance on Accounting Standard for Lease Transaction


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Definition

IFRS, US GAAP and JP GAAP define a financial liability in a similar way, to include a contractual obligation to deliver cash or a

financial asset to another entity, or to exchange financial instruments with another entity under conditions that are potentially

unfavourable. Generally, the US GAAP definition of a financial liability is narrower compared to that under IFRS. Also, derivatives that

may be settled in an issuer’s own shares are evaluated differently under IFRS and US GAAP as explained below.

Classification of non-derivative contracts

IFRS Where there is a contractual obligation (either explicit or indirectly through its terms and conditions) on the issuer of an

instrument whereby the issuer may be required to deliver either cash or another financial asset to the holder, that

instrument meets the definition of a financial liability.

The issuer also classifies the financial instrument as a liability if the settlement is contingent on uncertain future events

beyond the control of both the issuer and the holder. An instrument that is settled using an entity’s own equity shares is

also classified as a liability if the number of shares varies in such a way that the fair value of the shares issued equals the

obligation.

Financial instruments with characteristics of both liabilities and equity are classified as either liabilities or equity. When an

evaluation of the terms of an instrument determines that it contains both a liability and an equity component it is

bifurcated between liabilities and equity.

Puttable instruments (financial instruments that give the holder the right to put the instrument back to the issuer for cash

or another asset) are liabilities, except when the class of puttable instruments is the residual interest in the entity and

meet certain characteristics prescribed in the Standard. Specific guidance exists when the holder’s right to redemption is

subject to specific limits.

US GAAP Under US GAAP, the following types of instrument are classified as liabilities under ASC 480:

• a financial instrument issued in the form of shares that is mandatorily redeemable − i.e., that embodies an

unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date

(or dates) or upon the occurrence of an event that is certain to occur;

• a financial instrument (other than an outstanding share) that, at inception, embodies an obligation to repurchase the

issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the

obligation by transferring assets (for example, a forward purchase contract or written put option on the issuer’s equity

shares that is to be physically settled or net cash settled); and

• a financial instrument that embodies an unconditional obligation or a financial instrument other than an outstanding

share that embodies a conditional obligation that the issuer should or may settle by issuing a variable number of its

equity shares, also, provided the contract meets certain conditions.

Specific SEC guidance provides for the classification of certain redeemable instruments that are outside the scope of

ASC 480 as mezzanine equity (i.e., outside of permanent equity). Examples of items requiring mezzanine classifications

are instruments with contingent settlement provisions or puttable shares. However, IFRS does not provide for the

classification of an instrument as mezzanine equity.

JP GAAP There is no detailed guidance for the classification of a financial liability and equity. However, the classification follows the

legal form under the corporate law.

Compound instruments that are not convertible instruments (that do not contain equity conversion features)

IFRS If an instrument has both a liability component and an equity component—known as a compound instrument (e.g.,

redeemable preferred stock with dividends paid solely at the discretion of the issuer)—IFRS requires separate accounting

for each component of the compound instrument.

The liability component is recognised at fair value calculated by discounting the cash flows associated with the liability

component at a market rate for a similar debt host instrument and the equity component is measured as the residual

amount.

The accretion calculated in the application of the effective interest rate method on the liability component is classified as

interest expense. The equity component is recognised in equity with no subsequent remeasurement.


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US GAAP The guidance does not have the concept of compound financial instruments outside of instruments with equity

conversion features. As such, under US GAAP the instrument would be classified wholly within liabilities or equity.

JP GAAP Compound instruments which have both a liability and an equity component are bifurcated into liability or equity following

the legal form under the corporate law.

Convertible Instruments (compound instruments that contain equity conversion features)

IFRS For convertible instruments with a conversion feature characterized by a fixed amount of cash for a fixed number of

shares (fixed-for-fixed), IFRS requires bifurcation and split accounting between the liability and equity components of the

instrument. The liability component is recognised at fair value calculated by discounting the cash flows associated with

the liability component —at a market rate for nonconvertible debt —and the equity conversion features are measured as

the residual amount and recognised in equity with no subsequent remeasurement.

Equity conversion features within liability host instruments that fail the fixed-for-fixed requirement are considered to be

embedded derivatives. Such embedded derivatives are bifurcated from the host debt contract and measured at fair

value, with changes in fair value recognised in profit or loss.

US GAAP Equity conversion features should be separated from the liability component and recorded separately as embedded

derivatives only if they meet certain criteria (e.g., fail to meet the scope exception of ASC 815). If equity conversion

features are not bifurcated as embedded derivatives, the intrinsic value of a beneficial conversion feature (“BCF”) may still

need to be recorded in equity in certain circumstances; IFRS does not have a concept of BCF as the compound

instruments are already accounted for based on their components. Also, under US GAAP if the conversion feature can

be cash settled at the option of the issuer, then the liability and equity components are separated.

JP GAAP For convertible instruments, either bifurcating into equity and liabilities or treating as a single instrument is acceptable. In

practice, they are generally treated as a single instrument.

Puttable shares / Shares redeemable upon liquidation

IFRS Puttable shares Puttable instruments are generally classified as financial liabilities, because the issuer does not have the unconditional

right to avoid delivering cash or other financial assets. Under IFRS, the legal form of an instrument does not necessarily

influence the classification of a particular instrument. (This includes puttable shares or other puttable instruments.)

Under this principle, IFRS may require certain interests in open-ended mutual funds, unit trusts, partnerships and the like

to be classified as liabilities (since holders can require cash settlement). This could lead to situations where some entities

have no equity capital in their financial statements.

An entity may classify certain puttable instruments as equity provided they have particular features and meet certain

specific conditions of IAS 32.

Shares redeemable upon liquidation For instruments issued out of finite-lived entities that are redeemable upon liquidation, equity classification may be

appropriate if certain conditions are met.

However, when classifying redeemable financial instruments issued by a subsidiary (either puttable or redeemable upon

liquidation) for a parent’s consolidated accounts, equity classification at the subsidiary level is not extended to the

parent’s classification of the redeemable non-controlling interests in the consolidated financial statements as the same

instrument would not meet the specific IAS 32 criteria from the parent’s perspective.

US GAAP Puttable shares The redemption of puttable shares is conditional upon the holder exercising the put option. This contingency removes

puttable shares from the scope of instruments that ASC 480 requires be classified as a liability. However, SEC registrants

would classify these instruments as "mezzanine" while such classification is encouraged but not required for private

companies.

Shares redeemable upon liquidation ASC 480 scopes out instruments that are only redeemable upon liquidation. Therefore, such instruments may achieve

equity classification for finite-lived entities.

In classifying these financial instruments issued by a subsidiary in a parent’s consolidated financial statements, U.S.

GAAP permits an entity to defer the application of ASC 480; the result is that the redeemable interests issued by a

subsidiary is not a liability in the parent’s consolidated financial statements.


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JP GAAP Puttable shares and shares redeemable upon liquidation There is no detailed guidance for puttable shares and shares redeemable upon liquidation. In practice, they are classified

in equity following the legal form under the corporate law.

Derivates on own shares-“fixed for fixed” versus indexed to issuer’s own share

IFRS Only contracts that provide for gross physical settlement meet the fixed-for-fixed criteria (i.e., a fixed number of shares

for a fixed amount of cash) and can be classified as equity. Variability in the amount of cash or the number of shares to

be delivered results in financial liability classification.

For example, a warrant issued by Company X has a strike price adjustment based on the movements in Company X’s

stock price. This feature would fail the fixed-for-fixed criteria under IFRS - the same adjustment would meet the fixed-

for-fixed criteria under U.S. GAAP. As such, for Company X’s accounting for the warrant, IFRS would result in liability

classification whereas US GAAP would result in equity classification.

US GAAP Equity derivatives need to be indexed to the issuer’s own shares to be classified as equity. The assessment follows a two

step approach under ASC 815-40-15.

Step 1 considers whether there are any contingent exercise provisions and, if so, they cannot be based on an observable

market or index other than those referenced to the issuer’s own shares or operations

Step 2 considers the settlement amount. Only settlement amounts equal to the difference between the fair value of a

fixed number of the entity’s equity shares and a fixed monetary amount or a fixed amount of a debt instrument issued by

the entity, will qualify for equity classification.

If the instrument's strike price (or the number of shares used to calculate the settlement amount) is not fixed as outlined

above, the instrument may still meet the equity classification criteria when the variables that might effect settlement

include inputs to the fair value of a “fixed for fixed” forward or option on equity shares and the instrument does not

contain a leverage factor.

JP GAAP Warrant is classified as net assets. There is no specific guidance for derivatives on an issuer’s own shares other than

warrant since such derivatives are not common in the Japanese market.

Derivates on own shares-settlement models

IFRS Contracts that are net settled (net cash or net shares) are classified as liabilities or assets. This is also the case even if the

settlement method is at the issuer’s discretion.

Gross physical settlement is required to achieve equity classification.

Unlike US GAAP, under IFRS a derivative contract that gives one party (either the holder or the issuer) a choice over how

it is settled (net in cash, net in shares or by gross delivery) is a derivative asset/liability unless all of the settlement

alternatives would result in its being an equity instrument.

US GAAP Derivative contracts that are in the scope of ASC 815-40 and that:

(1) require physical settlement or net share settlement; and

(2) give the issuer a choice of net cash settlement or settlement in its own shares

are considered equity instruments, provided they meet the criteria set forth within the literature. Analysis of a contract’s

terms is necessary to determine whether the contract meets the qualifying criteria, some of which can be difficult to meet

in practice.

Similar to IFRS, derivative contracts that require net cash settlement are assets or liabilities and contracts that require

settlement in shares are equity instruments.

Contracts that give the counterparty a choice of net cash settlement or settlement in shares (physical or net settlement)

result in derivative classification. However, if the issuer has a choice of net cash settlement or share settlement, the

contract can still be considered an equity instrument.

JP GAAP There is no specific guidance for derivatives on own shares since such derivatives are not common in the Japanese

market.

Written put option on the issuer’s own shares

IFRS If the contract itself meets the definition of an equity instrument (because it requires the entity to purchase a fixed amount

of its own shares for a fixed amount of cash), any premium received or paid must be recorded in equity. Therefore, the

premium received on such a written put is classified as equity, which is contrary to US GAAP where the fair value of the

written put is recorded as a liability.


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In addition when an entity has an obligation to purchase its own shares for cash (e.g., such as under a forward contract

to purchase its own shares or under a written put), the issuer records a financial liability for the discounted value of the

amount of cash that the entity may be required to pay. The liability is recorded against equity.

US GAAP A financial instrument—other than an outstanding share—that at inception

(1) embodies an obligation to repurchase the issuer’s equity shares or is indexed to such an obligation and (2) requires or

may require the issuer to settle the obligation by transferring assets shall be classified as a liability (or an asset in some

circumstances). Examples include forward purchase contracts or written put options on the issuer’s equity shares that

are to be physically settled or net cash settled.

ASC 480 requires put options be measured at fair value, with changes in fair value recognised in current earnings.

JP GAAP There is no specific guidance for derivatives on an issuer’s own shares since such derivatives are not common in the

Japanese market.

Measurement

Initial measurement of a liability with related party

IFRS When an instrument is issued to a related party, the liability should initially be recorded at fair value, which may not be the

value of the consideration received.

The difference between fair value and the consideration received (i.e., any additional amount lent or borrowed) is

accounted for as a current-period expense, income, or as a capital transaction based on its substance.

US GAAP When an instrument is issued to a related party at off-market terms, one should consider which model the instrument falls

within the scope of as well as the facts and circumstances of the transaction (i.e., the existence of unstated rights and

privileges) in determining how the transaction should be recorded. There is, however, no requirement to initially record the

transaction at fair value.

The ASC 850 presumes that related party transactions are not at arm’s length and the associated disclosure requirements

should also be considered.

JP GAAP Initial measurement of liabilities between related parties is accounted for under the general measurement guidance.

Effective-interest-rate calculation

IFRS The effective interest rate used for calculating amortization under the effective interest method discounts estimated cash

flows through the expected—not the contractual—life of the instrument.

Generally, if the entity revises its estimate after initial recognition, the carrying amount of the financial liability should be

revised to reflect actual and revised estimated cash flows at the original effective interest rate, with a cumulative-catch-

up adjustment being recorded in profit and loss. Frequent revisions of the estimated life or of the estimated future cash

flows may exist, for example, in connection with debt instruments that contain a put or call option that does not need to

be bifurcated or whose coupon payments vary. Payments may vary, due to an embedded feature that does not meet the

definition of a derivative because its underlying is a nonfinancial variable specific to a party to the contract (e.g., cash

flows that are linked to earnings before interest, taxes, depreciation and amortization; sales volume; or the earnings of

one party to the contract).

Generally, floating rate instruments (e.g., LIBOR plus spread) issued at par is not subject to the cumulative catch-up

approach; rather the effective interest rate is revised as market rates change.

US GAAP The effective interest rate used for calculating amortization under the effective interest method generally discounts

contractual cash flows through the contractual life of the instrument.

However, there may be circumstances where expected life is used.

JP GAAP Financial liabilities are initially measured at cost. However, issuance of a debt discount and likewise transactions are

calculated using the effective interest rate method, which is similar to IFRS.

Transaction costs (also known as debt issue cost)

IFRS When the liability is not carried at fair value through income, transaction costs are deducted from the carrying value of the

financial liability and are not recorded as separate assets. Rather, they are accounted for as a debt discount and


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amortized using the effective interest rate method,

Transaction costs are expensed immediately when the liability is carried at fair value, with changes recognised in profit

and loss.

US GAAP When the liability is not carried at fair value through income, transaction costs are deferred as an asset.

Transaction costs are expensed immediately, when the liability is carried at fair value, with changes recognised in profit

and loss.

JP GAAP Basically, debt issue costs are expensed when incurred. However, it is also permitted to recognise the debt issue cost as

a deferred asset which is amortized over the debt maturity period basically by the interest method.

Derecognition of financial liabilities

IFRS A financial liability is derecognised when: the obligation specified in the contract is discharged, cancelled or expires; or

the primary responsibility for the liability is legally transferred to another party. A liability is also considered extinguished if

there is a substantial modification in the terms of the instrument – for example, where the discounted present value of

new cash flows differs from the remaining cash flows of the original financial liability by at least 10%.

The difference between the carrying amount of a liability (or a portion thereof) extinguished or transferred and the amount

paid for it should be recognised in net profit or loss for the period.

US GAAP Similar to IFRS, a financial liability is derecognised only if it has been extinguished. Extinguishment means paying the

creditor and being relieved of the obligation or being legally released from the liability either judicially or by the creditor, or

as a result of a substantial modification in terms - i.e., where the discounted present value of new cash flows differs from

the remaining cash flows of the original financial liability by at least 10%.

JP GAAP Similar to IFRS. A financial liability must be derecognised when the contractual obligation for the financial liability is

discharged, extinguished or when the primary debtor has been disclaimed from its position as a primary debtor. However,

there is no guidance which states that a financial liability is considered extinguished if there is a substantial modification

in the terms and conditions of the financial instrument.

Proposed guidance – IFRS and US GAAP

Derecognition ED

The IASB’s proposed amendments on derecognition also include a revision to the derecognition of financial liabilities in IAS 39 to

be more consistent with the definition of a liability in the IASB Framework.

FASB and IASB Comment Requests on Financial Instruments with Characteristics of Equity

In November 2007, the FASB issued its Preliminary Views on Financial Instruments with Characteristics of Equity and the IASB

issued a discussion paper under the same title in February 2008. The Boards have indicated their intent to use input received to

their individual requests as the basis of a joint project to develop a high-quality common standard. The requests are part of larger,

broad-based projects that have lasted a number of years and that are expected to continue for the near future and that are further

evidence of the complexity and challenge this topical area presents in practice.

In October 2008 the IASB discussed the comment letters received and which approach provided the best starting point. The IASB

and FASB decided to begin future deliberations using the principles underlying the perpetual and basic ownership approaches.

The boards acknowledged that they may decide to make exceptions to the basic principles as they continue to develop an

approach to identify equity instruments. The IASB expects to issue an exposure draft in early 2010 with a final standard no earlier

than 2011.


Refer Derivative and hedging section for details of the proposed guidance.

Credit Risk in Liability Measurement

In June 2009, the IASB published a discussion paper on the use of credit risk in liability measurement. The discussion paper was

accompanied by a staff paper that outlined the three most often-cited arguments in favour of including credit risk in current

measurement of liabilities and the three most often-cited arguments against it. The objective of the discussion paper is to generate

a focused discussion that will enhance the debate on this topic that has generated more comment and controversy than any other

issue in fair value.

REFERENCES: IFRS: IAS 1, IAS 32, IAS 39, IFRIC 2US GAAP: ASC 470-20, ASC 480, ASC 815, ASC 815-15-25-4, ASC 815-15-25-5, ASC 815-40, ASC 825, ASC 850, ASC 860, ASR 268, CON 6JP GAAP: Accounting Standard for Financial Instruments, Practical Guidelines on Accounting Standards for Financial Instruments, Q&A on Financial Instruments Accounting


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Recognition and classification

IFRS An instrument is classified as equity when it does not contain an obligation to transfer economic resources. Preference

shares that are not redeemable, or that are redeemable solely at the option of the issuer, and for which distributions are at

the issuer’s discretion, are classified as equity. Only derivative contracts that result in the delivery of a fixed amount of

cash, or other financial asset for a fixed number of an entity’s own equity instruments, equity components of compound

instruments, puttable instruments that can now be classified as equity under the amendment to IAS 32 are classified as

equity instruments. All other derivatives on the entity’s own equity are accounted for as derivatives.

US GAAP Generally, an instrument qualifies as equity from the issuer’s perspective if it does not meet the criteria for liability

classification. However, for SEC registrants, certain redeemable instruments need to be classified as “mezzanine” equity.

See “Financial Liabilities and equity” section for further discussion.

JP GAAP It follows the legal form under the corporate law. Financial instruments such as preferred share are classified as equity.

Mandatorily redeemable financial instruments are not common in Japan.

Purchase of own shares

IFRS When an entity’s own equity shares or other equity instruments are repurchased, they are shown as a deduction from

shareholders’ equity at cost. Any profit or loss on the subsequent sale of the shares or equity instruments is shown as a

change in equity.

When an entity has an obligation or a conditional obligation to purchase its own shares for cash (e.g., such as under a

forward contract to purchase its own shares or under a written put) and the contract itself meets the definition of an

equity instrument (because it requires the entity to purchase a fixed amount of its own shares for a fixed amount of cash),

any premium received or paid must be recorded in equity.

US GAAP Similar to IFRS, except when treasury stock is acquired with the intention of retiring the stock, an entity has the option to:

charge the excess of the cost of treasury stock over its par value entirely to retained earnings; allocate the excess

between retained earnings and additional paid-in-capital (APIC); or charge the excess entirely to APIC.

JP GAAP Similar to IFRS. However, there is no guidance for the treatment for any premium received or paid when an entity has an

obligation or a conditional obligation to purchase its own shares for cash and the contract itself meets the definition of an

equity instrument.

Dividends on ordinary equity shares

IFRS Presented as a deduction in the statement of changes in equity in the period when authorised by shareholders.



Transaction cost for issue and purchase of own shares

IFRS Transaction costs are deducted from equity.

US GAAP Transaction costs are deducted from the proceeds of issuing capital stock.

JP GAAP Transaction costs are recorded in non-operating expense.

REFERENCES: IFRS: IAS 32, IAS 39US GAAP: ASC 470-20, ASC 480, CON 6JP GAAP: Accounting Standard for Financial Instruments, Guidance on Accounting for Other Compound Financial Instruments (Compound Financial Instruments Other than Those with an Option to increase Paid-in Capital), Practical Guidelines on Accounting Standard for Financial Instruments, Q&A on Financial Instruments Accounting, Guidance on Accounting Standards for Treasury Shares and Reversal of Legal Reserve


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Derivatives

IFRS, US GAAP and JP GAAP specify requirements for the recognition and measurement of derivatives.

Definition and Net settlement provision

IFRS A derivative is a financial instrument:

• whose value changes in response to a specified variable or underlying rate (for example, interest rate);

• that requires no or little net investment; and

• that is settled at a future date.

IFRS does not include a requirement for net settlement within the definition of a derivative.

There is an exception under IAS 39 for derivatives whose fair value cannot be measured reliably (i.e., instruments linked

to equity instruments that are not reliably measurable), which could result in not having to account for such instruments

at fair value. In practice, however, this exemption is very narrow in scope, because in most situations it is expected that

fair value can be measured reliably even for unlisted securities.

An option contract between an acquirer and a seller to buy or sell stock of an acquiree at a future date that results in a

business combination likely would be considered a derivative under IAS 39 for the acquirer however, the option may be

classified as equity from the seller’s perspective.

US GAAP Sets out similar requirements, except that the terms of the derivative contract should require or permit net settlement.

US GAAP generally excludes from the scope of ASC 815 certain instruments linked to unlisted equity securities when

such instruments fail the net settlement requirement and are therefore not accounted for as derivatives.

An option contract between an acquirer and a seller to buy or sell stock of an acquiree at a future date that results in a

business combination may not meet the definition of a derivative as it may fail the net settlement requirement (i.e., the

acquiree’s shares are not listed so the shares may not be readily convertible to cash).

JP GAAP Similar requirements to IFRS are provided. However, the terms of the derivative contract should require or permit net

settlement, as US GAAP requires.

Own use versus normal purchase normal sale

There are many factors to consider in determining whether When a contract related to non-financial items qualifies for the “own

use”(IFRS)/”normal purchase normal sale (NPNS)” (US GAAP) exception and meets the requirement of a derivative; such contract is

permitted not to apply the accounting treatment of a derivative.

IFRS “Own use” are contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument,

or by exchanging financial instruments, as if the contracts were financial instrument, with the exception of contracts that

were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance

with the entity’s expected purchase, sale or usage requirement. IFRS requires such contract to be accounted for as own

use (i.e., not accounted for as a derivative) if the own use criteria are satisfied.

US GAAP “NPNS” are contracts that provide for the purchase or sale of something other than a financial instrument or derivative

instrument that will be delivered in quantities expected to be used or sold by the reporting entity over a reasonable period

in the normal course of business. If a contract meets the requirement of the NPNS exception, then the reporting entity

must document that it qualifies in order to apply the NPNS exception - otherwise, it will be considered a derivative.

JP GAAP Contracts related to future purchase, future sale or commodity transactions, for which the delivery of the commodity is

apparent at inception and which the aim of such transaction are not related to trading purposes, are not be considered to

be derivative.

Initial measurement

All derivatives are recognised on the statement of financial position as either financial assets or liabilities under IFRS, US GAAP and JP

GAAP. They are initially measured at fair value on the acquisition date.


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IFRS and US GAAP require subsequent measurement of all derivatives at their fair values with changes recognised in profit or loss

except for derivatives used in cash flow or net investment hedges. However, under IFRS, a derivative that is linked to and should be

settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured is carried at cost less impairment

until settlement. JP GAAP requires to defer the change in fair value of hedging instruments in net assets until the profit or loss of

hedged item is recognised. However, fair value hedge is also permitted in certain cases.

Embedded derivatives

IFRS and US GAAP require separation of derivatives embedded in hybrid contracts when the economic characteristics and risks of

the embedded derivatives are not closely related to the economic characteristics and risks of the host contract, a separate instrument

with the same terms as the embedded derivative would meet the definition of a derivative, and the hybrid instrument is not measured

at fair value through profit or loss. IFRS and US GAAP provide an option to value certain hybrid instruments to fair value instead of

bifurcating the embedded derivative.

Under JP GAAP, derivatives embedded in hybrid instruments are bifurcated into financial assets and financial liabilities when the

following requirements are met and are valued at fair value. The resulting valuation differences are accounted for as profit or loss of

the current period. (1) There is a possibility that the risks of the embedded derivatives may impact the actual financial asset or financial

liability, (2) a separate derivative with the same terms as the embedded derivative would meet the characteristics of a derivative, (3)

the valuation differences of the hybrid instrument due to changes in the fair value will not be recognised in the profit or loss of the

current period. However, when the embedded derivative is bifurcated for managerial purposes, despite not meeting the requirement of

(1) or (3), bifurcation are permitted.

There are some detailed differences between IFRS and US GAAP for certain types of embedded derivatives on what is meant by

‘closely related’. Under IFRS, after the amendment of IFRIC 9 and IAS 39 in March 2009, on reclassification of a financial asset out of

the "at fair value through profit or loss" category, all embedded derivatives should be reassessed and, if necessary, separately

accounted for. If an entity is unable to measure the embedded derivative that would have to be separated on reclassification, the

financial asset is prohibited from being reclassified and has to remain in the "at fair value through profit or loss" category. This

amendment only affects those entities that reclassified financial assets using the October 2008 reclassification amendment. It may

mean that some reclassifications will have to be reversed if the embedded derivative that is required to be separated is unable to be

measured. .

Under US GAAP, if a hybrid instrument contains an embedded derivative that is not clearly and closely related to the host contract at

inception, but is not required to be bifurcated, the embedded derivative is continuously reassessed for bifurcation.

Reassessment of embedded derivatives

IFRS IFRS precludes reassessment of embedded derivatives after inception of the contract unless there is a change in the

terms of the contract that significantly modifies the expected future cash flows that would otherwise be required under

the contract.

Having said that, if an entity reclassifies a financial asset out of the held for trading category, embedded derivatives must

be assessed and, if necessary, bifurcated.

US GAAP If a hybrid instrument contains an embedded derivative that is not clearly and closely related at inception, and it is not

bifurcated (since it does not meet the definition of a derivative), it must be continually reassessed to determine whether

bifurcation is required at a later date. Once it meets the definition of a derivative, the embedded derivative is bifurcated

and measured at fair value with changes in fair value recognised in earnings

Similarly, the embedded derivative in a hybrid instrument that is not clearly and closely related at inception and is

bifurcated must also be continually reassessed to determine whether it subsequently fails to meet the definition of a

derivative. Such embedded derivative should cease to be bifurcated at the point at which it fails to meet the requirements

for bifurcation.

An embedded derivative that is clearly and closely related is not reassessed subsequent to inception for the “clearly and

closely related” feature. However, for non-financial host contracts, the assessment of whether an embedded foreign

currency derivative is clearly and closely related to the host contract should only be performed at inception of the

contract.

JP GAAP Embedded derivatives are bifurcated when their risk increases and may impact the actual financial asset and financial

liability.


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Calls and puts in debt instruments

IFRS Calls, puts or prepayment options embedded in a hybrid instrument are closely related to the debt host instrument if

either: a) the exercise price approximates the amortized cost on each exercise date or b) the exercise price of a

prepayment option reimburses the lender for an amount up to the approximate present value of the lost interest for the

remaining term of the host contract. Once determined to be closely related as outlined above, these items do not

require bifurcation.

US GAAP Multiple tests are required in evaluating whether an embedded call or put is clearly and closely related to the debt host.

The failure of one or both of the below outlined tests is common and typically results in the need for bifurcation.

If a debt instrument is issued at a substantial premium or discount and a contingent call or put can accelerate

prepayment of principal, then the call or put is not clearly and closely related. (Test #1)

If there is no contingent call or put that can accelerate principal or if the debt instrument is not issued at a substantial

premium or discount, then it must be assessed whether the debt instrument can be settled in a such a way that the

holder would not recover substantially all of its recorded investment or the embedded derivative would at least double

the holder's initial return and the resulting rate would be double the current market rate of return. However, this rule is

subject to certain exceptions. (Test #2)

JP GAAP There is no guidance for the evaluation of the relationship between the prepayment option and the host contract. The

evaluation of the prepayment option to be closely related to the host contract is judged by whether the risk impacts the

host contract or not.

Non-financial host contracts – currencies commonly used

IFRS Criteria (a) and (b) cited for US GAAP are also in IFRS. However, bifurcation of an embedded foreign currency derivative

from a non-financial host is not required if payments are denominated in a currency that is commonly used to purchase

or sell such items in the economic environment in which the transaction takes place.

For example, Company X, in Russia (functional currency and local currency is Russian ruble) sells timber to another

Russian Company with a ruble functional currency in Euros. Since the Euro is a currency commonly used in Russia,

bifurcation of an embedded foreign currency derivative from the non-financial host contract would not be required under

IFRS.

US GAAP US GAAP requires bifurcation of an embedded foreign currency derivative from a non-financial host unless the payment

is (a) denominated in the local currency or functional currency of a substantial party to the contract, (b) the price is

routinely denominated in that foreign currency in international commerce (e.g., US Dollar for crude oil transactions) or (c)

a foreign currency used because a party operates in a hyperinflationary environment.

JP GAAP The overall credit risk in synthetic collateralized debt obligations (CDOs) is not high, embedded derivatives are not

bifurcated as the possibility of their impact on actual financial assets is low.

Embedded credit derivatives in synthetic collateralized debt obligations (CDOs)

IFRS The embedded credit derivative in synthetic CDOs is considered not to be closely related to the debt host contract and

requires bifurcation. This is because the issuer (typically a special purpose entity) transfers the credit risk of an asset it

does not own by writing a credit default swap while the SPE usually owns treasuries or other highly rated securities.

US GAAP US GAAP does not consider a synthetic CDO to have an embedded credit derivative that is required to be bifurcated.

Therefore, an investor in such instruments generally accounts for the investment as one unit of account.

JP GAAP The overall credit risk in synthetic collateralized debt obligations (CDOs) is not high, embedded derivatives are not

bifurcated as the possibility of their impact on actual financial assets is low.

Hedge accounting

Detailed guidance is set out in the respective standards under IFRS, US GAAP and JP GAAP dealing with hedge accounting.

Criteria for hedge accounting

Hedge accounting is permitted under IFRS, US GAAP and JP GAAP provided that an entity meets stringent qualifying criteria in

relation to documentation and hedge effectiveness. All three frameworks require documentation of the entity’s risk management


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objectives and how the effectiveness of the hedge will be assessed. Hedge instruments should be highly effective in offsetting the

exposure of the hedged item to changes in the fair value or cash flows, and the effectiveness of the hedge is measured reliably on a

continuing basis under three frameworks.

A hedging relationship qualifies for hedge accounting under IFRS, US GAAP and JP GAAP if changes in fair values or cash flows of

the hedged item are expected to be highly effective in offsetting changes in the fair value or cash flows of the hedging instrument

(‘prospective’ test) and ‘actual’ results are within a range of 80% to 125% (‘retrospective’ test). Under JP GAAP, if, at inception, hedge

instruments and hedged assets or liabilities are the same, or critical terms related to forecasted transaction are the same, it is

permissible to omit effectiveness testing thereafter.

When to assess effectiveness

IFRS IFRS requires that hedges be assessed for effectiveness on an ongoing basis and that effectiveness be measured, at a

minimum, at the time an entity prepares its annual or interim financial reports.

Therefore, if an entity is required to produce only annual financial statements, IFRS requires that effectiveness be tested

only once a year. An entity may, of course, choose to test effectiveness more frequently.

US GAAP US GAAP requires that hedge effectiveness be assessed whenever financial statements or earnings are reported and at

least every three months (regardless of how often financial statements are prepared).

JP GAAP The hedge effectiveness should always be evaluated at each closing date and at least once semiannually.

Hedged items

IFRS, US GAAP and JP GAAP contain additional requirements for the designation of specific financial assets and liabilities as hedged

items. These are outlined in the table below. Additional detailed application differences may arise.


Held-to-maturity investments cannot be designated as a hedged item with respect to interest-rate risk or prepayment risk.

Similar to IFRS. Similar to IFRS. However, held-to-maturity securities can be designated as a hedged item if the held-to-maturity security is hedged by an interest swap from the acquisition date, and the conditions of the interest swap and the hedged securities are virtually identical in terms of notional principal, condition of receipt and payment for the interest, and the contract term.

If the hedged item is a financial asset or liability, the guidance allows a portion of a specific risk to qualify as a hedged risk (so long as effectiveness can be reliably measured). Designating a portion of a specific risk may reduce the amount of ineffectiveness that needs to be recorded in profit or loss under IFRS.

Under IFRS, portions of risks can be viewed as portions of the cash flows (e.g., excluding the credit spread from a fixed-rate bond in a fair value hedge of interest rate risk) or different types of financial risks, provided the types of risk are separately identifiable and effectiveness can be measured reliably.

The guidance does not allow a portion of a specific risk to qualify as a hedged risk in a hedge of financial assets or financial liabilities. US GAAP specifies that the designated risk be in the form of changes in one of the following:

• Overall fair value or cash flows.

• Benchmark interest rates.

• Foreign currency exchange rates.

• Creditworthiness and credit risk.

The interest rate risk that can be hedged is explicitly limited to specified benchmark interest rates.

Similar to IFRS. A portion of the total amounts or holding period of a hedged item can be designated as a hedged item.

If the hedged item is a non-financial asset or liability, it may be designated as a hedged item only for foreign currency risk, or in its entirety for all risks because of the difficulty of isolating other risks.

Similar to IFRS. Assets and liabilities which are expected to be impaired due to changes in market price can be designated as a hedged item.

If similar assets or similar liabilities are aggregated and hedged as a group, the change in fair value attributable to the hedged risk for individual items should be proportionate to the change in fair value for the group.

Similar to IFRS. Similar to IFRS. If a hedged item consists of a number of assets or liabilities, each asset or liability should be exposed to potential losses arising from common market fluctuation and anticipated to respond in the same way to the market fluctuations.


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An entity is permitted to hedge foreign exchange risk to a firm commitment to acquire a business in a business combination only for foreign exchange risk.

Companies accounting for these types of hedges as cash flow hedges under IFRS establish a policy for releasing the cumulative amount recorded in equity to profit or loss. Once the transaction occurs, such amounts are released into profit or loss at the earlier of goodwill impairment or disposal of the acquiree.

US GAAP specifically prohibits a firm commitment to enter into a business combination or acquire or dispose of a subsidiary, minority interest or equity method investee from qualifying as a hedged item for hedge accounting purposes (even if it is with respect to foreign currency risk)

There is no similar guidance as IFRS requires.

Fair value hedge of interest rate risk in a portfolio of dissimilar items

IFRS IFRS allows a fair value hedge of interest rate risk in a portfolio of dissimilar items whereby the hedged portion may be

designated as an amount of a currency, rather than as individual assets (or liabilities). Furthermore, an entity is able to

incorporate changes in prepayment risk by using a simplified method set out in the guidance, rather than specifically

calculating the fair value of the prepayment option on a (prepayable) item by item basis.

In such strategy, the change in fair value of the hedged item is presented in a separate line in the statement of financial

position and does not have to be allocated to individual assets or liabilities.

US GAAP US GAAP does not allow a fair value hedge of interest rate risk in a portfolio of dissimilar items.

JP GAAP It is permitted for financial institutions only if they apply a highly established hedging method for reflecting the

effectiveness of offsetting risk in the financial statements.

Hedges of a portion of the time period to maturity

IFRS IFRS permits designation of a derivative as hedging only a portion of the time period to maturity of a hedged item if

effectiveness can be measured and the other hedge accounting criteria are met. For example, an entity with a 10% fixed

bond with remaining maturity of 10 years can acquire a 5-year pay-fixed, receive-floating swap and designate the swap

as hedging the fair value exposure of the interest rate payments on the bond until year 5 and the change in value of the

principal payment due at maturity to the extent affected by changes in the yield curve relating to the 5 years of the swap.

That is, a 5-year bond is the imputed hedged item in the actual 10-year bond; the interest rate risk hedged is the 5-year

interest rate implicit in the 10-year bond.

US GAAP US GAAP does not permit the hedged risk to be defined as a portion of the time period to maturity of a hedged item.

JP GAAP Similar to IFRS, JP GAAP permits hedged risk to be defined as a portion of the time period to maturity of a hedged item.

Servicing Rights

IFRS Under IFRS, servicing rights are considered non-financial items. Accordingly, they can only be hedged for foreign

currency risk or hedged in their entirety for all risks (i.e., not only for interest rate risk).

Furthermore, IFRS precludes measurement of servicing rights at fair value through profit or loss because the fair value

option is applicable only to financial items and therefore cannot be applied to servicing rights.

US GAAP US GAAP specifically permits servicing rights to be hedged for the benchmark interest rate or for overall changes in fair

value in a fair value hedge.

An entity may, however, avoid the need to apply hedge accounting by electing to measure servicing rights at fair value

through profit or loss as both the hedging instrument and the hedged item would be measured at fair value through profit

or loss.

JP GAAP There is no specific guidance on servicing rights as hedging servicing rights are not common.

Cash flow hedges with purchased options

IFRS Under IFRS, when hedging one-sided risk via a purchased option in a cash flow hedge of a forecasted transaction, only

the intrinsic value of the option is deemed to be reflective of the one-sided risk of the hedged item. Therefore, in order to

achieve hedge accounting with purchased options, an entity will be required to separate the intrinsic value and time value

of the purchased option and designate as the hedging instrument only the changes in the intrinsic value of the option.


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As a result, for hedge relationships where the critical terms of the purchased option match the hedged risk, generally, the

change in intrinsic value will be deferred in equity while the change in time value will be recorded in profit or loss.

US GAAP US GAAP permits an entity to assess effectiveness based on total changes in the purchased option’s cash flows (that is,

the assessment will include the hedging instrument’s entire change in fair value). As a result, the entire change in the

option’s fair value (including time value) may be deferred in equity based on the level of effectiveness.

Alternatively, the hedge relationship can exclude time value from the hedging instrument such that effectiveness is

assessed based on intrinsic value.

JP GAAP Changes in the market price or cash flows of a hedged item are generally due to the fluctuations in the spot price of

underlying instruments, and those changes are construed to correspond to the changes in fair value of derivatives used

as a hedging instrument less the changes in the time value or other related values (i.e., changes in the intrinsic value). As

such, the intrinsic value and the time value are basically separated and only the changes of the option’s intrinsic value are

designated as a hedging instrument and the changes in the time value or other related values are recorded in profit or

loss. However, the time value and other related values are permitted to be designated as a hedged item in the aggregate.

Hedging instruments

Typically, only a derivative instrument can qualify as a hedging instrument in most cases.

Foreign currency risk and the combination of derivatives and nonderivatives

IFRS Under the guidance, for foreign currency risk only, two or more nonderivatives or proportions of them or a combination of

derivatives and nonderivatives or proportions of them can be viewed in combination and jointly designated as the

hedging instrument.

As an illustrative example, consider a fact pattern in which a US parent’s functional currency is the US dollar. Say the US

parent has a net investment in a French subsidiary whose functional currency is the Euro. US parent also has fixed-rate

external debt issued in yen and a receive-fixed-yen, pay-floating-Euro currency swap for all principal and interest

payments. The combination of the fixed-rate yen debt and a receive-yen, pay-Euro currency swap resembles the

economics of floating-rate Euro debt. Under IFRS, the combination of the debt and the swap may be designated as a

hedging instrument in a net investment in the French subsidiary.

US GAAP US GAAP prohibits using a combination of a separate derivative and a nonderivative as hedging instrument.

In the illustrative example above, US GAAP would preclude the combination of the derivative and nonderivative to be

designated as a single hedging instrument in a hedging relationship.

JP GAAP There is no guidance for the combination of a derivative and a non-derivative to be designated as the hedging instrument.

Foreign currency risk and internal derivatives

IFRS Under IFRS, internal derivatives do not qualify for hedge accounting in the consolidated financial statements (because

they are eliminated in consolidation). However, a treasury center’s net position that is laid off to an external party may be

designated as a hedge of a gross position in the consolidated financial statements. Careful consideration of the positions

to be designated as hedged items may be necessary so as to minimize the effect of this difference.

The internal derivatives would qualify as hedging instruments in the separate financial statements of the subsidiaries

entering into internal derivatives with a group treasury center.

US GAAP US GAAP permits hedge accounting for foreign currency risk with internal derivatives, provided specified criteria are met

and, thus, accommodates the hedging of foreign currency risk on a net basis by a treasury center. The treasury center

enters into derivatives contracts with unrelated third parties that would offset, on a net basis for each foreign currency,

the foreign exchange risk arising from multiple internal derivative contracts.

JP GAAP For internal derivatives, when a derivative transaction between one company of the group companies and an external

party can individually correspond to an internal derivative transaction, such a transaction may be designated as the

hedging instruments under consolidated account. However, there is no guidance in JP GAAP referring to a treasury

centre of the group.

A written option in a separate contract

IFRS Under the guidance, two or more instruments may be designated as the hedging instrument only if none of them is a

written option or a net written option. Assessment of whether a contract is a net written option includes assessment of


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whether a written option and a purchased option can be combined and viewed as one contract. If the contracts can be

combined, none of the contracts is a written option and the combined contract would be the eligible hedging instrument.

For a written option and a purchased option to be combined and viewed as one contract, the separate contracts must

meet a series of indicators, including that they (1) were entered into contemporaneously and in contemplation of one

another, (2) have the same counterparty and (3) relate to the same risk and that there is no apparent economic need or

substantive business purpose for structuring the transactions separately that could not also have been accomplished in a

single transaction.

US GAAP The guidance does not require contracts to be entered into contemporaneously with the same counterparty in a

determination of when separate contracts can be combined and designated as a hedging instrument.

In instances where a net premium is received, US GAAP requires that the quantitative tests in ASC 815 be met in order to

qualify as a hedging instrument.

JP GAAP Similar to IFRS in terms of not being available for designating a written option or a net written option as a hedging

instrument.

Hedging more than one risk

IFRS IFRS permits designation of a single hedging instrument to hedge more than one risk in two or more hedged items by

separating a single swap into two hedging instruments if certain conditions are met.

A single hedging instrument may be designated as a hedge of more than one type of risk if the risks hedged can be

identified clearly, the effectiveness of the hedge can be demonstrated and it is possible to ensure that there is specific

designation of the hedging instrument and different risk positions. In the application of this guidance, a single swap may

be separated by inserting an additional (hypothetical) leg, provided that each portion of the contract is designated as a

hedging Instrument in a qualifying and effective hedge relationship.

US GAAP US GAAP does not allow a single hedging instrument to hedge more than one risk in two or more hedged items. US

GAAP does not permit creation of a hypothetical component in a hedging relationship to demonstrate hedge

effectiveness in the hedging of more than one risk with a single hedging instrument.

US GAAP permits cash flow hedge accounting if a hedging instrument (e.g., a basis swap) is used to modify the interest

receipts or payments associated with a recognised financial asset or liability from one variable rate to another variable

rate (i.e., one leg of the swap should be the same as the payment on the financial liability and the other leg of the swap

should match the receipt on the financial asset).

JP GAAP Interest rate currency swap is separated into two hedging instruments (interest rate risk and foreign currency risk).

Foreign currency risk and intragroup hedging

IFRS For foreign currency hedges of forecasted transactions, IFRS does not require the entity with the hedging instrument to

have the same functional currency as the entity with the hedged item. At the same time, IFRS does not require that the

operating unit exposed to the risk being hedged within the consolidated accounts be a party to the hedging instrument.

As such, IFRS allows a parent company with a functional currency different from that of a subsidiary to hedge the

subsidiary’s transactional foreign currency exposure. The same flexibility regarding the location of the hedging instrument

applies to net investment hedges.

US GAAP Under the guidance, either the operating unit that has the foreign currency exposure is a party to the hedging instrument

or another member of the consolidated group that has the same functional currency as that operating unit is a party to

the hedging instrument. However, for another member of the consolidated group to enter into the hedging instrument,

there may be no intervening subsidiary with a different functional currency.

JP GAAP Hedge accounting can be applied to hedging instruments held for the foreign currency risk in the qualifying forecasted

transactions between consolidated entities.

Hedge relationships

Exposure to risk can arise from: changes in the fair value of an existing asset or liability; changes in the future cash flows arising from

an existing asset or liability; or changes in future cash flows from a transaction that is not yet recognised.

IFRS Recognises the following types of hedge relationships:

• a fair value hedge where the risk being hedged is a change in the fair value of a recognised asset or liability or an

unrecognised firm commitment;


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• a cash flow hedge where the risk being hedged is the variability in cash flows forecasted for a future date or period. A

forecasted transaction should be highly probable to qualify as a hedged item.; and

• a hedge of a net investment in a foreign entity, where a hedging instrument is used to hedge the foreign currency

exposure to changes in the reporting entity’s share in the net assets of that operation.

US GAAP Similar to IFRS. However, there are differences in the detailed application.


Fair value hedges

IFRS Hedging instruments are measured at fair value. The hedged item is adjusted for changes in its fair value but only due to

the risks being hedged. Gains and losses on fair value hedges, for both the hedging instrument and the item being

hedged, are recognised in profit or loss.


JP GAAP In principle, hedge accounting is applied using the deferral method whereby gains and losses or valuation differences

generated from a hedging instrument measured at fair value in net assets are deferred until the gain or loss related to a

hedged item is recognised. In addition, fair value hedges similar to IFRS and US GAAP are permitted. However, this

method is applied for hedging securities available for sale as it is permitted only for hedging an item which is valued at

fair value at balance sheet date.

Cash flow hedges and basis adjustments on acquisition of nonfinancial items

IFRS Hedging instruments are measured at fair value, with gains and losses on the hedging instrument, where they are

effective, initially deferred in equity and subsequently released to profit or loss concurrent with the earnings recognition

pattern of the hedged item. Gains and losses on financial instruments used to hedge forecasted asset and liability

acquisitions may be included in the cost of the non-financial asset or liability – a ‘basis adjustment’. This is not permitted

for financial assets or liabilities. Under IFRS, basis adjustment commonly refers to an adjustment of the initial carrying

value of a nonfinancial asset or nonfinancial liability subject to a cash flow hedge. That is, the initial carrying amount of

the hedged item recognised on the statement of financial position (i.e., the basis of the hedged item) is adjusted by the

cumulative amount of the hedging instrument’s fair value changes that were recorded in equity.

IFRS gives entities an accounting policy choice to either basis adjust the hedged item (if it is a nonfinancial asset or

liability) or release amounts from equity to profit or loss as the hedged item affects earnings.

US GAAP In the context of a cash flow hedge, US GAAP does not permit basis adjustments. That is, under US GAAP, the gain or

loss on the hedging instrument remains in equity and is released to the income statement as the hedged item affects

earnings (US GAAP does refer to basis adjustments in a different context wherein the term is used to refer to the method

by which, in a fair value hedge, the hedged item is adjusted for changes in its fair value attributable to the hedged risk.)

JP GAAP When the forecasted transactions represent acquisitions of an asset, the resulting gains and losses do not incur

immediately, but will incur as the cost of sale or depreciation of the acquired asset. As such, basis adjustment, which

reflects the gains and losses to the cost of the the acquired asset, is applied. However, when the acquired assets are

interest bearing financial assets such as a loan, they are deferred as hedging gains and losses in net assets and

transferred into profit and loss when interests are received.

Hedges of net investments in foreign operations

IFRS Similar treatment to cash flow hedges. The hedging instrument is measured at fair value with gains/losses deferred in

equity, to the extent that the hedge is effective, together with exchange differences arising on the entity’s investment in

the foreign operation. These gains/losses are released from equity to profit or loss on disposal or partial disposal of the

foreign operation.

US GAAP Similar to IFRS. Gains and losses are transferred to the income statement upon sale or complete or substantially

complete liquidation of the investment.


Effectiveness testing and measurement of hedge ineffectiveness

IFRS IFRS does not specify a single method for assessing hedge effectiveness prospectively or retrospectively. The method an

entity adopts depends on the entity’s risk management strategy and is included in the documentation prepared at the


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inception of the hedge. The most common methods used are the critical-terms comparison, the dollar-offset method and

regression analysis.

Short-cut method IFRS does not allow a shortcut method by which an entity may assume no ineffectiveness.

IFRS permits portions of risk to be designated as the hedged risk for financial instruments in a hedging relationship such

as selected contractual cash flows or a portion of the fair value of the hedged item, which can improve the effectiveness

of a hedging relationship. Nevertheless, entities are still required to test effectiveness and measure the amount of any

ineffectiveness

Matched-terms method IFRS does not specifically discuss the methodology of applying a matched-terms approach in the level of detail included

within US GAAP. However, if an entity can prove for hedges in which the principal terms of the hedging instrument and

the hedged items are the same that the relationship will always be 100% effective based on an appropriately designed

test, a similar qualitative analysis may be sufficient for prospective testing. Even if the principal terms are the same,

retrospective effectiveness is still measured in all cases, since IFRS precludes the assumption of perfect effectiveness.

US GAAP US GAAP does not specify a single method for assessing hedge effectiveness prospectively or retrospectively. The

method an entity adopts depends on the entity’s risk management strategy and is included in the documentation

prepared at the inception of the hedge.

Short-cut method US GAAP provides for a shortcut method that allows an entity to assume no ineffectiveness (and, hence, bypass an

effectiveness test) for certain fair value or cash flow hedges of interest rate risk using interest rate swaps (when certain

stringent criteria are met).

Matched-terms method Under US GAAP, for hedges that do not qualify for the shortcut method, if the critical terms of the hedging instrument

and the entire hedged item are the same, the entity can conclude that changes in fair value or cash flows attributable to

the risk being hedged are expected to completely offset. An entity is not allowed to assume (1) no ineffectiveness when it

exists or (2) that testing can be avoided. Rather, matched terms provide a simplified approach to effectiveness testing in

certain situations.

The SEC has clarified that the critical terms have to be perfectly matched to assume no ineffectiveness. Additionally, the

critical-term-match method is not available for interest rate hedges.

JP GAAP As a general rule, if critical terms between a hedging instrument and hedging assets or liabilities or a forecast transaction

are the same, the hedging instrument is generally presumed to fully net-settle market fluctuations or cash flow changes

at the inception of the hedge and after. In those cases, hedge effectiveness test can be omitted.

Furthermore, interest rate swap with conditions virtually identical in terms of notional principal, condition of receipt and

payment of the interest and the contract term of the hedged asset or liability are not required to be fair valued. The net

amount of actual receipt and payment is adjusted to the interest of the related hedged assets or liabilities (which is an

exceptional treatment for an interest rate swap).


FASB Exposure Draft on Accounting for Hedging Activities

On June 6, 2008, the FASB issued an exposure draft (ED) to amend the accounting for hedging activities and other related

literature. The objective of the proposed Standard is to simplify the accounting for hedging activities, resolve hedge accounting

practice issues that have arisen under the current guidance and make the hedge accounting model and associated disclosures

more useful and understandable to financial statement users.

The ED would eliminate:

• The shortcut method and critical-terms-match method

• The right to designate individual risks as hedged risk, except in the case of foreign currency risk and hedges of interest rate

risk on a company’s own debt at inception of the debt

• The requirement to quantitatively assess hedge effectiveness on an ongoing basis in order to qualify for hedge accounting

In addition, the ED would enable companies to qualify for hedge accounting by their performing a qualitative assessment at

inception of the hedging relationship demonstrating that:


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• An economic relationship exists between the hedging instrument and the hedged transaction

• The derivative would be expected to reasonably offset the change in fair value of the hedged item

After inception, companies would need to reassess hedge effectiveness only if circumstances suggest that the hedging

relationship may no longer be reasonably effective.

Redeliberations on the hedging project have been delayed pending a decision on the financial instruments research project. As

hedging is a subset of that project, the Board decided to wait for the agenda decision to be made before continuing work on the

hedging project. This project has the potential to create significant differences when compared to current IFRS. However, both

the IASB and FASB are coordinating efforts in a project to produce new guidance for hedge accounting.


In March 2008 the IASB released a discussion paper that discusses the main causes of complexity in reporting financial

instruments. It also discusses possible intermediate and long-term approaches to improving financial reporting and reducing

complexity. The IASB has noted that many preparers of financial statements, their auditors and users of financial statements find

the requirements for reporting financial instruments complex. The IASB and the FASB have been urged by many to develop new

standards of financial reporting for financial instruments that are principles based and less complex than today’s requirements.

As a result of the financial crisis, work on this project was accelerated to change the accounting for financial instruments. The

replacement of IAS 39 project is being broken down into three stages, (1) classification and measurement of financial assets and

liabilities, (2) impairment and (3) hedge accounting. The IASB is expected to release exposures drafts over the remainder of 2009

with classification and measurement already released in July 2009, impairment in October 2009 and hedge accounting in

December 2009 with final standards in time for year end financial statements for 2009 (classification and measurement) and during

2010 (impairment and hedge accounting). The classification and measurement project is expected to eliminate the requirement to

evaluate embedded derivatives in financial instruments.

This project has the potential to create significant differences when compared to current US GAAP. However, both the IASB and

FASB are coordinating efforts in their projects to reduce complexity in reporting financial instruments, although the ultimate

standards may not be fully converged. Please refer to Financial Assets section for further details.

Recent changes – IFRIC

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

The IFRIC recently issued IFRIC 16, Hedges of a Net Investment in a Foreign Operation. The interpretation applies to an entity that

hedges the foreign currency risk arising from its net investments in foreign operations and that wishes to qualify for hedge

accounting under IAS 39. The interpretation:

• Disqualifies presentation currency risk as a risk that can be hedged: The interpretation clarifies that only risk associated with

functional currencies can be hedged.

• Allows a parent company to hedge a net investment in an indirect subsidiary: The interpretation clarifies that an entity can

hedge a net investment in an indirect foreign subsidiary where there are intervening subsidiaries with different functional

currencies.

• Allows a hedging instrument to be held anywhere within a consolidated group regardless of the functional currency of the

entity holding the hedging instrument.

The interpretation converges to US GAAP in relation to presentation currency risk. However, IFRS still has more flexibility for hedge

accounting in terms of the levels where the actual hedges are located within an entity. This interpretation would be effective for

reporting periods beginning on or after July 1, 2009.

REFERENCES: IFRS: IAS 39, IFRS 7, IFRIC 9, IFRIC 16US GAAP: ASC 815, ASC 815-15-25-4 through 25-5, ASC 815-20-25-3, ASC 830-30-4-2 through 40-4JP GAAP: Accounting Standard for Financial Instruments, Guidance on Accounting for Other Compound Financial Instruments (Compound Financial Instruments Other than Those with an Option to increase Paid-in Capital), Practical Guidelines on Accounting Standards for Financial Instruments, Q&A on Financial Instruments Accounting


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Foreign currency translation

Functional currency – definition and determination

IFRS Functional currency is defined as the currency of the primary economic environment in which an entity operates. If the

indicators for the determination of functional currency are mixed and the functional currency is not obvious, management

should use its judgment to determine the functional currency that most faithfully represents the economic results of the

entity’s operations by focusing on the currency of the economy that determines the pricing of transactions (not the

currency in which transactions are denominated).

Additional evidence (secondary in priority) may be provided from the currency in which funds from financing activities are

generated, or receipts from operating activities are usually retained, as well as the nature of activities and extent of

transactions between the foreign operation and the reporting entity. In the case of a foreign operation e.g., a subsidiary or

a branch, it is necessary to assess whether its activities are carried out as an extension of the reporting entity rather than

being carried out with a significant degree of autonomy.

US GAAP Similarly emphasises the primary economic environment in determining an entity’s functional currency. However, US

GAAP has no hierarchy of indicators. In practice, there is a greater focus on the cash flows rather than the currency that

influences the pricing.

JP GAAP Functional currency is determined based on legal entity, i.e., foreign subsidiaries and foreign branches. Foreign

subsidiaries use their local currency and foreign branches use headquarters’ currency, as their functional currency. This is

on the basis that operations of foreign subsidiaries are deemed to be independent of their parent company whereas

operations of foreign branches are deemed to be dependent on their parent company.

Translations – the individual entity

IFRS, US GAAP and JP GAAP have similar requirements regarding the translation of transactions by an individual entity, as follows:

• Translation of transactions denominated in foreign currency is at the exchange rate in operation on the date of the transaction;

• Monetary assets and liabilities denominated in foreign currency are re-translated at the closing (year-end) rate;

• Non-monetary foreign currency assets and liabilities are translated at the appropriate historical rate;

• Non-monetary items denominated in a foreign currency and carried at fair value are reported using the exchange rate that existed

when the fair value was determined (IFRS and JP GAAP);

• Amounts in profit or loss are translated using historical rates of exchange at the date of transaction or an average rate as a practical

alternative, provided the exchange rate does not fluctuate significantly; and

• Exchange gains and losses arising from an entity’s own foreign currency transactions are reported as part of the profit or loss for

the year. This includes foreign currency gains and losses on available-for-sale debt securities (IFRS and JP GAAP) as well as

long-term loans, which in substance form part of an entity’s net investment in a foreign operation.

Translation – consolidated financial statements

When translating financial statements into a different presentation currency (for example, for consolidation purposes into the functional

currency of the parent), IFRS, US GAAP and JP GAAP require the assets and liabilities to be translated using the closing (year-end) rate.

Amounts in profit or loss are translated using the average rate for the accounting period if the exchange rates do not fluctuate significantly.

However, under JP GAAP, exchange rate as of closing date is also permitted only for translation of expense and revenue for foreign

subsidiaries IFRS is silent on the translation of equity accounts; historical rates are used under US GAAP and JP GAAP. The translation

differences arising are reported in equity (other comprehensive income under IFRS and US GAAP, in net assets under JP GAAP).

Tracking of translation differences in equity

IFRS Translation differences in equity are separately tracked and the cumulative amounts disclosed. The appropriate amount

of cumulative translation difference relating to an entity is transferred to profit or loss on disposal of that foreign

operation, and included in gain or loss on sale. For partial disposals where control or significant influence is lost, the

entire cumulative translation adjustment (CTA) is recognised in profit or loss. For a partial disposal where control is


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retained, CTA is allocated to the additional non-controlling interest. For a partial disposal where significant influence is

retained, CTA is recycled into profit or loss on a proportionate basis.

US GAAP Similar to IFRS; there may be some differences in the detailed application of the model depending on the type of

disposal.


Translation of goodwill and fair value adjustments on acquisition of foreign entity

IFRS Translated at closing rates.



Presentation currency

IFRS Presentation currency is the currency in which the financial statements are presented. An individual entity and a group

have a free choice as to its presentation currency (if the presentation currency is not the functional currency, the reason

for selecting a different presentation currency must be disclosed.

Assets and liabilities are translated at the closing rate at the date of the statement of financial position when financial

statements are presented in a currency other than the functional currency. Items in the statement of comprehensive

income are translated at the exchange rate at the date of the transaction or, if the exchange rates do not fluctuate

significantly, at average rates. Equity accounts may be translated at either historical or closing rates - such policy choice

must be applied consistently.

US GAAP Under US GAAP, for translation into the consolidated group, historical rates are used for equity with the translation of

other items being similar to IFRS.

JP GAAP Similar to IFRS. Income statement captions are translated using the average rate during the relevant time period in

principle, and translation using the exchange rate as at closing date is also permitted. The rate as at the transaction date

is used in the equity caption. The presentation currency is the functional currency of parent company, i.e., Japanese yen.

REFERENCES: IFRS: IAS 21US GAAP: ASC 830, ASC 830-30JP GAAP: Accounting Standards for Foreign Currency Transactions, Practical Guidelines on Accounting Standards for Foreign Currency Transactions

Earnings per share

Earnings per share (EPS) is disclosed by entities whose ordinary shares or potential ordinary shares are publicly traded, and by

entities in the process of issuing such securities under three frameworks. IFRS, US GAAP and JP GAAP use similar methods of

calculating EPS, although there are detailed application differences.

Basic EPS

IFRS Basic EPS is calculated as profit available to common shareholders, divided by the weighted average number of

outstanding shares during the period. Shares issued as a result of a bonus issue are treated as outstanding for the whole

year. Bonus issues occurring after the year-end are also incorporated into the calculation. For rights issues, a theoretical

ex-rights formula is used to calculate the bonus element. Comparative EPS is adjusted for bonus issues and rights issues.



Diluted EPS calculation

IFRS The ‘treasury share’ method is used to determine the effect of share options and warrants. The assumed proceeds from

the issue of the dilutive options and warrants are regarded as having been received from issuing shares at fair value. The

difference between the number of shares to be issued on exercise of options and the number of shares that would have

been issued at fair value is treated as an issue of ordinary shares for no consideration (i.e., a bonus issue) and is factored

into the denominator used to calculate diluted EPS. The earnings figure is not adjusted for the effect of share options/

warrants.


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The guidance states that dilutive potential common shares shall be determined independently for each period presented,

not a weighted average of the dilutive potential common shares included in each interim computation.

The contracts that can be settled in either common shares or cash at the election of the entity or the holder are always

presumed to be settled in common shares and included in diluted EPS; that presumption may not be rebutted.

The potential common shares arising from contingently convertible debt securities would be included in the dilutive EPS

computation only if the contingency price was met as of the reporting date.

US GAAP In computing diluted EPS, the treasury stock method is applied to instruments such as option and warrants. This requires

that the number of incremental shares applicable under the contract be included in the EPS denominator which a year-

to-date weighted average number of incremental shares is computed by using the incremental shares from each

quarterly diluted EPS computation.

The if-converted method applies to most convertible securities, which requires the denominator to be adjusted under the

assumption that all potential common shares under the contract are issued at the beginning of the period.

Certain convertible debt securities give the issuer a choice of either cash or share settlement. These contracts would

typically follow the if-converted method, as US GAAP contains the presumption that contracts that may be settled in

common shares or in cash at the election of the entity will be settled in common shares. However, that presumption may

be overcome if past experience or a stated policy provides a reasonable basis to believe it is probable that the contract

will be paid in cash, in which case the treasury stock method is applied.

Contingently convertible debt securities with a market price trigger (e.g., debt instruments that contain a conversion

feature that is triggered upon an entity’s stock price reaching a predetermined price) should always be included in diluted

EPS computations if dilutive—regardless of whether the market price trigger has been met. That is, the contingency

feature should be ignored.

JP GAAP Similar to IFRS. When treasury stock method is applied, entity’s stock price is average stock price of the period.


Joint IASB/ FASB Exposure Draft: Simplifying Earnings per share

In August 2008, a joint exposure draft was issued to reduce differences between IFRS and US GAAP that can be resolved in a

relatively short time and can be addressed outside major projects. The objective of this exposure draft is to clarify and simplify the

computation of EPS and converge requirements of IAS 33 with those of ASC 260. The proposed amendments would improve the

comparability of EPS since it will eliminate differences in the denominator of the earnings per share calculation. As such, many of

the existing differences will be eliminated if adopted as currently drafted. In April 2009 the IASB considered comments received in

relation to the exposure draft. In the light of other priorities, the IASB does not expect to discuss this project until 2010.

REFERENCES: IFRS: IAS 33US GAAP: ASC 260JP GAAP: Accounting Standards for Earnings per Share, Guidance on Accounting Standards for Earnings per Share

Related-party disclosures

Definition

The objective of the disclosures required by IFRS, US GAAP and JP GAAP in respect of related-party relationships and transactions is

to ensure that users of financial statements are made aware of the extent to which the financial position and results of operations may

have been influenced by the existence of related parties.

Related-party relationships are generally determined by reference to the control or indirect control of one party by another, or by the

existence of joint control or significant influence by one party over another. All three accounting frameworks are broadly similar as to

which parties would be included within the definition of related parties, including subsidiaries, joint ventures, associates, directors and

shareholders.

Under IFRS, US GAAP and JP GAAP, certain disclosures are required if the relationship is one based on control, regardless of

whether transactions between the parties have taken place. These include the existence of the related-party relationship the name of

the related party and the name of the ultimate controlling party.

Disclosures

IFRS For transactions with related parties there is a requirement to disclose the amounts involved in a transaction, the amount,


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terms and nature of the outstanding balances and any doubtful amounts related to those outstanding balances for each

major category of related parties. There is no specific requirement to disclose the name of the related party (other than

the immediate parent entity, the ultimate parent entity and the ultimate controlling party).

The compensation of key management personnel is disclosed within the financial statements in total and by category of

compensation.

US GAAP Similar to IFRS, except that disclosure of compensation of key management personnel is not required within the financial

statements. SEC regulations require key management compensation to be disclosed outside the primary financial

statements.

JP GAAP Similar to IFRS. The description for the remuneration of board member (separately for internal board member and

external board member) is disclosed in the nonfinancial information sector of annual security report.


In December 2008, the IASB issued an exposure draft of amendments to IAS 24 ‘Relationships with the state (proposed

amendments to IAS 24)’ that proposes to simplify the disclosure requirements that apply to state-controlled entities. Under the

amended IAS 24, such entities would be exempt from providing full details about transactions with other state-controlled entities

and the state. The final standard is expected to be issued in the second half of 2009.

REFERENCES: IFRS: IAS 1, IAS 24US GAAP: ASC 850JP GAAP: Regulation on the Terminology, Format and Preparation of Financial Statements, Accounting Standard for Related Party Disclosures, Guidance on Accounting Standard for Related Party Disclosures

Segment reporting

Recent change – JP GAAP

In March 2008, the ASBJ released Accounting Standard for Disclosures about Segments of an Enterprise and Related information

(Accounting Standard No.17) and Guidance on Accounting Standard for Disclosures about Segments of an Enterprise and Related

information (Guidance No, 20) to converge with IFRS. These standards introduce “the Management Approach” for the segment

information disclosure and specify the disclosure of related information. These standards will be applied in fiscal years beginning

on and after April 1, 2010. The below JP GAAP explanation is prepared under this revised standard.

Following the issuance of IFRS 8, Operating Segments, the requirements under IFRS and US GAAP are very similar. In addition, in

March 2008, Accounting Standard for Disclosures about Segments of an Enterprise and Related Information is published for JP

GAAP. Set out below is a summary of the IFRS requirements. The requirements of US GAAP and JP GAAP are identical in many areas

and similar in the others.


Scope

IFRS/US GAAP Entities whose debt or equity instruments are traded in a public market and entities that file, or are in the process of filing,

financial statements with a securities or other regulator for the purposes of issuing any class of instrument in a public

market.

JP GAAP Similar to IFRS, but only for public companies and companies that report under the Financial Instruments and Exchange

Law.

Format

IFRS/US GAAP/JP GAAP Based on operating segments and the way the chief operating decision-maker evaluates financial information for the

purposes of allocating resources and assessing performance.


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Identification of segment

• General approach: IFRS/US GAAP/JP GAAP Based on the internally reported operating segments.

• Matrix form of organisation (when managers are held responsible for two or more overlapping sets of components): IFRS Entities that utilize a matrix form of organizational structure are required to determine their operating segments by

reference to the core principle (i.e., an entity shall disclose information to enable users of its financial statements to

evaluate the nature and financial effects of the business activities in which it engages and the economic environments in

which it operates).

US GAAP Entities that utilize a matrix form of organizational structure are required to determine their operating segments on the

basis of products or services offered, rather than geography or other metrics


• Aggregation of similar operating segments: IFRS/US GAAP/JP GAAP Specific aggregation criteria are given to determine whether two or more operating segments are similar.

• Threshold for reportable segments: IFRS/US GAAP/JP GAAP Revenue, results or assets are 10% or more of all segments. If total external revenue of reported segments is below 75%

of the entity's revenue, additional segments are reported until the 75% threshold is reached.

Measurement

• Accounting policies for segments: IFRS/US GAAP/JP GAAP Those adopted for internal reporting to the chief operating decision-maker for the purposes of allocating resources and

assessing performance shall be applied.

Main disclosures

• Factors used to identify reportable segments: IFRS/US GAAP/JP GAAP Disclosure required includes basis of organisation (for example, based on products and services, geographical areas,

regulatory environments) and types of product and service from which each segment derives its revenues.

• Profit or loss and total assets for each reportable segment: IFRS/US GAAP/JP GAAP Required.

• Components of profit of each reportable segment: IFRS/US GAAP/JP GAAP Required if included in the measure of segment profit or loss reviewed by the chief operating decision-maker, or are

otherwise regularly provided to the chief operating decision-maker, even if not included in that measure of segment profit

or loss:

— third-party revenues;

— inter-segment revenues;

— interest income;

— interest expense;

— depreciation and amortisation;

— material items of income and expense disclosed in accordance with IAS 1 (For US GAAP, unusual or infrequently

occurring items);

— share of results from equity accounting;

— income tax expense or income;

— material non-cash items other than depreciation and amortisation.

In addition to above items, amortization of goodwill and special gain or loss are required under JP GAAP.

• Liabilities of reportable segment: IFRS Required if regularly reported to chief operating decision-maker.


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US GAAP Not required.


• Other items to be disclosed by reportable segment: IFRS/US GAAP/JP GAAP Investments accounted for by equity method and additions to certain non-current assets (principally PPE and intangible

assets) where included in the assets reported to the chief operating decision-maker or are otherwise regularly reported to

the chief operating decision-maker.

• Major customers: IFRS/US GAAP/JP GAAP If revenues from transactions with a single external customer amount to 10% or more of an entity's revenues, the entity

shall disclose that fact, the total revenue from each such customer and the relevant segment(s) that reported the

revenues.

• Geographical information: IFRS/US GAAP/JP GAAP Third-party revenues from and certain non-current assets (principally PPE and intangible assets) located in country of

domicile and all foreign countries (in total and, if material, by country) are disclosed.

• Third-party revenues: IFRS/US GAAP/JP GAAP Also disclosed for each product and service if this has not already been disclosed as part of the reportable segment

information required by IFRS or US GAAP.

• Reconciliations of segment to the corresponding totals of the entity: IFRS/US GAAP/JP GAAP Reconciliations of total segment revenue, total segment measures of profit or loss, total segment assets, total segment

liabilities and totals of any other significant segment items disclosed are required.

REFERENCES: IFRS: IFRS 8US GAAP: ASC 280JP GAAP: Regulations concerning Consolidated Financial Statements and its Guideline, Accounting Standard for Disclosures about Segments of an Enterprise and Related information, Guidance on Accounting Standard for Disclosures about Segments of an Enterprise and Related information

Discontinued operations

IFRS and US GAAP have requirements for the measurement and disclosures of ‘discontinued’ operations. Under JP GAAP,

discontinued operation is not defined and not reported on the face of the income statement.

ISSUE IFRS US GAAP

Definition of discontinued operations

A discontinued operation is a component of an entity (operations and cash flows that can be clearly distinguished, operationally and for financial reporting, from the rest of the entity) that has either been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.

The definitions of discontinued operations are different under IFRS compared to US GAAP. Therefore disposal transactions may be accounted for differently.

Partial disposals characterized by movement from a controlling to a noncontrolling interest could qualify as discontinued operations.

The results of operations of a component of an entity that either has been disposed of or is classified as held for sale are reported as discontinued operations if

• the operations and cash flows have been or will be eliminated from the ongoing operations of the entity; and

• there will be no significant continuing involvement in the operations of the component after the disposal transaction.

A component presented as a discontinued operation under US GAAP may be a reportable segment, operating segment, reporting unit, subsidiary or an asset group.

Generally, partial disposals characterized by movement from a controlling to a noncontrolling interest would not qualify as discontinued operations due to continuing involvement.

Envisaged timescale Completed within a year, with limited exceptions. Similar to IFRS.

Starting date for disclosure From the date on which a component has been disposed of or, if earlier, classified as held for sale.

Similar to IFRS.

Measurement Lower of carrying value or fair value less costs to sell. Similar to IFRS.


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Presentation A single amount is presented on the face of the statement of comprehensive income comprising the post-tax profit or loss of discontinued operations and the post-tax profit or loss recognised in the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation. An analysis of this amount is required either on the face of the statement of comprehensive income or in the notes for both current and prior periods.

Similar to IFRS. From measurement date, results of operations of discontinued component (and gain or loss on disposal) are presented as separate line items in the income statement, net of tax, after income from continuing operations.

Ending date of disclosure Until completion of the discontinuance. Similar to IFRS.

Comparatives Statement of comprehensive income and cash flow statement re-presented for effects of discontinued operations but not statement of financial position.

Similar to IFRS except that separate disclosure of cash flows from discontinued operations is not required. If a company elects to disclose cash flows from discontinued operations separately, it must disclose such cash flows consistently and must do so for any comparative periods presented.


In September 2008, the IASB published an exposure draft on IFRS 5 that proposes a change to the definition of discontinued

operation and additional disclosure about components of an entity that have been disposed of or are classified as held for sale

(regardless of whether they meet the discontinued operation definition). The objective of this project is to develop a common

definition of discontinued operations and require common disclosures related to disposals of components of an entity. Under the

proposed changes a discontinued operation could only be an operating segment (as defined by IFRS 8) or a business held

exclusively with a view to resale. The proposed definition could result in fewer items being recognised as discontinued operations

than at present.

REFERENCES: IFRS: IFRS 5US GAAP: ASC 205, ASC 205-20, ASC 230, ASC 360-10

Events after the Reporting Period

Recent changes – US GAAP

In May 2009, the FASB issued a final standard regarding Subsequent Events that establishes general standards of accounting for

and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to

be issued.

Three frameworks have similar standards on events after the reporting period.

Adjusting events after the reporting period

IFRS Adjusting events that occurred after the reporting period are events that provide additional evidence of conditions that

existed at the end of the reporting period and that materially affect the amounts included. The amounts recognised in the

financial statements are adjusted to reflect adjusting events after the reporting period.

US GAAP Similar to IFRS, referred to as ‘recognised subsequent events’. However, see refinancing and rescheduling of debt

payments on p.17.

JP GAAP Similar to IFRS, referred to as ‘adjusting subsequent events’.

Non-adjusting events after the reporting period

IFRS Non-adjusting events that occur after the reporting period are defined as events that are indicative of conditions that

arose after the reporting period. Where material, the nature and estimated financial effects of such events are disclosed

to prevent the financial statements from being misleading.

US GAAP Similar to IFRS, referred to as ‘Type 2’ events.

JP GAAP Similar to IFRS, referred to as ‘disclosure subsequent events’.

REFERENCES: IFRS: IAS 10US GAAP: ASC 855JP GAAP: Audit Treatment for Subsequent Events


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Interim financial reporting

Stock exchange requirements

IFRS IFRS does not require public entities to produce interim statements but encourages interim reporting – see ‘Additional

guidance’ below.

US GAAP Similar to IFRS, the FASB does not mandate interim statements. However, if required by the SEC, domestic US SEC

registrants should follow ASC 270 and comply with the specific financial reporting requirements in Regulation S-X

applicable to quarterly reporting.

JP GAAP Listed companies are required to present quarterly reports. Legislation requires financial institutions such as banking or

insurance industries to disclose semi-annual (consolidated) financial statements for the second quarter of the year.

Allocation of costs in interim periods

IFRS Interim financial statements are prepared via the discrete-period approach, wherein the interim period is viewed as a

separate and distinct accounting period, rather than as part of an annual cycle. The spreading of costs that affect the full

year is not appropriate and could result in increased volatility in interim financial statements.

US GAAP US GAAP views interim periods primarily as integral parts of an annual cycle. As such, it allows entities to allocate among

the interim periods certain costs that benefit more than one of those periods.


Additional guidance

Additional guidance under three frameworks is similar. They include the following:

• Consistent and similar basis of preparation of interim statements, with previously reported annual data and from one period to the

next;

• Use of accounting policies consistent with the previous annual financial statements, together with adoption of any changes to

accounting policies that it is known will be made in the year-end financial statements (for example, application of a new standard);

• Incomplete transactions are treated in the same way as at the year-end. Under IFRS and US GAAP impairment losses recognised in

interim periods in respect of goodwill, or an investment in either an equity instrument or a financial asset carried at cost, are not

reversed. However, under JP GAAP, the impairment for investment recognised at each quarterly period can be reassessed at year

end.

• The tax charge in IFRS and US GAAP is based on an estimate of the annual effective tax rate applied to the interim results. Under

JP GAAP, in principle, same calculation as year-end is required for interim period. However, it is also allowed to apply an estimate

of the annual effective tax rate that IFRS and US GAAP require.

• Summarised statement of comprehensive income (statement of operations) (including segment revenue/profit), statement of

financial position, cash flow statement, statement of changes in equity and selected notes; and

• A narrative commentary.

Comparatives for the statement of financial position (balance sheet) are taken from the last annual financial statements under IFRS,

US GAAP and JP GAAP. Quarterly interim reports contain comparatives (other than for the statement of financial position/ balance

sheet) under IFRS, US GAAP and JP GAAP for the cumulative period to date and the corresponding period of the preceding year.

REFERENCES: IFRS: IAS 34, IFRIC 10US GAAP: ASC 270, ASC 280JP GAAP: Regulations on the Terminology, Format and Preparation Methods of Interim Financial Statements, Accounting Standards for Preparing Interim Consolidated Financial Statements, Guidance on Accounting Standards for Impairment of Fixed Assets, Accounting Standard for Quarterly Financial Reporting


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Index


First-time adoption of accounting framework ................ 15

Historical cost or valuation ............................................. 15

Financial statements

Changes in accounting policy and other accounting changes

Changes in accounting estimates ............................ 23

Changes in accounting policy .................................. 22

Correction of errors .................................................. 23


Comparatives ........................................................... 17

Component .............................................................. 16


Compliance .............................................................. 16


Classification of specific items ................................. 22

Definition of cash and cash equivalents ................... 22

Direct/indirect method .............................................. 21

Exemptions .............................................................. 21

Format ...................................................................... 22

Statement of changes in equity (Statement of changes in shareholders’ equity)

Presentation ............................................................. 21

Statement of comprehensive income (Statement of operations)

Format ...................................................................... 19

Exceptional (significant) items .................................. 21

Extraordinary items .................................................. 21


Current/non-current distinction (general) ................. 17

Format ...................................................................... 17

Offsetting assets and liabilities ................................. 18

Other classification in statement of financial position (balance sheet) ........................................... 19


Common issues (subsidiaries, associates and joint ventures)

Impairment ............................................................... 31

Reporting periods ..................................................... 31

Scope exclusion : for subsidiaries, associates and joint ventures .................................................... 30

Uniform accounting policies .................................... 31

Employee share trusts (including employee share ownership plans) .................. 28

Investments in associates

Definition .................................................................. 28

Equity method .......................................................... 28

Investments in joint ventures

Contributions to a jointly controlled entity ............... 30

Definition .................................................................. 29

Jointly controlled assets ........................................... 30

Jointly controlled entities ........................................ 29

Jointly controlled operations .................................... 30

Types ........................................................................ 29

Investments in subsidiaries

Consolidation model and subsidiaries ..................... 24

Disclosures ............................................................... 27

Preparation ............................................................... 24

Presentation of non-controlling interest .................. 26

Special purpose entities ........................................... 26

Business combinations

Acquisitions

Acquired contingencies ............................................ 35

Bargain purchase (“negative goodwill”) ................... 36

Consideration transferred ........................................ 34

Contingent consideration ......................................... 34

Date of acquisition ................................................... 33

Fair Value .................................................................. 37

Goodwill ................................................................... 35

Goodwill impairment ................................................ 36

Identifying the acquirer ............................................ 34

Intangible assets ...................................................... 35

Noncontrolling interests at acquisition (Minority interests) ................................................... 37

Recognition and measurement of identifiable assets and liabilities acquired .................................. 35

Restructuring provisions .......................................... 34

Share-based consideration ...................................... 34

Subsequent adjustments to assets and liabilities .... 36

Transaction costs ..................................................... 35

Business combinations involving entities under common control ................................................... 37

Definition ......................................................................... 33

Employee benefit arrangements, including share-based payments and income tax .............................................. 38

Pooling (uniting) of interests method .............................. 37

Step acquisitions (investor obtaining control through more than one purchase) ................................... 37

Revenue recognition

Barter transactions

Accounting for advertising-barter transactions ........ 44

Accounting for barter-credit transactions ................ 45

Non-advertising-barter transactions ........................ 44


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Combining contracts and segmenting a contract .... 44

Completed contract method .................................... 44

Percentage-of-completion method ......................... 43

Recognition method ................................................. 43

Scope ....................................................................... 43

Extended warranties ....................................................... 45

Multiple-element arrangements

General ..................................................................... 41

Multiple-element arrangements – contingencies ..... 43

Multiple-element arrangements – customer loyalty programmes .................................................. 42

Multiple-element arrangements – software revenue recognition .................................................. 42

Revenue

Definition .................................................................. 39

Measurement ........................................................... 39

Revenue recognition ................................................ 39

Revenue recognition criteria for the sale of goods .. 39

Specific revenue recognition issues

Contingent consideration ......................................... 40

Rendering services ................................................... 40

Rendering services – right of refund ........................ 41

Sales of goods - continuous transfer method .......... 40

Expense recognition

Employee benefits – pensions

Defined benefit plan ................................................. 47

Bases of charge to statement of comprehensive income (statement of operation) .......................... 48

Curtailment definition ............................................ 50

Deferred compensation arrangements ................. 50

Determination of pension and other post-retirement obligation and expense ............... 47

Discount rate for obligations................................. 49

Expected return on plan assets ............................ 49

Multiemployer plans ............................................. 50

Past-service cost .................................................. 48

Recognition of actuarial gains and losses ............ 48

Statement of financial position (Balance sheet) asset limitation ...................................................... 50

Statement of financial position (balance sheet) presentation .......................................................... 49

Subsidiary’s defined benefit pension plan forming part of a group plan ................................. 50

Substantive commitment to provide pension or other postretirement benefits ........................... 49

Valuation of plan assets ........................................ 49

Defined contribution plan ......................................... 47

Defined contribution plan ..................................... 47

Share-based payment transactions

Classification of awards – cash flows ...................... 56

Classification of awards – equity versus liability ...... 52

Deferred taxes on share-based payments ............... 55

Employer’s payroll tax payable on exercise of share options by employees .................................... 55

Graded vesting ......................................................... 54

Grant date – employee award .................................. 53

Improbable to probable modifications ..................... 54

Measurement ........................................................... 53

Non-employee share-based payment transactions ... 54

Other vesting triggers ............................................... 54

Recognition .............................................................. 53

Reversal of compensation cost ................................ 53

Scope ...................................................................... 52

Scope of employee stock purchase plans ............... 52

Specific expense recognition issues

Interest expense ....................................................... 47

Termination benefits ........................................................ 51

Assets

Biological assets ............................................................. 68

Capitalisation of borrowing costs

Recognition .............................................................. 66

Financial assets

Available-for-sale debt financial assets: foreign exchange gains/losses ................................. 71

Available-for-sale financial assets: fair value versus cost of unlisted equity instruments (securities) ........ 71

Definition .................................................................. 70

Derecognition ........................................................... 76

Effective interest rates: changes in expectations ..... 72

Effective interest rates: expected versus contractual cash flows ............................................ 72

Fair value measurement: bid/ask spreads ............... 72

Fair value measurement: Day One gains and losses ............................................................... 73

Fair value option for equity-method investments ..... 72

Impairment of available-for-sale equity instruments ... 75

Impairment principles: available-for-sale debt instruments (securities) ............................................ 74

Impairment principles: held-to-maturity debt instruments ............................................................. 75

Impairments: reversal of losses ............................... 76

Loans and receivables ............................................. 73

Losses on available-for-sale equity instruments (securities) subsequent to initial impairment recognition ............................................................... 76

Reclassification of assets between categories ........ 73


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Recognition and initial measurement ....................... 70

Historical cost or valuation ............................................. 57


Recognition and measurement ................................ 65

Reversal of impairment loss ..................................... 66

Insurance recoveries ....................................................... 68

Intangible assets

Amortisation – acquired and internally generated intangibles ................................................................ 59

Impairment – acquired and internally generated intangibles ................................................................ 59

Initial measurement – acquired intangibles .............. 58

Initial measurement – internally generated intangibles ............................................................... 59

Recognition – additional criteria for internally generated intangibles ............................................... 57

Recognition – separately acquired intangibles ........ 57

Recognition – website development costs .............. 58

Recognition – advertising costs .............................. 58

Subsequent measurement – acquired and internally generated intangibles .............................. 59

Inventories

Definition .................................................................. 67

Formula for determining cost ................................... 68

Measurement ........................................................... 67

Investment property

Definition .................................................................. 66

Initial measurement .................................................. 67

Subsequent measurement ....................................... 67


Lease classification – general ................................. 62

Lease classification – other ...................................... 63

Leases involving land and buildings ........................ 64

Operating leases ...................................................... 64

Recognition of the investment in the lease .............. 63

Sale-leaseback arrangements .................................. 64

Nonmonetary assets ....................................................... 68

Non-current assets held for sale ..................................... 62


Asset retirement obligations ..................................... 60

Depreciation ............................................................. 61


Recognition .............................................................. 59

Subsequent expenditure .......................................... 60

Subsequent measurement ...................................... 61

Liabilities

Contingencies

Contingent asset ...................................................... 81

Contingent liability .................................................... 82

Deferred tax

Business combinations – acquisitions ..................... 85

General considerations ............................................ 82

Measurement of deferred tax ................................... 82

Presentation of deferred tax ..................................... 83

Specific applications ................................................ 83

Government grants ......................................................... 86


Classification ............................................................ 86

Finance leases .......................................................... 86

Operating leases ...................................................... 87

Sale and leaseback transactions ............................. 87

Provisions

Measurement ........................................................... 80

Onerous contracts .................................................... 81

Recognition .............................................................. 80

Restructuring provisions .......................................... 81


Classification of non-derivative contracts ...................... 88

Compound instruments that are not convertible instruments (that do not contain equity conversion features) .......................................................................... 88

Convertible Instruments (compound instruments that contain equity conversion features) ................................ 89

Definition ......................................................................... 88

Derivates on own shares-“fixed for fixed” versus indexed to issuer’s own share ....................................... 90

Derivates on own shares-settlement models ................. 90

Measurement

Derecognition of financial liabilities .......................... 92

Effective-interest-rate calculation............................. 91

Initial measurement of a liability with related party .... 91

Transaction costs (also known as debt issue cost) .... 91

Puttable shares / redeemable upon liquidation .............. 89

Written put option on the issuer’s own shares................ 90

Equity

Equity instruments

Dividends on ordinary equity shares ........................ 93

Purchase of own shares .......................................... 93

Recognition and classification ................................. 93

Transaction cost for issue and purchase of own shares ............................................................... 93


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Derivatives

Calls and puts in debt instruments ......................... 96

Definition and Net settlement provision ................... 94

Embedded credit derivatives in synthetic collateralized debt obligations (CDOs) .................... 96

Embedded derivatives .............................................. 95


Non-financial host contracts – currencies commonly used ........................................................ 96

Own use versus normal purchase normal sale ........ 94

Reassessment of embedded derivatives ................ 95

Subsequent measurement ....................................... 95

Hedge accounting

A written option in a separate contract .................. 99

Cash flow hedges and basis adjustments on acquisition of nonfinancial items ............................ 101

Cash flow hedges with purchased options ............ 98

Criteria for hedge accounting ................................... 96

Effectiveness testing and measurement of hedge ineffectiveness ........................................................ 101

Fair value hedge of interest rate risk in a portfolio of dissimilar items .................................................. 98

Fair value hedges ................................................... 101

Foreign currency risk and internal derivatives ........ 99

Foreign currency risk and intragroup hedging ..... 100

Foreign currency risk and the combination of derivatives and nonderivatives ............................... 99

Hedge relationships ............................................... 100

Hedged items ........................................................... 97

Hedges of a portion of the time period to maturity ... 98

Hedges of net investments in foreign operations... 101

Hedging instruments ................................................ 99

Hedging more than one risk ................................. 100

Servicing Rights ....................................................... 98

When to assess effectiveness ................................ 97


Discontinued operations ............................................... 109

Earnings per share ........................................................ 105

Basic EPS ............................................................... 105

Diluted EPS calculation .......................................... 105

Events after the Reporting Period ................................. 110

Adjusting events after the reporting period ............ 110

Non-adjusting events after the reporting period .... 110

Foreign currency translation ......................................... 104

Functional currency – definition and determination ......................................................... 104

Presentation currency ............................................ 105

Tracking of translation differences in equity ........... 104

Translation – consolidated financial statements .... 104

Translations – the individual entity ......................... 104

Translation of goodwill and fair value adjustments on acquisition of foreign entity .......... 105

Interim financial reporting ............................................. 111

Additional guidance ................................................ 111

Allocation of costs in interim periods .................... 111

Stock exchange requirements ............................... 111

Related-party disclosures ............................................. 106

Definition ................................................................ 106

Disclosures ............................................................. 106

Segment reporting ........................................................ 107

Format .................................................................... 107

Identification of segment ....................................... 108

Main disclosures .................................................... 108

Measurement ......................................................... 108

Scope ..................................................................... 107


PwC Japan IFRS Project Office

PwC Japan provides advice to clients wishing to transition to IFRS as well as advisory services on the implementation of new or amended Japanese accounting standards as they converge with IFRS. We have developed a team of dedicated IFRS professionals who are carefully selected from across our practice with the requisite knowledge and experience to allow them to lead the provision of high quality IFRS services to our clients.

● For more information on IFRS, please visit website below:　 www.pwcjp-ifrs.com

● Contact: 　 Email : [email protected]

Similarities and DifferencesA comparison of IFRS, US GAAP and JP GAAP

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Similarities and Differences 2009 IFRS USGAAP[1]