IFRS VS.

US GAAP
REPORTING:
Implications for
multinational
companies
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April 30, 2012

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WELCOME
TODAY'S PRESENTERS

April Little John Heintz

National IFRS Practice Leader Senior Segment Manager Global
Partner, Tax Accounting Risk Advisory Integrator
Services CCH Integrator, A Wolters Kluwer
Houston, TX Business

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WEBCAST
AGENDA

Why do we care about

IFRS?
Overview of IFRS status
globally and in the US
Key IFRS / US GAAP
differences
Finding resources

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WHY SHOULD WE CARE?
IFRS ISN'T HERE YET

"Permanently private" companies

IFRS for SME or reporting packages to owner /
investor
Foreign reporting requirements
Merger and acquisition activity
Raising capital globally
Current limits on technical accounting resources
IASB influence on accounting standards
Global market pressure
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WHY SHOULD WE CARE?
BUSINESS IMPACTS OF
IFRS

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WEBCAST
AGENDA

Why do we care about IFRS?

Overview of IFRS status
globally and in the US
Key IFRS / US GAAP
differences
Finding resources

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OVERVIEW OF IFRS
A FEW BASIC CONCEPTS

Common accounting enables ease of comparison across

borders of companies in similar industries
Easier to analyze cross-border transactions
Approximately 30,000 pages of GAAP to 3,500 pages
of IFRS

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OVERVIEW OF IFRS
ADOPTION AROUND THE
WORLD

Countries that require

or permit IFRSs for
domestic entities
Countries seeking
convergence with, or
pursuing adoption
of, IFRSs
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OVERVIEW OF IFRS
A FEW BASIC CONCEPTS

Conversion: Overall transition to new standards

[EU, Australia]
Convergence: Rewriting of one standard at a time
[China]
Condorsement: Evaluating on a standard-by-standard
basis

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LEASING & REVENUE
RECOGNITION
THE NEW ODD COUPLE

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SEC STAFF PAPER ON
INCORPORATION OF IFRS
EXPLORING A POSSIBLE
METHOD
What it is:
SEC staff's views on possible IFRS
adoption and ways to approach
SEC is open to considering variety of
options to ensure quality is maintained
in conversion

What it is not:
A decision
The only possible approach

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SEC STAFF PAPER ON
INCORPORATION OF IFRS
POSSIBLE ADOPTION
THROGH CONDORSEMENT
Completed MOU Projects on Projects with no current
projects IASB's agenda revisions planned

FASB would determine for each group whether and

how to incorporate differences Page 10
WEBCAST
AGENDA

Why do we care about IFRS?

Overview of IFRS status
globally and in the US
Key IFRS / US GAAP
differences
Finding resources

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EXAMPLE: US DEMO, INC.
MANUFACTURES DEMO
AEROSPACE
COMPONENTS
US Demo acquired German Demo Exchange rate:
German Demo prepares financial 12/28/2010.1.31643
statements using IFRS 12/20/2011.1.29380
Average..1.305115
German Demo reports to US Demo
in US GAAP
Functional currency:
German Demo: Euro
US Demo: US Dollar
German tax rate: 15%
Municipal tax: 14%
Blended rate: 26.9%

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GLOBAL INTEGRATOR
LOG-IN SCREEN

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US DEMO FOREIGN SUB
ENDING BALANCE SHEET

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CONSISTENT POLICIES
IN CONSOLIDATED
FINANCIAL STATEMENTS
Guidance Impact
Upon adoption all Previous accounting policy election may not longer be allowed
accounting policy elections
are re-evaluated

Policy elections must be If differences exist between subsidiaries, changes to policies may be
made consistently for the required
entire group (including
equity method investments)

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IFRS/GAAP MAJOR
DIFFERENCES
FUNCTIONAL CURRENCY
DETERMINATION
Primary Indicators
1) Currency that mainly influences sales
prices for goods and services: often the
price sales transactions are denominated
2) Currency of the country whose
competitive forces and regulations that
determines the sales prices of its goods
IFRS and services
3) Currency that mainly influences the
labor, materials, and other costs of
providing goods or services
1) Currency in which the entity primarily
generates and expends cash, if direct
extension of parent, may not be local
U.S. GAAP currency
2) Operations are self-contained and
integrated in that country
Secondary Indicators
1) Currency in which financing activities are
generated
2) Currency in which receipts from operating
activities are usually retained
3) Extension of reporting entity or
autonomous
4) Reporting entity transactions are high or
low proportion
5) Affect of cash flows on reporting entity
6) Can fulfill debt service without funds
from reporting entity
No similar indicators
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ACCOUNTING DIFFERENCES
WITH TAX IMPLICATIONS
RECOGNITION
FOREIGN CURRENCY
IFRS
Deferred taxes are recognized
for temporary differences that
arise when nonmonetary
assets and liabilities are
measured in their functional
currency but have a tax base
determined in a different
currency.
Financial statement impact
U.S. GAAP
under IFRS
U.S. GAAP prohibits Under IFRS, different amounts of
recognition of deferred taxes deferred taxes may be recognised.
for differences related to assets Therefore, amounts on statement
and liabilities that are of financial position and income
remeasured from the local statement may differ.
currency into the functional
currency using historical
exchange rates and that result
from changes in exchange rates
or indexing for tax purposes
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US DEMO FOREIGN SUB
CURRENCY CONVERSION

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US DEMO FOREIGN SUB
CURRENCY CONVERSION

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US DEMO FOREIGN SUB
CURRENCY CONVERSION

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IFRS/GAAP MAJOR
DIFFERENCES
PROPERTY, PLANT &
EQUIPMENT
Remeasurement of
Depreciation Revaluation
residual value
Separate long lived assets Account for prospectively as Cost basis or
into major components change in estimate
and depreciate separately

IFRS

Fair value model basis

No similar requirement No similar requirement No similar option

*Fun With Federal
U.S. GAAP Income Tax
Regulations
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IFRS/GAAP MAJOR
DIFFERENCES
PROPERTY, PLANT &
EQUIPMENT CONTINUED
Impairment Impairment reversals Industry guidance

Impairment Assets other than No similar requirements;

goodwill reversed Investment property
IFRS = provided certain conditions choice to use fair value
are met
one-step approach

Impairment Reversals of impairment Rate regulated

losses not permitted Oil and gas
= Real estate
Health care
U.S. GAAP two-step approach Insurance
Mining
Cable television
Airlines
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US DEMO FOREIGN SUB
PROPERTY, PLANT &
EQUIPMENT

Page 27
US DEMO FOREIGN SUB
PROPERTY, PLANT &
EQUIPMENT

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IFRS/GAAP MAJOR
DIFFERENCES
INTANGIBLES
Measurement Impairment tests

Intangibles (finite-lived)
other than goodwill and Goodwill
other long-lived assets
Accounting policy election Impairment Impairment at CGU
cost model or level
IFRS revaluation model = =

one-step approach one-step approach

Revaluation model not Impairment Impairment at reporting
permitted unit level
= =
U.S. GAAP
two-step approach two-step approach
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IFRS/GAAP MAJOR
DIFFERENCES
INTANGIBLES CONTINUED
Industry/transaction specific
Impairment loss
guidance
Assets other than goodwill reversed No similar requirements
provided certain conditions are met

IFRS

Reversals of impairment losses not Rate-regulated entities

permitted Internal use software
Take-off and landing slots
U.S. GAAP Broadcasting rights
Cable television
Title plant
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IFRS/GAAP MAJOR
DIFFERENCES
INVENTORY
Recognition of
Measurement Impairments
additional losses

LIFO prohibited Same cost Lower of cost Reversal

method required or net required (limited
for all inventories realizable to amount of
IFRS having similar value original write
nature and use to down)
entity

LIFO permitted No similar Lower of cost Reversal not

requirement or market permitted
(current
U.S. GAAP replacement
cost)
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IFRS/GAAP MAJOR
DIFFERENCES
INCOME TAXES
Initial recognition exemption Intercompany profits

Deferred tax not recognized for:

Deferred tax calculated
initial recognition
with reference to tax rate of buyer
not a business combination and
at end of reporting period.
IFRS accounting profit and taxable
Taxes paid by seller recorded as current
profit not affected
tax expense.

No similar provision Not recognized on elimination of

intercompany profits

U.S. GAAP Taxes paid by the seller recorded as an

asset and recognized on sale to third
party.
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IFRS/GAAP MAJOR
DIFFERENCES
INCOME TAXES CONTINUED
Valuation allowance
Uncertain tax positions Offsetting
Deferred tax assets

No similar provision Permitted:

Legal enforceable right
of offset
No valuation allowance Entity intends to offset
IFRS
or settle
simultaneously

Two-step process to Permitted:

recognize and measure the Legal enforceable right
effects of a tax position of offset
U.S. GAAP Valuation allowance

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IFRS/GAAP MAJOR
DIFFERENCES
CONTINGENCIES
Recognition/measurement Disclosures

When probable Best estimate recorded Liability More detailed

(more likely than = expected value discounted at requirements
not; > 50%) (midpoint of range) pre-tax rate
IFRS encompassing
risks specific to
liability

When probable If some amount is Discounting not Less detailed

(likely to occur better estimate = record permitted requirements
somewhat greater that amount
than 50%) (minimum recorded
U.S. GAAP when no amount within
range is better)

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US DEMO US HEAD
ENTITY
VALUATION ALLOWANCE

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US DEMO US HEAD
ENTITY
VALUATION ALLOWANCE

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US DEMO US HEAD
ENTITY
CUMULATIVE TAX SCHEDULE

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US DEMO US HEAD
ENTITY
DEFERRED TAX SCHEDULE

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ACCOUNTING DIFFERENCES
WITH TAX IMPLICATIONS
MEASUREMENT ENACTED OR
SUBSTANTIALLY ENACTED
IFRS
Deferred tax assets and
liabilities shall be measured at
the tax rates that are expected
to apply when asset realized or
liability settled, based on tax
rates (and tax laws) enacted or
substantively enacted by date of
statement of financial position.
U.S. GAAP
Deferred tax assets and liabilities
are measured using enacted tax
rate(s) expected to apply to
taxable income in periods
deferred tax liability or asset is
expected to be settled or realized.
Tax rates substantially enacted by
date of statement of financial
position shall not be used.
Financial statement impact
under IFRS
Under IFRS, the measurement of
amounts of deferred taxes may differ.
Therefore, amounts on statement of
financial position and income
statement may differ.
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US DEMO US HEAD
ENTITY
EFFECTIVE TAX RATE

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US DEMO US HEAD
ENTITY
CHANGE IN TAX RATE

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ACCOUNTING DIFFERENCES
WITH TAX IMPLICATIONS
INTRAPERIOD TAX
ALLOCATION
Financial statement impact
IFRS U.S. GAAP
under IFRS
Subsequent changes in Certain subsequent changes in Less income statement volatility
deferred tax assets and deferred tax assets and liabilities under IFRS
liabilities shall be recognized (such as related to changes in
in profit or loss except to tax rates and tax laws)
extent they relate to items recognized in income regardless
previously recognized outside of whether deferred tax was
profit or loss initially recorded in income,
equity, or a business
combination

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ACCOUNTING DIFFERENCES
WITH TAX IMPLICATIONS
OTHER COMPREHENSIVE
INCOME

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IFRS/GAAP MAJOR
DIFFERENCES
INCOME TAXES CONTINUED
Investments in subsidiaries, associates Disclosures

Deferred taxes not recognized for taxable No similar requirement

temporary differences of investments if:
Parent, investor, or venturer able to control Adjustments for current tax of
timing of reversal; and prior periods, dividends, amount
IFRS Probable temporary difference will not of deferred tax asset and
reverse in foreseeable future supporting evidence

Deferred taxes recognized on undistributed Components of tax expense

earnings of domestic subsidiaries and related to investment tax credits
corporate joint ventures and investments in and government grants,
U.S. GAAP equity investees if apparent temporary components of pre-tax income
difference will reverse in foreseeable future as domestic or foreign
No similar requirement
Page 10
IFRS/GAAP MAJOR
DIFFERENCES
INCOME TAXES CONTINUED
Classification
(Classified Balance Sheet)
Deferred tax assets and liabilities
IFRS classified as noncurrent
Deferred tax assets and liabilities
classified as current or noncurrent
based on classification of related
asset or liability for financial
reporting
Valuation allowance for tax
U.S. GAAP jurisdiction allocated between
current and noncurrent deferred tax
assets for that jurisdiction on a pro
rata basis
Specific guidance
No similar guidance
Alternative or parallel income tax
systems
Attribution of income taxes to entity or
owners
Allocation of taxes to entities in group
Tax benefits - special deductions and
tax holidays
Equity method investments
Investment tax credits
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US DEMO FOREIGN SUB
US GAAP, IFRS, & TAX

Page 24
US DEMO FOREIGN SUB
US GAAP, IFRS, & TAX

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WEBCAST
AGENDA

Why do we care about IFRS?

Overview of IFRS status
globally and in the US
Key IFRS / US GAAP
differences
Finding resources

Page 3
FINDING RESOURCES
PROVISION INFORMATION
CCHINTEGRATOR.COM
More information:
LinkedIn Group CCH Integrator
Current updates on IFRS
internationally
Whitepapers
Software CCHIntegrator.com

Page 49
FINDING RESOURCES
GRANTTHORNTON.COM/IFRS

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WEBCAST
CONTACT OUR SPEAKERS

April Little Houston, TX april.little@us.gt.com 832.476.3730

John Heintz Philadelphia, PA john.heintz@wolterskluwer.com 215.534.6117

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