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US GAAP vs. IFRS: the basics, March 2010 - Financial statement presentation - Ernst & Young - United States

US GAAP vs. IFRS: the basics, March 2010

Financial statement presentation

Similarities

There are many similarities between US GAAP and IFRS relating to financial statement presentation. For example, under both frameworks, the components of a complete set of financial statements include:

  • balance sheet
  • income statement
  • other comprehensive income
  • cash flows
  • accompanying notes to the financial statements.
Further, both US GAAP and IFRS require that the financial statements be prepared on the accrual basis of accounting (with the exception of the cash flow statement) except for rare circumstances. Both standards have similar concepts regarding materiality and consistency that entities have to consider in preparing their financial statements.

Differences between the two tend to arise in the level of specific guidance.

Significant differences


US GAAPIFRS
Financial periods requiredGenerally, comparative financial statements are presented; however, a single year may be presented in certain circumstances. Public companies must follow SEC rules, which typically require balance sheets for the two most recent years, while all other statements must cover the three-year period ended on the balance sheet date.Comparative information must be disclosed in respect of the previous period for all amounts reported in the financial statements.
Layout of balance sheet and income statementNo general requirement within US GAAP to prepare the balance sheet and income statement in accordance with a specific layout; however, public companies must follow the detailed requirements in Regulation S-X.IAS 1 Presentation of Financial Statements does not prescribe a standard layout, but includes a list of minimum items. These minimum items are less prescriptive than the requirements in Regulation S-X.
Presentation of debt as current versus non-current in the balance sheetDebt for which there has been a covenant violation may be presented as non-current if a lender agreement to waive the right to demand repayment for more than one year exists prior to the issuance of the financial statements.

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

Debt associated with a covenant violation must be presented as current unless the lender agreement was reached prior to the balance sheet date.

Deferred taxes are presented as non- current. (Note: If the recently issued Exposure Draft on income taxes is adopted as a final standard, IFRS would converge with US GAAP.)

Income statement — classification of expensesSEC registrants are required to present expenses based on function (for example, cost of sales, administrative).Entities may present expenses based on either function or nature (for example, salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes.
Income statement — extraordinary itemsRestricted to items that are both unusual and infrequent.Prohibited.
Income statement — discontinued operations presentationDiscontinued operations classification is for components held for sale or to be disposed of, provided that there will not be significant continuing cash flows or involvement with the disposed component.Discontinued operations classification is for components held for sale or to be disposed of that are either a separate major line of business or geographical area or a subsidiary acquired exclusively with an intention to resell.
Disclosure of performance measuresSEC regulations define certain key measures and require the presentation of certain headings and subtotals. Additionally, public companies are prohibited from disclosing non-GAAP measures in the financial statements and accompanying notes.Certain traditional concepts such as “operating profit” are not defined; therefore, diversity in practice exists regarding line items, headings and subtotals presented on the income statement when such presentation is relevant to an understanding of the entity’s financial performance.
Third balance sheetNot required.A third balance (and related notes) are required as of the beginning of the earliest comparative period presented when an entity restates its financial statements or retrospectively applies a new accounting policy.

Convergence

The Boards have undertaken a joint project on financial statement presentation.

Each Board issued an initial discussion document in October 2008 addressing the more fundamental issues for presentation of information on the face of the financial statements that may ultimately result in significant changes in the current presentation format of the financial statements under both US GAAP and IFRS.

The Boards expect to issue an exposure draft in the second quarter of 2010.

In September 2008, the Boards issued proposed amendments to ASC 205-20 Presentation of Financial Statements, Discontinued Operations (formerly FAS 144) and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations to converge the definition of discontinued operations. In redeliberations, the Boards tentatively have decided that the definition of discontinued operations will be consistent with the current definition in IFRS 5, i.e., a separate major line of business or geographic area.

The definition no longer will consider the criteria that (a) the cash flows of the component are eliminated after disposal and (b) there is no significant continuing involvement with the component), but will require disclosure of those items.

The Boards will require increased disclosures for discontinued operations and for components that are disposed of but are not classified as discontinued operations. The Boards will re-expose the proposals in 2010.

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