International Versus U.S. Accounting: What in the World is the Difference?

• Chapter 1 - Introduction to International Accounting
  • Learning Objectives
  • Introduction
  • Cross-Country Accounting Differences
  • Why Accounting Rules Differ Internationally
  • The Demand for International Accounting Standards
  • Impediments to International Accounting Standards
  • The International Accounting Standards Committee
  • The International Accounting Standards Board
  • Adoption of International Standards
  • FASB/IASB Cooperation
  • SEC Actions
  • Summary and Conclusions
  • Questions
  • Case
• Chapter 2 - Introduction to Financial Statements Prepared in Accordance with IFRS
  • Learning Objectives
  • Introduction
  • It’s All in How You Say It
  • Conceptual or Theoretical Accounting Framework
  • IAS 1 – Presentation of Financial Statements
    • Financial Statement Presentation – Balance Sheet
    • Financial Statement Presentation – Income Statement
    • Financial Statement Presentation – Statement of Changes in Equity
    • Financial Statement Presentation – Cash Flow Statement
    • Financial Statement Presentation – Notes
    • Financial Statement Presentation – Earnings Per Share
    • Financial Statement Presentation – IASB/FASB Project
  • Summary and Conclusions
  • Questions
  • Case
• Chapter 3 - Current Assets
  • Learning Objectives
  • Introduction
  • Financial Statement Presentation of Current Assets
    • Cash
    • Accounts Receivable
    • Inventories
    • Marketable Securities
  • Summary and Conclusions
  • Questions
  • Case
    • Sub-case A
    • Sub-case B
    • Sub-case C
• Chapter 4 - Property, Plant & Equipment, and Investment Property
  • Learning Objectives
  • Introduction
  • Property, Plant & Equipment (PP&E)
    • Initial Valuation
    • Construction Period Interest
    • Exchange of Assets
    • Asset Exchanges
    • Depreciation of PP&E
    • Revaluation of PP&E
    • Deferred Taxes on Revaluations
    • Downward Revaluations
    • Disclosure Requirements for Long-Term Assets
  • Investment Property
  • Summary and Conclusions
  • Questions
  • Case
• Chapter 5 - Leases, Intangibles, and Asset Impairment
  • Learning Objectives
  • Introduction
  • Leases
    • Lease Disclosures
    • Other Lease Issues
    • Example Companies
  • Intangible Assets
    • Purchased Intangible Assets
    • Self-Created Intangible Assets
    • Revaluation of Intangible Assets
    • Measurement Subsequent to Acquisition
    • Goodwill
    • Example Companies
  • Impairment of Long-Lived Assets
    • Comparison with U.S. GAAP
    • Subsequent Reversals of Impairment Losses
    • Impairment of Goodwill
    • Impairment Disclosures
    • Other Impairment Issues
    • Example Companies
    • Deferred Tax Assets
  • Summary and Conclusions
  • Questions
  • Cases
• Chapter 6 - Liabilities
  • Learning Objectives
  • Introduction
  • General
  • Contingencies
  • Deferred Taxes
  • Pensions
  • Employee Stock Compensation
  • Convertible Debt
  • Preferred Stock
  • Summary and Conclusions
  • Questions
  • Case
• Chapter 7 - Accounting Changes, Discontinued Operations, Derivatives and Hedging, Segment Reporting, and Interim Financial Statements
  • Learning Objectives
  • Summary
  • Accounting Changes and Error Corrections
    • Change in Estimate
    • Change in Accounting Principle
    • Correction of an Error
  • Discontinued Operations
  • Long-term Construction Contracts
  • Derivatives
  • Hedge Accounting
    • Disclosures by Example Companies
  • Segment Reporting
    • Primary Features of IFRS 8
    • Segment Reporting by Example Companies
  • Interim Financial Reporting
  • Summary and Conclusions
  • Cases
• Chapter 8 - Business Combinations, Consolidated Financial Statements, and Foreign Operations
  • Learning Objectives
  • Introduction
  • Business Combinations
    • Accounting Methods
    • Cost of the Acquisition
    • Assets and Liabilities to Be Revalued
    • Recognition of Intangible Assets
    • Goodwill
    • Negative Goodwill
    • Disclosures
    • Sample Companies
  • Consolidated Financial Statements
    • Joint Ventures
    • Associates
  • Foreign Subsidiaries
  • Summary and Conclusions
  • Cases
• Chapter 9 - Latest Developments
• Appendix A - Jardine Matheson
• Appendix B - Nestle
• Appendix C - Bayer
• Appendix D - Nokia

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Chapter 2 - Introduction to Financial Statements Prepared in Accordance with IFRS

Learning Objectives

• Be able to review international accounting financial statements and identify variances from U.S. GAAP.
• Identify differences in terminology used in non-U.S. financial statements.
• Understand differences between IFRS and U.S. GAAP in the following financial statements:

- Balance Sheet,
- Income Statement,
- Statement of Changes in Equity, and
- Cash Flow Statement

Introduction

In this chapter we will provide an overview of the format and structure of a set of financial statements provided in accordance with International Financial Reporting Standards (IFRS). We will also outline some differences between U.S. GAAP and IFRS as they pertain to underlying assumptions and conventions and to financial statement presentation.

Throughout this chapter and the text, we will refer to the 2007 financial statements of four companies that present their statements in accordance with IFRS. These four companies are

1. Jardine Matheson – A diversified Bermuda-based company with businesses in supermarkets, drugstores, construction, hotel management and ownership, and property development. The majority of its operations are in Asia and Australia.
2. Nestle – A Swiss company engaged in the food, water, and pharmaceutical sectors.
3. Bayer – A German firm with operations in health care, agriculture, polymers, and chemicals.
4. Nokia – A Finnish company with businesses in mobile phones, network infrastructure, and related services.

Financial statements and notes of these companies can be found in Appendix A through D, respectively.

It's All in How You Say It

As you examine the financial statements in the appendices, you will notice some unusual language. In many cases, words we use in the U.S. to denote a certain classification of asset, liability, income, or expense are called something different internationally. This is similar to someone from England referring to an elevator as a lift or calling the trunk of a car a boot.

A few of the more-common wording differences you may encounter are as follows. In each case the international term is first, followed by the U.S. term.

• Stocks – Inventory
• Share Capital – Common Stock or Paid-in Capital
• Share Issue Premium – Additional Paid-in Capital
• Outside Interests – Minority Interests
• Debtors – Accounts Receivable
• Creditors – Accounts Payable
• Trading Profit – Operating Profit
• Revenue Reserves – Retained Earnings

Conceptual or Theoretical Accounting Framework

IFRSs are grounded in a theoretical "conceptual framework." As with the Statements of Financial Accounting Concepts (SFAC) in the U.S., the IASB's "Framework for the Preparation and Presentation of Financial Statements" sets forth assumptions underlying financial accounting (e.g., materiality, going concern), defines qualitative characteristics of financial statements (e.g., relevance, reliability), and defines elements of financial statements (e.g., assets, liabilities). These concepts and definitions are similar to those found in U.S. SFACs.

One substantive difference between IFRS and U.S. GAAP is that although transactions are recorded on the basis of historical cost; property, plant, and equipment and some other long-lived assets may be revalued to fair value for IFRS. We will discuss this issue in Chapter 4.

IFRS provides for what some refer to as a "fairness exception." It is similar to a "Rule 203 exception" under U.S. auditing standards. Under IFRS, if management decides that application of a provision of any standard would be so misleading that it would conflict with the objective of financial statements set out in the IASB Framework, management must use a different application to achieve a fair presentation. There is a rebuttable presumption, however, that if other entities in similar circumstances comply with the requirement, compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework. Furthermore, if such an action is taken, significant note disclosure is required.

IAS 1 – Presentation of Financial Statements

This standard sets forth the requirements for presentation of a complete set of financial statements consisting of a balance sheet, income statement, cash flow statement, equity statement (showing either all changes in equity accounts or changes in equity accounts other than transactions with owners), and notes to financial statements.

IAS 1 was substantively rewritten in September 2007. The revised standard is effective for annual periods ending on or after January 1, 2009, with earlier application permitted. The changes are noted below.

Similar to U.S. GAAP, statements prepared under IFRS are general-purpose financial statements that provide information about an enterprise's financial position, performance, and cash flows. The financial statements will be used by investors and others in making economic decisions.

IFRS requires that the current year and the prior year be presented whereas U.S. GAAP has no specific requirement to present comparatives. However, the U.S. Securities and Exchange Commission (SEC) generally requires three years (current year plus two comparable years) for all statements except the balance sheet for public companies that file with the SEC.

We will discuss some of the substantive differences provided by IFRS, and we will examine the manner in which the components of basic financial statements differ in appearance.

IAS 1 generally does not prescribe a particular format for the presentation of the financial statements. Unlike the U.S., where a common format has evolved, statements prepared in accordance with IFRS are presented using multiple formats. As you examine the financial statements presented in the appendices, observe that the primary financial statements all include a separate column titled "notes." This presentation is not required under IFRS, but it has evolved as a way to clearly indicate to statement readers the notes that apply to each item in question.

IAS 1 sets out the requirements for the statement headings. The heading should include the following:

• The name of the statement
• The reporting enterprise
• Whether the statements are for one enterprise or for a group (consolidated)
• The date or time period covered
• The reporting currency
• The level of precision of currency (thousands, millions, etc.)

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