Reporting Under U.S. GAAP and IFRS
Layout of the Statement of Financial
Position for Commercial and Industrial Entities
- CPAs can’t afford to not know about International Financial
Reporting Standards (IFRS). The grace period for delaying the first-time
adoption of IFRS is elapsing for companies that are publicly traded
in European Union and non-EU jurisdictions and that already report
under U.S. GAAP (see EC Regulation No. 1606/2002, via EU Member
States election). This means that many U.S. companies that operate
in the EU and delayed IFRS adoption to a fiscal year starting on
or after January 2007 will have to report in at least two comprehensive
bases of accounting. Conversely, if the SEC proceeds as expected
and eliminates the requirement for reconciliation to U.S. GAAP by
December 2009, many EU publicly held companies will be allowed to
use IFRS in the United States.
accounting systems for compliance with multiple reporting bases—permits
accounting firms to offer more efficient results than the traditional,
and costly, reconciliation approach. Furthermore, because the
International Accounting Standards Board (IASB) will not require
the application of new standards before January 1, 2009, companies
that have yet to adopt IFRS have the additional opportunity to
understand future needs and plan accordingly. New standards may
and will be developed before that date.
of the statement of financial position differs under U.S. GAAP
and IFRS. CPAs should be aware of the implications and plan for
dual reporting accordingly.
and U.S. GAAP offer some latitude in financial statement presentation.
Ernst & Young’s 2005 overview of the adoption of IFRS
by 65 companies found an average of 14 lines on the balance sheet,
with greater aggregation by the Dutch and British companies as
opposed to the Spanish and French
Another 2005 survey, of companies in Italy adopting IFRS, showed
that 84% displayed between 10 and 20 lines on their balance sheet
of Financial Position
some differences between the statements of financial position
under IFRS and U.S. GAAP. Most of the concepts below about headings
are common across the financial statements.
In general, the use of a specific comprehensive basis of accounting
in a specific jurisdiction may require (or permit) the adoption
of certain titles for each financial statement. Financial statements
must be clearly identified, so that users can distinguish information
to which a specific body of standards applies from other data.
applies to U.S. GAAP and IFRS, although with some differences—namely
that U.S. GAAP and IFRS have different scopes of application with
regard to supplementary information.
enterprise that reports under U.S. GAAP should use the titles
“balance sheet,” “statement of financial position,”
or “statement of financial condition.” SEC Regulation
S-X uses “balance sheet,” but favors “statement
of financial condition” when treating an employee stock
purchase or savings and similar plans [section 210.6A-02 (d) and
210.6A-5 (a)]. Form 20-F uses both “balance sheet”
and “statement of financial position” [Part 1, Item
5, E2(c), Part 1; General Instructions to Items 11(a) and 11(b),
3C (ii)]. The same term, “balance sheet,” applied
to business entities under IAS 1 (Revised December 2005), Presentation
of Financial Statements (para. 5). It should be noted that
the EU also uses “balance sheet” in its accounting
directives. IAS 1 (Revised September 2007) moves to the “statement
of financial position,” to focus on the underlying concept
and align with the auditing terminology. In an international context,
when the title of a financial statement is the same under both
IFRS and GAAP, the title alone does not denote the standards used.
sheet” is the only term mentioned for such a statement under
IFRS, no explicit prohibition for alternative terms exists. IAS
1 (Revised September 2007) allows titles other than “statement
of financial position.”
titles, as per U.S. accounting and auditing standards (AU section
623), should be used if an other comprehensive basis of accounting
(OCBOA) is used; that is, if a cash basis, income tax basis, or
a basis prescribed by a regulatory agency is used instead of GAAP.
The OCBOA concept is not discussed under IFRS.
organizations may adapt or use other terminology (IAS 1, para.
5), U.S. governmental, not-for-profit, and other nonbusiness enterprises
must use specific terminology, such as GASB standards.
principles used. Both U.S. GAAP and IFRS (IFRS 1,
para. 3; IAS 1, para. 16; IAS 34, para. 19) financial statements
should contain in the notes a statement of compliance with the
respective accounting principles.
S-X, use of U.S. GAAP is presumed. Under Form 20-F, Part III,
Item 17, the GAAP used should be indicated in the accountant’s
report or in a reasonably prominent head note before the financial
foreign issuer adopting IFRS for the first time should prominently
indicate the type of GAAP used (IFRS or prior national GAAP) and
whether such financial statements are referred to, included, or
incorporated by reference. In the two latter cases, prior IFRS
and national GAAP–based information may not be formatted
side by side. A
foreign issuer should also include a warning about the noncomparability
of the information based on IFRS or prior national GAAP (Form
20-F, General Instructions, G, Instructions 1 and 3).
period. Under current U.S. GAAP and IFRS, the reporting
period or date must be noted prominently in the heading of the
IAS 1, para.
37, explicity permits a shorter period for annual financial statements,
such as 52 weeks for convenient closing of the accounts, insofar
as the impact is immaterial. Under IAS 1, para. 36–37, a
modification of the balance sheet date, which is considered an
exceptional circumstance, triggers the disclosure of any different
period covered, the reasons for the change, and the potential
impairment of the prior period’s comparability. Under Regulation
S-X, section 210.1-02(k), a financial statement’s fiscal
year is assumed to mean the calendar year unless a different reporting
period is used.
name and status. The heading of each financial statement
should prominently note the legal name and structure of the reporting
entity, including any modifications from the prior periods. In
general, IAS 1, para. 52, leaves the means of prominent display
to management, and requires adequate repetition wherever needed.
IAS 1, para. 138, also requires, within the notes or the financial
statements, disclosure of the entity’s domicile, jurisdiction
of formation, and address of registered office or principal place
of business if different. Form 20-F, Part I, Items 4A and B, adds
the date of incorporation, the respective legislation, and the
name and address of any company’s agent in the host country.
The proposed amendments to IAS 32 and IAS 1 would require disclosure
of the length, when limited, of an entity.
of reporting. Under IFRS, each financial statement
must indicate prominently whether it refers to an entity’s
separate or consolidated financial statements (IAS 1, para. 51).
The same can arguably be assumed under U.S. GAAP, although it
contemplates only consolidated financial statements as general
purpose financial statements of a parent company with consolidated
subsidiaries (SFAS 94, Consolidation of All Majority-owned
Subsidiaries, footnote 3), but does not prohibit the use
of parent-only financial statements for other use (see ARB 51,
Consolidated Financial Statements, para. 24).
S-X generally refers to consolidated financial statements, although
in specific cases it refers to entity statements. Form 20-F uses
the term “company” on a consolidated level, unless
noted otherwise (General Instructions, E).
IAS 1, para.
138, requires that the ultimate parent entity be indicated in
the notes or elsewhere. The notes to the consolidated financial
statements must also note the relationship an entity has with
parents that do not hold a majority of the voting power (IAS 27,
para. 40). Form 20-F requires a brief description of the group
and the entity’s position within the group (Part I, Item
stage enterprises. Unlike IFRS, which does not contain
specific guidance on development-stage enterprises, SFAS 7, Accounting
and Reporting by Development Stage Enterprises (para. 12–13,)
requires that such enterprises categorize their financial statements
as such, and include a narrative on the business and the change
in development status.
currency. Under U.S. GAAP, Regulation S-X, and IAS
1, the currency in which financial statements are presented must
be displayed prominently on the statements.
S-X section 210.3-20(b) also requires a foreign private issuer
to prominently disclose material exchange restrictions or controls
on the reporting currency, the issuer’s domicile, and the
of precision. Financial statements are expressed
in nominal units of money (CON 5.5). IAS 1, para. 51 and 53, requires
the level of precision to be prominently presented. Thousands
or millions are permitted, provided this does not detract from
materiality. It is worth noting that in some European jurisdictions,
this practice is allowed in the notes and management’s disclosure
and analysis but not in the financial statements. Many U.S. pronouncements
show disclosures in thousands or millions of dollars. Regulation
S-X section 210.4-01(b) permits the use of other multiples if
indicated either immediately under the item or in the currency
column headings, or described otherwise.
Under both U.S. GAAP and IFRS, as a result of the general requirement
for consistent presentation and comparability, the formatting,
layout, and terminology of financial statements should be homogeneous
across time periods.
and generally accepted terminology of the financial statements
should follow general legibility and any other applicable requirements.
In general, their appearance should denote the connotation and
importance of the financial statements. Negative amounts should
be clearly displayed [Regulation S-X section 210.4-01 (a) and
information. Form 20-F, Part I, Item 4 B, also requires
that a company disclose other information, including the nature
of operations and principal activities, the main categories of
products sold or services performed for each of the last three
years, any significant new products or services and their status,
and the principal markets, including a breakdown of total revenues
by category of activity and geographic market for each of the
last three financial years. Under IAS 1, para. 138, the entity
must provide a description of the type of business and its primary
activities in the notes or elsewhere.
of the Statement of Financial Position
GAAP and IFRS mandate no general balance sheet layout, format,
or display order, apart from guidance for specific items. Exhibit
1 illustrates the layout dimensions and their interactions
from the perspective of financial statement users. Under Regulation
S-X section 210.4-01(a), the form, order, and generally accepted
terminology of the financial statements should denote the importance
of the financial statements. In the United States, the layout
generally results from nonpromulgated custom or industry practice.
By contrast, the EU Fourth Directive contains specific formats
IFRS, a company’s current practices may refer to the adoption
of prior national GAAP and accounting traditions. Depending upon
the specific jurisdiction, different formats may be considered
acceptable, as long as they are compliant with IFRS.
the IASB’s Joint Project on Financial Statement Presentation
is elaborating on working principles. The presentation on the
face of the financial statements is to develop from cohesiveness;
the separation of financing, operating, and investing categories;
liquidity criterion; discrimination of measurement bases and their
uncertainty; origin of changes in reported amounts; and an assessment
of cash flows information.
practices in different countries have been developing around the
balanced format and the equity format, with varied column or page
arrangements, and two basic forms: the account (or horizontal)
form, or the report (or vertical) form (Exhibit
are compatible with U.S. GAAP and IFRS, although the equity format—equity
as a residual—is typically employed under both the IASB
and FASB conceptual frameworks. It should be noted, however, that
the implementation guidance for IAS 1 includes an example of a
balance sheet under balanced format and report form.
GAAP, assets are presented in descending order of liquidity, liabilities
in ascending order of time to maturity, and equity in descending
order of priority in liquidation. Balance sheets under IFRS, however,
typically follow an order of increasing liquidity (Exhibit
order is generally a result of accounting practice. Such patterns
may be overridden by standards, however. IFRS 5, implementation
guidance, Example 12, displays noncurrent assets (or disposal
groups) classified as held for sale and the liabilities directly
associated with them as the last rank of current assets and current
liabilities, respectively, although their degree of liquidity
within current items may vary depending on the specific circumstances.
For SEC registrants, SAB Topic 11 clarifies that various sorting
orders may be chosen, provided they are consistent throughout
order is independent of whether a specific order of presentation,
such as a classified balance sheet (with a current/noncurrent
distinction), is adopted. Similarly, the sorting order should
not to be confused with the presentation in order of decreasing/increasing
liquidity, which is an alternative to a classified balance sheet
that IAS 1, para. 60, permits only in certain circumstances.
models. The two main orders of presentation on the
statement of financial position are: a) classified balance sheet
(current or noncurrent shown on the face of the statement); and
b) a display in order of increasing/descending liquidity (or in
order by nature, subcategorized by short-term/long-term).
purpose of a classified balance sheet is to assist financial statement
users in understanding a working capital analysis. The current
and noncurrent classification is usually considered a proxy for
liquidity. Therefore, the distinction between these two displays
is centered on the role of, and the means of, delivering liquidity
of presentation versus note disclosure to convey liquidity information
is still under discussion in the IASB and FASB’s joint project
on Financial Statement Presentation. One of the project’s
working principals for all financial statements is to assist users
in assessing liquidity, articulated as the common denominator
of SFAS 95, Statement of Cash Flows, and IAS 7, Cash
a classified balance sheet. The use of a classified balance
sheet is not mandated under U.S. GAAP. In practice, as explained
by SFAS 6, para. 7 (Classification of Short-Term Obligations
Expected to Be Refinanced: An Amendment of ARB No. 43, Chapter
3A), it is provided by most entities, with the exception
of certain industries where such presentation is deemed not to
be significant (e.g., finance, trading, insurance, investment,
utilities, plus personal financial statements). By contrast, for
not-for-profit organizations, SFAS 117, para. 12 (Financial
Statements of Not-for-Profit Organizations), explicitly requires
the use of either a classified balance sheet, a decreasing-liquidity
order, or note disclosure to convey liquidity information.
For SEC registrants,
Regulation S-X, section 210.5-02, prescribes a classified balance
sheet only when it is appropriate. In such a case, current assets
and current liabilities must be totaled.
view was adopted by the pre-2003 version of IAS 1, where a classified
balance sheet was not mandated, and by IAS 30, Disclosures
in the Financial Statements of Banks and Similar Financial Institutions,
para. 18, which explicitly required banks and other financial
institutions to classify by nature and subclassify by liquidity,
without distinguishing current from noncurrent items, on the grounds
that the operating cycle of many assets and liabilities was usually
shorter than one year. A classified balance sheet was required
by IAS 1, para. 51, unless reliability is assured and relevance
is enhanced by using the order of liquidity or a mixed criterion.
Therefore, an entity that prior to January 1, 2005, elected not
to present the current/noncurrent distinction on the face of the
balance sheet, notwithstanding a clearly identifiable operating
cycle, had to retroactively restate, including comparative information.
and FASB convergence efforts are also likely moving toward liquidity
as an overarching principle regardless of an entity’s industry,
although the presentation for financial institutions is still
of liquidity or mixed bases. Under IAS 1, para.
60, there are several circumstances under which reliability and
enhanced relevance might necessitate a decreasing/increasing liquidity
criterion or a mixed basis, irrespective of the industry: 1) directly,
when the characteristics of a specific sector suggest a liquidity-based
display (e.g., financial institutions), not because of the industry
per se but because the relevance and reliability test applies
due to the inapplicability of the normal operating cycle (IAS
1, para. 63); 2) for a conglomerate or company that has a diversified
business (use of a mixed basis under IAS 1, para. 64); and 3)
residually, for all entities, when the current/noncurrent distinction
is not applicable because the operating cycle is not clearly identifiable.
No similar guidance for a mixed basis exists under U.S. GAAP.
Convergence to an approach similar to that of IFRS seems likely
to emerge from the financial statement presentation project.
versus long-term. Regardless of whether an entity
adopts a classified, liquidity-based, or mixed-basis balance sheet,
the portion of long-term items, whether monetary or not, that
are commingled into a single-line display shall be noted either
on the face of the balance sheet or in the notes (IAS 1, para.
61). Such a requirement is not specifically contemplated under
perspective is generally associated with short-term or long-term
assets, with the threshold between the two being whether they
are recoverable within 12 months of the reporting date. A classified
balance sheet is generally associated with the terms “current”
uses both the terms “current/noncurrent” and “short/long-term”
for display on a classified balance sheet (e.g., short-term investments,
noncurrent liabilities). The use of current/noncurrent tends to
prevail under IFRS for descriptions of items on the face of a
classified balance sheet (IAS 1, para. 67, generally permits different
nomenclature), usually leaving the term short/long-term for other
purposes, such as recognition and measurement (e.g., short-term
employee benefits, short-term compensated absences, long-term
SFAS 6, para.
2, uses the one-year threshold to define short-term obligations,
or refers to the operating cycle if a classified balance sheet
is used. IFRS provides no consistent definition of short- and
long-term, although short-term items may have an impact on measurement
of accounts receivable and payable per IAS 39, Financial Instruments:
Recognition and Measurement (Application Guidance, para.
79). IAS 1, para. 71, uses the one-year threshold for long-term
financial liabilities. IFRS 5, Noncurrent Assets Held for
Sale and Discontinued Operations (footnote to para. 2), and
IFRS 8, Operating Segments (footnote to para. 24), use
noncurrent with respect to a presentation in order of liquidity
to indicate recoverability beyond 12 months.
and FASB joint project on financial statement presentation is
considering whether to subclassify assets and liabilities into
short- and long-term or current and noncurrent. The two boards
would not identify the short/long-term or current/noncurrent threshold
with a specific lapse of time, but rather as a threshold, for
any asset or liability other than deferred taxes, for which either
the contractual maturity or the expected realization or settlement
falls within 12 months.
concept of current items. IAS 1, para. 68–69,
makes a distinction between current operating assets and liabilities
(i.e, assets sold, consumed, or realized as part of the normal
operating cycle, and associated liabilities) and other current
assets and current liabilities. It considers the operating cycle
to be the threshold for current status for the former items, while
a year from the reporting date is the threshold for the latter.
This distinction is not present under U.S. GAAP for assets (ARB
43, Restatement and Revision of Accounting Research Bulletins,
Ch.3A.5) and only notionally for liabilities (ARB 43, Ch.3A.7),
and the longer of one year or the operating cycle criterion applies
U.S. GAAP and IFRS, the determination of current is based on the
expectations for assets (under IAS 1, para. 66, based on intended
sale, consumption, or expected realization date for operating
assets and expected realization date for other assets; and under
ARB 43 Ch.3A.4, based on reasonably expected realization date).
On the other hand, under IAS 1, para. 69, unlike U.S. GAAP, it
is the contractual maturity date that is relevant for nonoperating
current liabilities. Therefore, a working capital analysis may
be affected by two entities’ differing use of a contractual
versus an expected date for liabilities and assets, respectively.
43, Ch.3A.7, a current liability is defined by the effects that
result from its extinguishment, in terms of either employment
of current assets or origination of different current liabilities.
This link is not explicitly stated in IAS 1, para. 69. It might
be implicitly argued for an operating liability; however, for
a financial liability it is the status of a liability as of the
balance sheet date that determines its classification, not the
classification of assets used for its settlement.
convention would apply when the normal operating cycle is ambiguous
(IAS 1, para. 68, and ARB 43 Ch.3A.5), or when different infra-year
operating cycles exist (ARB 43, Ch.3A.5). Lack of clear identifiability,
under IAS 1, para. 63, may be a prerequisite for adopting a liquidity-based
order of presentation, because its relevance for working capital
analysis diminishes with time and the difficulty in identifying
the normal operating cycle. In those cases, a classified balance
sheet under U.S. GAAP would be based on the same 12-month rule
as one with a liquidity criterion under IFRS.
of specific items, including obligations due on demand, refinancing
agreements, rollovers, covenant violations, restricted cash, special
funds, and deferred taxes, falls beyond the scope of this article.
Because of the differences noted above, U.S. GAAP
and IFRS could prescribe different treatments for the same item.
For example, when the contractual maturity of short-term investments
is within one year but realization is expected in a longer operating
cycle, U.S. GAAP classifies it as current but IAS 1 as noncurrent.
Operating inventories and trade receivables are generally classified
as current assets (ARB 43, Ch.3A.4; IAS 1, para. 68; and Regulation
S-X section 210.5-02). Even if they are realizable beyond one
year of the reporting date, they are current assets under IFRS,
although presumably less liquid than marketable securities.
liability that is not part of working capital and is due to be
settled in an operating cycle in excess of 12 months is current
under U.S. GAAP but noncurrent under IFRS. On the other hand,
the ability and intent to liquidate a long-term debt within one
year would make it current under U.S. GAAP but not under IFRS.
assets that are classified as held for sale and directly associated
liabilities are displayed separately as current assets and current
liabilities only when meeting the IFRS 5 criteria for held-for-sale.
Management’s intent is not sufficient. By contrast, under
U.S. GAAP, although such assets and liabilities are also classified
separately on the balance sheet, the general rule for current/noncurrent
distinction (SFAS 144, para. B120) applies, and is less restrictive
than the held-for-sale criteria.
has no minimum requirement for line items displayed on a balance
sheet. SFAS 117, Financial Statements of Not-for-Profit Organizations
(para. 11), expresses minimum grouping in conceptual terms of
similarity. Some parts of U.S. GAAP require presentation on the
face of the statement for specific items, such as treasury stock
(APBO 6, Status of Accounting Research Bulletins, para.
12), intangible assets, and goodwill (SFAS 142, Goodwill and
Other Intangible Assets, para. 42–43). Some standards
require presentation on a separate line or a parenthetical explanation,
as when different measurement bases are employed for similar assets
in the case of servicing assets and liabilities (SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities: A Replacement of FASB Statement
No. 125, para. 13B), or for hybrid financial instruments
(SFAS 111, Rescission of FASB Statement No. 32 and Technical
Corrections, para. 44A).
4 (Part I), Exhibit
4 (Part II), Exhibit
4 (Part III) contrast the minimum content to be presented,
apart from immaterial items (IAS 1, para. 31, and Regulation S-X,
section 210.4-02), under IFRS and Regulation S-X. Applying IAS
1, para. 54, literally would mean at least displaying the minimum
required line items; if additional detail were presented, this
would be displayed as subheadings and sub-items. In practice,
however, it is not difficult to find entities reporting under
IFRS and presenting a balance sheet with additional subheadings
at the same level of those minimum line items. For most other
items, IFRS generally requires disclosure either on the face of
the statement or in the notes.
for specific items, some IFRS pronouncements require presentation
on the face of the balance sheet but do not specifically mention
a separate line item. Examples include gross amount due from/to
customers for contract work (IAS 11, Construction Contracts,
para. 42), lease liabilities (IAS 17, Leases, para. 23), lease
receivables (IAS 17, para. 36), net liability for an employee
benefit plan (IAS 19, Employee Benefits, Basis for Conclusions,
para. 66), government grants (IAS 20, Accounting for Government
Grants and Disclosure of Government Assistance, para. 24),
and equity component of a compound instrument (IAS 32, para. 29,
and Application Guidance, para. 32). Under certain circumstances,
such items may be considered as additional line items or headings
for which IAS 1, para. 55, requires separate display when relevant.
For goodwill and other intangible assets, the implementation guidance
for IAS 1 shows separate display. The display of additional items
can also result from the application of disaggregation guidance
in IAS 1, para. 55–59.
Differences on the face of the balance sheet format
may arise from a number of factors:
differences, such as presentation in another statement, another
location in the same statement, or presentation under one set
of standards but not required, permitted, or encouraged in another;
differences, such as presentation under one set of standards
and note disclosure in another;
in recognition (not recognized under one set of standards, recognized
before or later, or recognized as income rather than an asset/liability);
differences (initial zero-value recognition).
as Simple as It Seems
financial results under both U.S. GAAP and IFRS can be a complex
undertaking. Even a seemingly simple area, like the presentation
of the balance sheet, is more intricate than one might think.
Small differences in terminology, classification, and presentation
can add up. Entities that must, or that choose to, report under
two bases of accounting would do well to focus on streamlined
data capture that can make the production of multiple financial
reports more efficient.
Bellandi, CPA, CA (Dottore Commercialista), Diploma in IFR of ACCA,
MBA, member of the NYSSCPA’s International Accounting
and Auditing Committee, is a practitioner in U.S. GAAP/IFRS dual
reporting, and director of the board and CFO of Canados. He can
be reached at www.cpa-center.com/bellandi.