Dual Reporting Under U.S. GAAP and IFRS
Layout of the Statement of Financial Position for Commercial and Industrial Entities

By Francesco Bellandi

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DECEMBER 2007 - 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.

Dual reporting—designing 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.

The layout 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.

Both IFRS 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
(www.ey.com/Global/download.nsf/International). Another 2005 survey, of companies in Italy adopting IFRS, showed that 84% displayed between 10 and 20 lines on their balance sheet (www.m2a.unito.it).

Statement of Financial Position

There are 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.

Titles. 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.

This concept 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.

A business 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.

While “balance 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.”

Different 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.

While nonbusiness 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.

Accounting 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.

Under Regulation 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 statements.

An eligible 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).

Reporting period. Under current U.S. GAAP and IFRS, the reporting period or date must be noted prominently in the heading of the financial statements.

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.

Entity 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.

Level 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).

Regulation 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 4.C).

Development 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.

Reporting 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.

Regulation 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 dividend’s currency.

Level 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.

Appearance. 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.

Form, order, 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 (c)].

Other 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.

Layout of the Statement of Financial Position

Both U.S. 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 for statements.

When adopting 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.

FASB and 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.

Basic Formats, Forms

Accounting 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 2).

Both formats 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.

Sorting Order

Under U.S. 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 3).

The sorting 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 the filing.

The sorting 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.

Order of Presentation

Basic 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).

The main 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 information.

The role 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 Flow Statements.

Use of 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.

A similar 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.

The IASB 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 under discussion.

Use 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.

Short- 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 U.S. GAAP.

A liquidity 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” and “noncurrent.”

U.S. GAAP 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 debt).

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.

The IASB 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.

The 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 to both.

Under both 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.

Under ARB 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.

The 12-month 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.

The treatment 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.

Implications. 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.

A financial 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.

Noncurrent 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.

Minimum Content

U.S. GAAP 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).

Exhibit 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.

In addition, 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.

Implications. Differences on the face of the balance sheet format may arise from a number of factors:

  • Display 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;
  • Disclosure differences, such as presentation under one set of standards and note disclosure in another;
  • Differences in recognition (not recognized under one set of standards, recognized before or later, or recognized as income rather than an asset/liability); and
  • Measurement differences (initial zero-value recognition).

Not as Simple as It Seems

Reporting 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.

Francesco 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.




















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