GAAP and IFRS Convergence Presented December 18, 2010 at Penn State University Abington by Joel...

GAAP and IFRS Convergence

Presented December 18, 2010

at Penn State University Abington by

Joel Wagoner, MBA, CPA, CMA, CFM

Assistant Professor of Business Administration

Arcadia University


How do GAAP and International Accounting Standards differ?


How did our world of divergent Accounting principles come to be?


Question: When is the SEC going to require us to adopt International Financial Reporting Standards (IFRS)?


On December 6, 2010, Alexandra DeFelice reported in the Journal of Accountancy that SEC Chair Mary Schapiro is not committed to a July, 2011 date for deciding whether American reporting entities will adopt IFRS.


Ms. Schapiro further stated that at least four years will be allowed for American reporting entities to accomplish the transition to IFRS.


At the earliest (if at all), American companies will begin using IFRS in 2015.


Consider: If the FASB and IASB were to converge American GAAP and IFRS, would it be necessary for American companies to adopt IFRS?


Even if full convergence were impractical, if the differences between GAAP and IFRS were significantly reduced, would the SEC find it desirable for American corporations to incur the expense of adopting IFRS?


For the past eight years, there has been such an ongoing effort to converge GAAP and IFRS.

Significant progress has slowly been made.


•Who is trying to converge American GAAP and International Accounting Standards?

– Financial Accounting Standards Board (FASB)

– International Accounting Standards Board (IASB)

Financial Accounting Standards Board

• Established in 1973

• Headquartered in Norwalk, Connecticut

• Replaced Accounting Principles Board

International Accounting Standards Board

• Founded in 1973

• Based in London, UK

• Has representatives on standards setting boards of United States, United Kingdom, Japan, Australia, Canada, France, Germany

International Accounting Standards Board

• Working to achieve convergence of accounting standards of all member countries

• Compliance with International Accounting Standards is voluntary - IASB has no enforcement authority.

• Process of establishing new IFRS’s is semi-democratic - similar to SFAS’s.


• Norwalk Agreement: 2002

• FASB and IASB “each acknowledged their commitment to the development of high-quality compatible accounting standards that could be used for both domestic and cross-border financial reporting.”

Norwalk Agreement

• FASB and IASB agreed to “undertake a short-term project aimed at removing a variety of individual differences between” GAAP and International Financial Reporting Standards (IFRS’s).

Norwalk Agreement

• FASB and IASB agreed to “remove other differences. . .through coordination of future work programs. . .through the mutual undertaking of discrete substantial projects which both Boards [sic] would address concurrently”

Short-term Convergence Project

• Originally included following items:– Balance Sheet Classification;– Inventory Costs;– Asset Exchanges;– Accounting Changes and Error Corrections;– Earnings per Share.


Balance Sheet Classification:

Was subsequently removed from the agenda.


Inventory Costs:

FASB issued SFAS 151 in November, 2004.

Inventory Costs

• SFAS 151: Idle capacity and abnormal spoilage costs should be expensed as incurred and excluded from inventory.• Previously, they would only have been excluded from inventory values only if “so abnormal as to require treatment as current period charges.”


Asset Exchanges:

FASB issued SFAS 153 in December, 2004.

Asset Exchanges

• SFAS 153: An exchange of similar productive assets should be accounted for based on the fair value of the assets exchanged.

• Previously, GAAP had prohibited recognizing a gain on an exchange of similar assets.


Accounting Changes and Error Corrections:

FASB issued SFAS 154 in May, 2005.


SFAS 154: A voluntary change in accounting principle should be accounted for retrospectively. All prior periods should be presented as though the newly adopted accounting policy had always been used, unless when impracticable to do so.


Before SFAS 154, a change in accounting principle would be effected by recognizing a cumulative change in the period in which the change occurred.


SFAS 154 also states that “any change in accounting principle made as a result of adopting a new pronouncement would be reported following the same guidance as that for voluntary changes in accounting principles” unless the new pronouncement requires otherwise.


Earnings per Share: This one wasn’t as “short-term” as hoped. The project has been inactive since May, 2009. The FASB can be expected to codify EITF Issue No. 03-6 as it relates to convertible participating securities. Doing so will not be binding on the IASB.


Memorandum of Understanding between the FASB and IASB on February 27, 2006 established “roadmap for the removal of the need for the reconciliation requirement for non-US companies that use IFRS’s and are registered in the United States.”

2006 Memorandum of Understanding

Established guidelines:

“Convergence of accounting standards can best be achieved through the development of high quality, common standards over time.”


• Established guidelines:

“Trying to eliminate differences between two standards that are in need of significant improvement is the not the best use of the FASB’s and IASB’s resources - instead, a new common standard should be developed that improves the financial information reported to investors.”


• Established guidelines:

“Serving the needs of investors means that the boards should seek to converge by replacing weaker standards with stronger standards.”


• Reaffirmed short-term convergence project:

“(L)imited to those differences between GAAP and IFRS’s in which convergence around a high-quality solution appears achievable in the short-term.”


“Because of the nature of the differences,it is expected that a high-quality solution can usually be achieved by selecting between U S GAAP and IFRS.”


“In instances in which the FASB and IASB agree that (American) GAAP offers the preferred accounting principle, other countries will adopt (American) GAAP to the extent that they also converge their accounting standards with IASB.


Included following items:– Fair Value Option (including investment properties);– Research and Development;– Income Taxes;– Asset Impairment;– Subsequent Events.


Fair-Value Option: The FASB issued SFAS 157 in 2007 and SFAS 159 in 2008.


Fair-Value Option: SFAS 157 prescribes how to measure fair value.


Fair-Value Option: SFAS 159 provides that financial instruments can be presented at fair value.


Research and Development: In 2004, the IASB and FASB “directed the staff to develop an inventory of individual differences relating to the accounting for research and development that are candidates to be eliminated in the short-term convergence project.”


Research and Development: The web page on this project has not been updated on the FASB’s website since 2006. According to the most recent update, it’s still in the research phase.


• At this time, the effort to converge GAAP and IFRS on Income Taxes is inactive.

•It is questionable if full convergence on accounting for income taxes is possible, considering that tax laws vary among countries.


Asset Impairment and Subsequent Events were also included in the Short-term Convergence Project in the 2006 Memorandum of Understanding, but have not been placed on the active agenda.


The FASB and IASB have resolved, or are currently working together on, numerous joint projects. The projects include:• Business Combinations;• A New Conceptual Framework;• Financial Statement Presentation;• Revenue Recognition.


• Leases;

• Emissions Trading Schemes;

• Financial Instruments with Characteristics of

Equity.

Business Combinations Project

In December, 2007 the FASB:– Revised SFAS 141, Business Combinations;– Issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements.

–


SFAS 141 revised– To define the “acquirer” in a business combination;


SFAS 141 revised– To require the acquirer to recognize assets acquired, liabilities assumed, and any noncontrolling interest at fair value.


SFAS 141 revised– To require contingent consideration and liabilities be measured at fair value at acquisition date;


SFAS 141 revised– To allow a gain to be recognized on bargain purchases as opposed to recognizing ‘negative goodwill’ on assets acquired.


SFAS 160: Amends ARB 51 to “establish accounting and reporting standards for noncontrolling interest in a subsidiary and for the deconsolidation of subsidiary.”


SFAS 160: “Requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.”


SFAS 160: Requires disclosure of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.


(Previously, the noncontrolling interest’s share of net income was reported as an expense and deducted to derive the consolidated net income.)


SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated.

Conceptual Framework Project

Purpose: “To develop an improved common conceptual framework that provides a sound foundation for developing future accounting standards.”


• “Such a framework is essential to. . .developing standards that are principles-based, internally consistent, and internationally converged.”

• “The new framework will build on the existing IASB and FASB frameworks and consider developments subsequent to the issuance of those frameworks.”


The FASB and IASB are, as a joint project:– “Focussing on changes in the environment since the original frameworks were issued, as well as omissions in the original frameworks”

– “Giving priority to addressing and deliberating those issues within each phase that are likely to yield benefits. . .in the short term”

– “Initially considering concepts applicable to private sector business entities.”


“A common goal of the. . .(FASB and IASB). . . is for their standards to be clearly based on consistent principles. To be consistent, principles must be rooted in fundamental concepts rather than a collection of conventions. To consistently achieve useful financial reporting, the body of standards taken as a whole and the application of those standards should be based on a framework that is sound, comprehensive, and internally consistent.”


Eight Phases (four inactive):– Objective and Qualitative Characteristics– Elements and Recognition– Measurement– Reporting Entity– Framework Purpose and Status in GAAP Hierarchy (inactive)– Applicability to Not-for-Profit Sector (inactive)– Presentation and Disclosure (inactive)– Remaining Issues (inactive)

Objective and Qualitative Characteristics

Purpose: To consider

– “The objective of financial reporting”;

– “The qualitative characteristics of financial reporting information”;

– “The trade-offs among qualitative characteristics and how they relate to the concepts of materiality and cost-benefit relationshps”.


The FASB published SFAC 8 in September, 2010.


SFAC 8: “The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.”


SFAC 8: “If financial information is to be useful, it must be relevant and faithfully represents [sic] what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely, and understandable.”

Elements and Recognition

Purpose: “To refine and converge the Boards’ frameworks”:

– “Revise and clarify the definitions of asset and liability”;

– “Resolve differences regarding other elements and their definitions”;


(continued from previous slide)

– “Revise the recognition criteria concepts to eliminate differences and provide a basis for resolving issues such as derecognition and unit of account.”


Current GAAP definition of an asset: “Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”


Concerns with the current definition of asset:– “Some users misinterpret. . .‘probable’ to mean that there must be a high likelihood of future economic benefits for the definition to be met; this excludes asset items with a low likelihood of future economic benefits.”


Concerns with the current definition of asset:– Emphasizes “the future flow of economic benefits, instead of focusing on the item that presently exists, an economic resource.”


Concerns with the current definition of asset:– “Some users misinterpret. . .‘control’ and use it in the same sense as that used for. . . consolidation accounting. The term should focus on whether the entity has some rights or privileged access to the economic resource.”


Concerns with the current definition of asset:– ‘Places undue emphasis on identifying the past transactions or events that gave rise to the asset, instead of focusing on whether the entity had access to the economic resource at the balance sheet date.”


The following definition of an “asset” has been suggested:

– An asset of an entity is a present economic resource to which the entity has access or can limit the access of others.”


The current definition of a liability is “Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”


Concerns about the definition of “liability” are comparable to those with the definition of “asset”: Misinterpretation of the term “probable”; Emphasis on future outflow of benefits instead of focus on the item that presently exists;

and undue emphasis on past events instead of the economic obligation that exists at the balance sheet date.


There is the additional concern that it is unclear how the current definition of ‘liability’ applies to contractual obligations.


The suggested new definition of a ‘liability’ is:– “A liability of an entity is a present economic obligation for which the entity is the obligor .”


• Neither the current framework of the FASB nor of the IASB includes criteria to when an item should be derecognized.

• The FASB and IASB “plan to revise their recognition criteria concepts to. . .provide a framework for resolving derecognition issues.”


The FASB has not updated the status of this phase since March, 2010. The Current Technical Plan on the FASB’s website does not present an anticipated date for further action.

Measurement

Purpose: “[L]ist and describe possible measurements, arrange or classify the measurements in a manner that facilitates standard-setting decisions, describe the advantages and disadvantages of each measurement in terms of the qualitative characteristics of useful financial information, and discuss at a conceptual level how the qualitative characteristics and cost constraint should be considered together in identifying an appropriate measurement.”

Reporting Entity

Purpose: “To determine what constitutes a reporting entity for the purposes of financial reporting.”

Reporting Entity

• The FASB and IASB jointly issued an exposure draft on March 11, 2010.

•Comments were accepted through July 16.

Reporting Entity

At their meeting on November 19, “[T]he Boards discussed some of the issues raised in comment letters on the Exposure Draft. . .and concluded that significant time will be required to satisfactorily address those issues. Because of the priority placed on other projects, the Boards concluded that they cannot devote the time necessary to properly address those issues in the near future.


Revenue Recognition Project: The FASB and IASB formally agreed to embark on the joint project in 2002.

Revenue Recognition Project

Before the Norwalk Agreement, the FASB had begun a project that “would lead to a new comprehensive accounting standard on revenue recognition and also would amend the related guidance on revenues and liabilities in certain of the FASB concepts statements.”


“Comprehensive guidance on revenue recognition has not been previously developed in the United States. . .There currently are more than 140 pieces of authoritative literature that relate to revenue recognition.”

– The FASB Report, December 24, 2002


Although the Codification Database does away with the multiplicity of authoritative sources of GAAP regarding revenue recognition, it remains both internally inconsistent and inadequate as guidance for many situations that businesses find themselves in.


The Exposure Draft proposes that an entity would “recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it receives, or expects to receive, in exchange for those goods or services.”


An entity accomplishes this in five steps:

1. Identifies its contract(s) with a customer;

2. Identifies the separate performance obligations in its contract(s);

3. Determines the transaction price;


4. Allocates the transaction price to the separate performance obligations;

5. Recognize revenue when the entity satisfies each performance obligation.


As the entity satisfies the obligations of the contract, it recognizes the proportionate revenue that has been allocated to the performance obligation.


Financial Statement Presentation– A joint project between the FASB, the IASB, and the Accounting Standards Board of Japan (ASBJ).

Financial Statement Presentation

Purpose: To “establish a common, high-quality standard for presentation of information in the individual financial statements (and among the financial statements) that will improve the ability of. . .financial statement users to:

(continued on next slide)


1. “Understand an entity’s present and past financial position.”

2. “Understand the past operating, financing, and other activities that caused an entity’s financial position to change and the components of those changes.”


3. “Use (the) financial statement information (along with information from other sources) to assess the amounts, timing, and uncertainty of an entity’s future cash flows.”


The project is being completed in three phases:

– In the first phase, the FASB and IASB “addressed what constitutes a complete set of financial statements and the requirements for presenting comparative financial information.”


• The FASB and IASB completed deliberations on Phase 1 in December, 2005.

•The IASB revised International Accounting Standard 1, “which brings IAS1 largely into line with SFAS 130, Reporting Comprehensive Income”.


• The FASB decided to wait until the end of Phase 2 before publishing an exposure draft on Phase 1.


The second phase “addresses the more fundamental issues for presentation of information on the faces of financial statements.”


Second Phase topics include:– “Developing principles for aggregating and disaggregating information in each financial statement.”

– “Defining the totals and subtotals to be reported in each financial statement. . .”

– “Reconsidering SFAS 95, Statement of Cash Flows,. . . including whether to require the use of the direct or indirect method.”


The FASB and IASB jointly issued a discussion paper on financial statement presentation in October, 2008. The discussion paper covers both Phase 1 and Phase 2.


The FASB and IASB solicited comments specifically on whether the following objectives will improve the usefulness of information provided in financial statements for capital providers, and whether we believe that the proposed means of fulfilling the objectives will be effective.


Objective 1: Cohesiveness (“An entity should present information in its financial statements in a manner that portrays a cohesive financial picture of its activities.”)


To the extent feasible, cohesiveness should be attained at the line item level. In many cases (e.g., research and development) this is not practical.


Objective 2: Disaggregation (“An entity should disaggregate information in its financial statements in a manner that makes it useful in assessing the amount, timing, and uncertainty of its future cash flows.”)


Objective 3: Liquidity and Financial Flexibility (“An entity should present information in its financial statements in a manner that helps users to assess the entity’s ability to meet its financial commitments as they become due and to invest in business opportunities.”)


The FASB and IASB posted the comments that they received to their respective websites.


•Originally, the two boards had intended to release an exposure draft by the end of 2010.

•The date was later moved to the first quarter of 2011.


• On July 1, the FASB and IASB jointly released a staff draft of an exposure draft on the new financial statement presentation.

•(This is literally a draft of a draft.)


On November 1, the boards announced that “[A]t their October 2010 joint meeting, the Boards acknowledged that they do not have the capacity currently to devote the time necessary to consider the information learned during outreach activities and modify their tentative decisions.”


“Consequently, the Boards decided to not issue an Exposure Draft in the first quarter 2011 as originally planned.”


"The Boards will return to this project when they have the requisite capacity. This is expected to be after June 2011.”


What follows are the major aspects and features of the financial statements that are proposed in the staff draft of July 1, 2010.


These are an indication of the future of financial reporting, as currently envisioned by the FASB and IASB.


An entity’s financial statements shall include the following sections, categories, and

subcategories, as appropriate:

a. A business section, containing:

1. An operating category

i. An operating finance subcategory

2. An investing category. [62]

.


An entity’s financial statements shall include:

b. A financing section, containing:

1. A debt category

2. An equity category.

[62]


An entity’s financial statements shall include:

c. An income tax section.

d. A discontinued operation section.

e. A multicategory transaction section. [62]

The Operating Category

The operating category of the business section will include:

–Assets used in the entity’s day-to-day business and all changes in those assets;– Liabilities that arise from the entity’s day-to-day business and all changes in those liabilities. [72]

The Operating Finance Subcategory

The operating finance subcategory includes liabilities that “are directly related to an entity’s operating activities; however, they also provide a source of long-term financing for the entity.” [74]


Liabilities are included in the operating finance subcategory if they meet (all) three conditions:


Condition 1: “The liability is incurred in exchange for a service, a right of use, or a good, or is incurred directly as a result of an operating activity (rather than a capital-raising activity that funds general business activities, capital expenditures, or acquisition

activities); [75]


Condition 2: “The liability is initially long term”; [75]


Condition 3: “The liability has a time value of money component that is evidenced by either interest or an accretion of the liability

attributable to the passage of time (that is, the accounting for the liability requires the calculation of an interest component).” [75]


The staff draft offers the following examples of liabilities that would be presented in the operating finance subcategory:

a. A net postemployment benefit obligation;

b. A lease obligation;

c. Vendor financing; [76]

The Operating Finance Subcategory“If an entity enters into a borrowing arrangement with its own suppliers primarily to acquire a specific good used in production or to procure a specific service, that borrowing arrangement, if initially long term, is classified in the operating finance subcategory of the operating category. If such a borrowing arrangement is not initially long term it is classified in the operating category.” [89]


Assets restricted for the purpose of satisfying liabilities reported in the operating finance subcategory will also be presented in the operating finance subcategory. [77]

The Investing Category

The investing category of the business section will include “an asset or a liability that an entity uses to generate a return and any change in that asset or liability”. [81]


“No significant synergies are created for the entity by combining an asset or a liability classified in the investing category with other resources of the entity.” [81]


“An asset or a liability classified in the investing category may yield a return for the entity in the form of, for example, interest, dividends, royalties, equity income, gains, or losses.” [81]


“Examples of investing activities and related items include:

a.The purchase and sale of investments, unless the transaction is part of the business in which the entity is engaged (for example, financial services entities)”

b. Dividends received on equity investments”

[82]

The Investing Category“Examples of investing activities and related items include:c. Interest earned on debt investmentsd. The purchase and sale of nonfinancial assets, such as a real estate investmente. Distributions of nonfinancial investments such as rents, royalties, fees, and commissionsf. Equity method investments and investments in fixed-income securities and equity securities.” [82]

The Financing Section

The financing section shall include items that are part of an entity’s activities to obtain (or repay) capital. [83]

Two categories in the financing section:

Debt

Equity


Although the statement of comprehensive income and statement of financial position will present debt-related and equity-related activities separately, “The statement of cash

flows shall not include separate categories for debt or equity.” [85]


“Assets and liabilities and the related income effects that arise from transactions involving an entity’s own equity shall be classified in the debt category and presented separately from borrowing arrangements within the debt category.” [93]


“Examples of assets and liabilities that arise from transactions involving an entity’s own equity include:

a. A dividend payable

b. A written put option on the entity’s own shares

c. A prepaid forward purchase contract for the entity’s own shares.” [94]


“Examples of activities or items that may be classified in the equity category in the statement of financial position or the financing section in the statement of cash flows include:a. Issuing shares or other equity instrumentsb. Common, preferred, and treasury sharesc. Cash payments to owners to acquire or redeem the entity’s sharesd. Distributions to owners.” [96]


Assets and liabilities will be presented in seven separate categories of the statement of financial position.

1.Business Operating

2.Business Operating Finance

3.Business Investing

4.Financing – Debt related


Assets and liabilities will be presented in seven separate categories of the statement of financial position.

5. Financing – Equity related

6. Income Tax-related

7. Discontinued Operations

The Income Tax Section

“The income tax section of the statement of financial position shall include all current and deferred income tax assets and liabilities. . . and any other assets or liabilities related to income taxes. An entity shall present cash flows related to those assets and liabilities in the income tax section of the statement of cash flows.” [97]


“In the statement of comprehensive income, an entity shall allocate income tax expense or benefit in accordance with Topic 740”. [98]


“Consequently, an entity may be required to present amounts of income tax expense or benefit in the discontinued operation section and in the other comprehensive income part of the statement of comprehensive income rather than in the income tax section of the statement of comprehensive income.” [98]

The Discontinued Operations Section

“All assets and liabilities related to a discontinued operation shall be classified in the discontinued operation section of the statement of financial position.” [99]

The Discontinued Operations Section

“All changes in the assets and liabilities of a discontinued operation shall be presented in the discontinued operation section of the statements of comprehensive income and cash flows.” [99]

Multicategory Transactions

“The net effects on comprehensive income and cash flows of an acquisition (or disposal) that results in the recognition of assets and liabilities in more than one section or category in the statement of financial position shall be

classified in the multicategory transaction section of the statements of comprehensive income and cash flows.” [100]


“An entity shall classify an asset or a liability used for more than one function in the

section or category of predominant use.” [106]


“Interest expense and cash paid for interest shall be presented in the same section, category, or subcategory as the liability giving rise to the interest.” [107]

Classification of Assets and Liabilities

“An entity shall present short-term assets, long-term assets, short-term liabilities, and long-term liabilities separately in each category within its statement of financial position unless a presentation based on liquidity provides information that is more relevant.” [115]


Note: No more “current” and “non-current” assets and liabilities. “Short-term” if within one year, “long-term” if more than one year. [124]


If a presentation based on liquidity is more relevant, “an entity shall present all assets and liabilities within each category in order of

liquidity.” [115]


“[A]n entity may present some of its assets and liabilities using a short-term/long-term classification and others in order of liquidity

if that presentation provides information that is relevant. The need for a mixed basis of presentation may arise when an entity has diverse operations.” [116]

Disaggregation

Disaggregation: “[D]isaggregate assets and liabilities and present them separately in the statement of financial position when the function, nature, or measurement basis of an item or aggregation of similar items is such

that separate presentation is relevant to an understanding of the entity’s financial position.” [119]

Disaggregation

“Assets or liabilities that do not respond similarly to similar economic events shall

be presented separately in the statement of financial position.” [120]

Cohesion

“An entity shall classify items of income and expense that comprise net income into the section, category, and subcategory that are consistent with the classification of the related asset or liability in the statement of financial position and consistent with the related cash flows in the statement of cash flows.” [137]


“An item of income or expense that is not related to an asset or a liability in the statement of financial position shall be

classified consistent with the activity generating the income, expense, or cash flow.” [137]

Disaggregation

“Disaggregation of income and expense items by function is useful in understanding the various activities required to convert an entity’s resources into cash.” [149]

Disaggregation

“An entity shall disaggregate and present its income and expense items by function within each section and category in the statement of

comprehensive income so that the information is useful in understanding the activities of the entity and in assessing the amount, timing, and uncertainty of future cash flows.” [140]

Disaggregation

“An entity shall disaggregate its income and expense items by their nature within the related functional grouping to the extent that the information is useful in assessing the amount, timing, and uncertainty of future cash flows.” [142]

Disaggregation

“Disaggregation by nature within a functional grouping may include, for example, disaggregating total cost of sales into materials, labor, transportation, and energy costs. Disaggregation by nature within a functional grouping may also include, for example, disaggregating revenue from selling goods into wholesale and retail components.” [143]

Disaggregation

“An entity may choose not to disaggregate. . .by function if (doing so) is not useful to users of financial statements in understanding the entity’s activities and the amount, timing, and uncertainty of future cash flows. (In that case), an entity shall disaggregate its income and expense items by nature and present that information in the statement of comprehensive income.” [148]

Statement of Cash Flows

• The statement of cash flows will be prepared on the direct basis.

• To the extent practical, the activities will align with the sections in the Statement of Financial Position and the Statement of Comprehensive Income.

Statement of Cash Flows

“[D]isaggregate cash flows in the statement of cash flows by classes of cash receipts and payments so that the statement of cash flows provides a meaningful depiction of how the entity generates and uses cash.” [177]


“Cash Equivalents” will no longer be presented on the same line of the balance sheet as “Cash”.

Statement of Comprehensive Income

“In the statement of comprehensive income, an entity shall indicate for each item of other comprehensive income, except for a foreign currency translation adjustment of a consolidated subsidiary, whether the item

relates to an operating activity, investing activity, financing activity, or a discontinued operation.” [139]


Separate from the project dealing with overall financial statement presentation, the FASB and IASB have been working on a project to redesign the statement of comprehensive income (income statement).


The two boards expect to release a pronouncement on the statement of comprehensive income in early 2011.


The boards have tentatively decided “[T]o require entities to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements.”


The boards have also decided “[T]o affirm the FASB’s tentative decision to require reclassification adjustments to be presented in both other comprehensive income and net income.”

Balance Sheet

The FASB and IASB are also working on a separate project related to the balance sheet.

Balance Sheet

The two boards expect to release a pronouncement in the first quarter of 2011.

Balance Sheet

In November, the two boards decided that assets and liabilities related to financial instruments may be offset “only if the entity has the unconditional right of offset and intends to settle net or intends to settle simultaneously.”

Balance Sheet

Simultaneous settlement refers to transactions that settle at the same moment.

Balance Sheet

“[A]n entity cannot offset a recognized financial asset and financial liability if the entity has a conditional right of offset.”

Financial Instruments

The two boards also expect to jointly publish a pronouncement on accounting for financial instruments in the second quarter of 2011.

Financial Instruments

Current discussions revolve around alternative methods of accounting for credit impairment.

Leases

The FASB and IASB are currently holding roundtable discussions before they issue a final pronouncement in 2011.

The FASB and IASB accepted comments on an Exposure Draft (which had been released on August 17) through December 15.

Leases

The Exposure Draft proposes removing the distinction between operating and capital leases.

Leases

All leases provide both the lessee and the lessor with an economic benefit consistent with the suggested definition of an asset and with an obligation consistent with the suggested definition of a liability.

Insurance Contracts

IFRS does not currently provide guidance to the extent that American GAAP does concerning insurance contracts.

Insurance Contracts

The IASB released an exposure draft on July 30, 2010 to provide further guidance. The draft’s provisions differ greatly from American GAAP.

Insurance Contracts

The FASB published a discussion paper on Insurance Accounting on September 17. Comments were invited through December 15. The FASB is currently holding roundtable discussions to gain further feedback on the discussion paper.

Fair Value Measurement

The FASB and IASB expect to publish a pronouncement on fair value measurement during the first quarter of 2011.


The FASB published an exposure draft on June 29, 2010. Comments were accepted through September 7.


The boards have tentatively decided “that an entity may apply the guidance on measuring the fair value of liabilities when measuring the fair value of its own equity instruments.”


“[T]he objective of measuring the fair value of a liability or an entity's own equity instrument is to estimate an exit price from the perspective of a market participant who holds the corresponding asset at the measurement date, regardless of whether that asset is traded (for example, on an exchange).”


The boards also tentatively decided that “An entity may measure the fair value of financial instruments that are managed on the basis of the entity's net exposure to a particular market risk, or to the credit risk of a particular counterparty, on a net basis if there is evidence that the entity manages its financial instruments in this way.”

Discontinued Operations

The boards expect to publish and exposure draft and a final pronouncement on discontinued operations during 2011.

Discontinued Operations

The boards do not expect significant changes in how discontinued operations are presented in the statement of comprehensive income. However, there may be additional disclosures required.

Voting Interest Entities

The FASB and IASB are jointly meeting to develop guidance on how to consolidate entities that are “controlled by voting or similar interests.”

Voting Interest Entities

No timetable has been developed for issuing a discussion paper or exposure draft on this subject.

Investment Companies

The FASB and IASB are also discussing “a number of issues raised by constituents related to the definition of an investment company.”


The issues concern how to account for a non-investment company that has an investment company as a consolidated subsidiary.


No timetable has been developed for issuing a discussion paper or exposure draft on this subject.

Emission Trading Schemes

The FASB and IASB have begun a project to determine the appropriate accounting for emission trading schemes.

Emission Trading Schemes

The boards expect to release an exposure draft by the end of 2011.

Research Projects

The FASB and IASB currently have joint research projects underway on

•Effective Dates and Transition Methods, for which a discussion paper was released on October 31, 2010;

•Derecognition of Financial Instruments, for which the FASB’s website has not been updated since May 1, 2009.

Research Projects

The discussion paper on effective dates and transition methods solicits the opinions of all interested parties on how best to implement new and revised principles resulting from the convergence of GAAP and IFRS.

Research Projects

Comments will be accepted through January 31, 2011.


In 2008 and 2009, and again on November 29, 2010, the FASB and IASB have reaffirmed the 2006 Memorandum of Understanding.


The FASB and IASB “again affirmed their commitment to developing a common set of high-quality standards.”


“The boards are aware that that continued progress toward convergence [sic] is a factor that the Securities and Exchange Commission will consider in evaluating its recent proposal to permit or require use of IFRS’s in the U.S.”

What will come of convergence?

• The obvious result: More consistency between American GAAP and International Accounting Standards.

• A more subtle, but nonetheless important, result: A rethinking of American GAAP.

More Information

• http://www.fasb.org

• http://www.iasb.org

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GAAP and IFRS Convergence Presented December 18, 2010 at Penn State University Abington by Joel...

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