Under the SEC’s IFRS Roadmap, large U.S. companies might be required to adopt IFRS in preparing their fiscal year 2014 financial statements. The process of converting from one set of GAAP to another is quite complex and there are many questions to be answered. To provide
508 Chapter 11
26 Letter to Ms. Florence E. Harmon, Securities and Exchange Commission, signed by John J. Brennan, Chairman, Financial Accounting Foundation, and Robert H. Herz, Chairman, Financial Accounting Standards Board, dated March 11, 2009 (accessed July 23, 2009, at http://www.fasb.org/cs/ContentServer?
c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156242108).
hoy36628_ch11_489-532.qxd 1/23/10 7:53 PM Page 508
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
Worldwide Accounting Diversity and International Standards 509
guidance on this issue, the first standard developed by the IASB was IFRS 1, “First-Time Adoption of IFRS.” IFRS 1establishes the procedures to be followed in converting from pre- viously used accounting standards to IFRS for the first time, and introduces the concept of the
“opening balance sheet.”
IFRS 1requires companies transitioning to IFRS to prepare an opening balance sheet at the
“date of transition.” The transition date is the beginning of the earliest period for which an en- tity presents full comparative information under IFRS. The following timeline shows how the transition date is determined:
First IFRS Financial Statements Comparative Period
1/1/13 12/31/13 12/31/14
Transition
Date Reporting
Date
If a company is preparing financial statements for the year ended December 31, 2014, under IFRS 1it also must provide comparative financial statements for the year ended December 31, 2013. January 1, 2013, is the beginning of the earliest period for which the comparative in- formation must be provided, and therefore is the transition date. This means that a company must begin using IFRS on January 1, 2013, to be able to prepare IFRS financial statements for 2014.
An entity must complete the following steps to prepare the opening IFRS balance sheet:
Step 1—Determine Applicable IFRS Accounting Policies Based on Standards in Force on the Reporting Date.
This requirement implies that companies must know two years in advance what the applicable standards will be on the reporting date. European Union companies were required to present IFRS financial statements for the first time on December 31, 2005. To assist EU companies in their transition to IFRS, the IASB adopted a “stable platform” policy in which new IASB standards issued after March 1, 2004, did not go into effect until after January 1, 2006. Thus, EU companies knew what the standards in force on December 31, 2005, were going to be as early as March 2004.
Step 2—Recognize Assets and Liabilities Required to Be Recognized under IFRS That Were Not Recognized under Previous GAAP and Derecognize Assets and Liabilities Previously Recognized That Are Not Allowed to Be Recognized under IFRS.
Deferred development costs are an example of an asset recognized under IFRS that is not al- lowed under U.S. GAAP. A U.S. company transitioning to IFRS on January 1, 2013, would be required to assess whether development costs incurred in prior years met the criteria for capi- talization in IAS 38,“Intangible Assets.” If so, then the costs previously expensed would be re- versed and recognized on the opening balance sheet as an asset. The counterpart would be an adjustment to stockholders’ equity. Restructuring is an area in which a U.S. company might need to derecognize a liability. A restructuring charge and related liability can be recognized at an earlier date under U.S. GAAP than under IFRS. Going forward, new IFRS adopters will need to amend their asset and liability recognition policies to make sure that they are in com- pliance with IFRS. For example, development costs incurred after January 1, 2013, will have to be evaluated for possible capitalization.
Step 3—Measure Assets and Liabilities Recognized on the Opening Balance Sheet in Accordance with IFRS.
An entity must retroactively apply applicable IASB standards to each asset and liability re- ported on the opening balance sheet. As an example, a company previously using LIFO to measure inventory will have to select a method acceptable under IFRS (FIFO or weighted av- erage cost) and retroactively apply that method to the inventory carried on the opening balance sheet. This represents a change in accounting principle. IFRS 1indicates that the effect of the change should be recognized in stockholders’ equity on the opening balance sheet, and not in net income.
hoy36628_ch11_489-532.qxd 1/7/10 1:46 AM Page 509
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
Step 4—Reclassify Items Previously Classified in a Different Manner from What Is Acceptable under IFRS.
There are several situations in which accounting elements are classified differently under IFRS and U.S. GAAP. For example, U.S. companies classify deferred tax assets and liabilities as current or noncurrent depending on the classification of the underlying asset or liability giv- ing rise to the deferred tax. Deferred taxes are classified as noncurrent only under IFRS. To comply with IAS 12,“Income Taxes,” deferred taxes classified as current under U.S. GAAP would have to be reclassified as noncurrent on the IFRS opening balance sheet. As another example, in some cases, convertible debt that is classified as a liability under U.S. GAAP would have to be reclassified as equity under IFRS.
Step 5—Comply with All Disclosure and Presentation Requirements.
First time adopters of IFRS will have to be careful to comply with all disclosure and presentation requirements, especially those contained in IAS 1,“Presentation of Financial Statements.” Several public accounting firms provide IFRS disclosure checklists that can be used for this purpose.27
In preparing the opening balance sheet, IFRS 1provides several optional exemptions from complying with IFRS where retrospective application would be extremely difficult and the bene- fit to users is unlikely to exceed the cost. First-time adopters of IFRS have an option notto (a) ad- just the carrying amount of goodwill recognized under previous GAAP, (b) restate a business combination originally accounted for under the pooling method, (c) retrospectively apply IFRS 2 to stock options, or (d) recognize any cumulative translation adjustment for foreign subsidiaries.
Once the opening IFRS balance sheet has been prepared, the company continues to use IFRS for the next two years so that comparative information can be included in the first set of annual financial statements prepared under IFRS. IFRS 1also requires a company to provide the following reconciliations in its first set of IFRS financial statements:
1. Reconciliation of total equity measured under previous GAAP to total equity measured un- der IFRS at:
(a) the date of transition to IFRS (e.g., January 1, 2013).
(b) the end of the comparative period (e.g., December 31, 2013).
2. Reconciliation of net income measured under previous GAAP to net income measured under IFRS for the comparative period (e.g., for the year ended December 31, 2013).
IFRS 1also requires disclosures explaining the company’s adoption of IFRS, including notes to accompany the IFRS reconciliations.
Exhibit 11.7 presents Note 4 from the 2005 Annual Report of the Spanish airline company Iberia, Lớneas Aộreas de Espaủa, S.A. In accordance with European Union regulations, Iberia adopted IFRS in 2005, with January 1, 2004, as the transition date. Note 4 provides the rec- onciliation of equity and net income from Spanish GAAP to IFRS for the comparative period 2004, and explains the major adjustments made. The notes indicate that Iberia opted not to re- state goodwill and instead wrote existing goodwill off against equity on the opening balance sheet. In addition, the notes explain that the company retroactively applied IFRS to remeasure the amounts reported on the opening balance sheet for provisions and other contingent liabil- ities, and deferred income.
IFRS Accounting Policy Hierarchy
With respect to the issue of determining appropriate accounting policies to use in preparing IFRS financial statements, IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors,” establishes the following hierarchy that firms must follow:
1. Apply specifically relevant standards (IASs, IFRSs, or Interpretations) dealing with an ac- counting issue.
2. Refer to other IASB standards dealing with similar or related issues.
510 Chapter 11
27 For example, the KPMG International Financial Reporting Group (IFRG) prepared an IFRS Disclosure Checklist dated June 2009, which is available for download at www.kpmg.com/SiteCollectionDocuments/
IFRG_disclosure_checklists/Disclosure-Checklist-2009.pdf.
hoy36628_ch11_489-532.qxd 1/23/10 7:53 PM Page 510
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
Worldwide Accounting Diversity and International Standards 511
4. Reconciliation of the Beginning and Ending Balances for 2004 per Spanish GAAP and IFRS
Reconciliation of equity at 1 January 2004 and at 31 December 2004
(Thousands of Euros) Equity at Equity at 1 January 31 December
Concept 2004 2004
Balance per Spanish GAAP in force at that datea 1,432,760 1,645,765
Impacts due to transition to IFRSb
Derecognition of amortisation of goodwill (98,098) (91,485)
Reversal of provisions and other contingent liabilities 116,682 124,507
Derecognition of deferred income 19,090 1,981
Reversal of provision for major repairs 5,114 —
Conversion to IFRSs of financial statements of companies
accounted for using the equity method 4,618 2,262
Derecognition of negative consolidation differences 1,494 998
Derecognition of deferred charges and start-up expenses (1,905) (5,189)
Other — 6
Total impact on equity 46,995 33,080
Minority interests 9,204 5,324
Balance per IFRSs 1,488,959 1,684,169
aObtained from the consolidated financial statements at the date shown, as approved by the shareholders at the related Annual General Meetings.
bTaking into consideration tax effects.
Reconciliation of profit for 2004
(Thousands of Euros) Increase/
(Reduction)
Concept 2004 Profit
Balance per Spanish GAAP in force at that date* 218,402
Impacts due to transition to IFRS:
Amortisation of goodwill 6,613
Provisions and other contingent liabilities 7,825
Derecognition of deferred income (17,109)
Reversal of provision for major repairs (3,521)
Conversion to IFRSs of financial statements of companies accounted
for using the equity method (2,356)
Share options (4,969)
Derecognition of negative consolidation differences (496)
Derecognition of deferred charges and start-up expenses (3,284)
Other 6
Total impact on equity/profit (17,291)
Balance per IFRSs 201,111
*Obtained from the consolidated financial statements at the date shown, as approved by the shareholders at the related Annual General Meeting.
The main changes arose in the following items:
Goodwill
Goodwill was calculated as the positive difference between the amount paid by Iberia, Líneas Aộreas de Espaủa, S.A. for the acquisition of 67% of Aviaciún y Comercio, S.A. and the related underlying carrying amount at 31 December 1997. This goodwill was attributed basically to the value of the market presence, size and image of Aviación y Comercio, S.A. at that date. Since it was not possible to reasonably allocate these items to a single cash-generating unit on the basis of which to evaluate possible changes in value in the future, the Company opted to write this EXHIBIT 11.7
Iberia Group 2005 Annual Report
hoy36628_ch11_489-532.qxd 1/7/10 1:46 AM Page 511
to download more slides, ebooks, and solution manual visit http://downloadslide.blogspot.com
3. Refer to the definitions, recognition criteria, and measurement concepts in the IASB Framework.
4. Consider the most recent pronouncements of other standard-setting bodies that use a simi- lar conceptual framework, other accounting literature, and accepted industry practice to the extent that these do not conflict with sources in items 2 and 3 above.
Two aspects of this hierarchy are noteworthy. First, the Frameworkis specifically listed as part of the hierarchy and must be consulted before considering sources of guidance listed in item 4. Second, because the FASB and IASB conceptual frameworks are similar, step 4 pro- vides an opportunity for entities to adopt FASB standards in dealing with accounting issues where steps 1 through 3 are not helpful.
In establishing accounting policies to be followed under IFRS, the two extreme approaches that companies can follow are:
1. Minimize change. Under this approach a company would adopt accounting policies con- sistent with IFRS that are most consistent with current accounting policies.
2. Fresh start. Under this approach a company would ignore current accounting policies and adopt accounting policies consistent with the IFRS that best reflect economic reality.
The first approach is likely to be less costly than the second approach. However, many commentators encourage companies to take advantage of the opportunity to start from a clean slate and adopt a fresh start approach. For example, in an IFRS newsletter for U.S. companies, Deloitte states: “While IFRS conversion can involve significant amount of work, there may be a unique opportunity to make needed improvements in your financial reporting and account- ing operations, systems, tax accounting, and processes.”28