Implementing IFRS Extract from: IFRS compared with US GAAP and French GAAP Assurance Services The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 2003 KPMG International, a Swiss nonoperating association. All rights reserved. KPMG International is a nonoperating Swiss verein which provides no services to clients. The services described herein are provided by member firms. KPMG International and its legally distinct member firms are not, and nothing contained herein shall be construed to place the parties in the relationship of, parent, subsidiaries, agents, partners or joint venturers. No member firm is authorised to obligate International or the other member firms.
Copies of the publication IFRS (International Financial Reporting Standards) compared with US GAAP and French GAAP can be purchased for euro 50 each. Please contact any KPMG office, or contact either KPMG’s Professional Practice Group of KPMG S. A. at +33 (0)1 55 68 74 16 or KPMG’s IFRS Conversions of KPMG S. A. at +33 (0)1 55 68 74 15. www. kpmg. com KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss nonoperating association. About this document
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Content This document is an extract from KPMG’s February 2003 publication IFRS compared with US GAAP and French GAAP, focusing on recognition, measurement and presentation, rather than disclosure. This document focuses on the preparation of consolidated financial statements by listed enterprises on a going concern basis. Requirements that are specific to stand-alone financial statements are not discussed; neither are specialised industry accounting practices.
For each major financial statement line item or accounting area, a brief summary of the key points under IFRS for identifying GAAP differences is provided on the left; on the right is a commentary identifying where French GAAP has significant differences from IFRS. However, this document does not describe fully the significant differences; for more information you should refer to the full publication. The requirements of IFRS are summarised assuming that the enterprise has adopted IFRS already.
The special transitional rules that will apply in the period that an enterprise changes to IFRS are not discussed. The IASB currently is debating these transitional rules and a new standard is expected during 2003. Cut-off date Final pronouncements issued to 31 December 2001 are reflected in this document even if those pronouncements are not effective immediately. Both IFRS and French GAAP are in a process of continual development and change. As a result, a number of the differences highlighted in this document may disappear, and new differences may arise.
Future developments In May and June 2002 the IASB published a series of exposure drafts as part of its “Improvements Project”; comments on the exposure drafts were due in September and October 20 02, and the final standards are expected to be published during 2003. As a result, a number of the significant differences highlighted in this document may disappear, and further differences may arise. Where the document summarises a requirement that is expected to be amended as part of the Improvements Project, it is highlighted with the symbol * to indicate a possible change.
In such cases please take particular care to watch for future developments. Regarding French GAAP Regulation CRC 02-10, which brings French GAAP closer to IFRS in respect of , the depreciation of assets was issued in December 2002 and becomes operative for annual financial statements covering periods beginning on or after 1 January 2005. Earlier application is encouraged for annual financial statements covering periods beginning on or after 1 January 2002. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Contents
Regulatory background Generally accepted accounting practice Legal and listing requirements General issues Form and elements of financial statements Statement of recognised gains and losses Statement of cash flows Basis of accounting Consolidation Business combinations Foreign currency translation Prior period adjustments and other accounting changes Events after the balance sheet date Specific balance sheet items General Property, plant and equipment Intangible assets Investment property Investments in associates and joint ventures Financial instruments, including hedging Inventories Biological assets Impairment Equity Provisions Deferred tax Contingent assets and liabilities Specific income statement items General Revenue Government grants Employee benefits Share-based payments Interest expense Income tax Extraordinary and exceptional items 5 5 5 5 6 6 6 6 7 8 8 8 8 8 9 9 9 10 10 11 11 11 11 12 12 12 12 12 13 13 13 13 13 13 14 © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Contents (continued) Special topics Leases Segment reporting Earnings per share Discontinuing operations Related party disclosures Financial instruments disclosure Non-monetary transactions Accompanying financial and other information Interim financial reporting 14 14 14 14 14 15 15 15 15 15 © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Regulatory background Generally accepted accounting practice IFRS is the term used to indicate the whole body of IASB authoritative literature.
At present the sources of such accounting requirements are International Accounting Standards (IAS) and interpretations thereof (such pronouncements are known as “SICs”). In addition, an Implementation Guidance Committee (IGC) provided interpretive guidance in applying IAS 39. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Generally accepted accounting practice The term “generally accepted accounting principles” has no formal meaning in France since laws, decrees and ministerial orders generally govern accounting. Legal sources are found in the Commercial Code, which constitutes the framework of general accounting rules and is applicable to traders, legal entities and individuals.
In France all businesses are required, for individual financial statements, to use the same chart of general ledger accounts, to follow the same accounting rules (which are influenced heavily by taxation laws) and also to use standardised formats for the balance sheet, profit and loss statement and the notes to the financial statements. The requirements are laid down in the General Accounting Plan, which was rewritten in CRC (Comite de la Reglementation Comptable) regulation 99-03. The CRC is a government organisation whose members are civil servants who serve on a part-time basis. Legal and listing requirements A true and fair override applies when the application of IFRS would be misleading. Legal and listing requirements There are no significant differences from IFRS. General issues Form and elements of financial statements
The following must be presented: balance sheet; s income statement; s a statement of recognised gains and losses or a statement of changes in equity, which incorporates recognised gains and losses; s statement of cash flows; and s notes to the financial statements, including accounting policies. s Form and elements of financial statements No statement of recognised gains and losses is required. The statements of changes in equity and cash flows need not be presented as primary statements. 5 IFRS FR Statement of recognised gains and losses A statement summarising recognised gains and losses must be either presented as a separate statement or combined with the statement of changes in equity. Statement of recognised gains and losses No statement of recognised gains and losses is required. Statement of cash flows
The statement of cash flows is reconciled to cash and cash equivalents. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Statement of cash flows The cash flow statement may be reconciled to net indebtedness rather than to cash. Dividends paid must be classified as financing. Dividends paid may be classified as operating or as financing. Basis of accounting The IASB uses a conceptual framework as an aid to drafting IFRS. Many items in the financial statements are revalued, on either an optional or compulsory basis. If an enterprise’s measurement currency is hyperinflationary, it must make current purchasing power adjustments. Basis of accounting
There is no documented conceptual framework in France. The financial statements generally are prepared on a historical cost basis. Financial statements of foreign entities in hyperinflationary economies may be measured as if their functional (measurement) currency were their parent’s reporting (presentation) currency. Consolidation Consolidation is based on the power to control, including a consideration of potential voting rights. A parent need not hold any shares in a subsidiary. A subsidiary is not consolidated if it is acquired and held exclusively for disposal in the near future. * Subsidiaries excluded from consolidation are treated as financial assets.
The gap between the period-ends of a parent and a subsidiary should be no more than three months either way. Consolidation Control is based on de facto control, and there is no guidance on potential voting rights. At least one share in a controlled entity must be held in order to consolidate it. A subsidiary held exclusively for subsequent disposal is not consolidated. Subsidiaries excluded from consolidation are treated as long-term investments. A subsidiary’s financial statements may be used for consolidation only if its year-end is not more than three months before that of the parent. 6 IFRS FR Business combinations Uniting of interests accounting is allowed in limited circumstances.
Business combinations Certain business combinations are accounted for in a way similar to an IFRS “uniting of interests” even if an acquirer can be identified. In determining the cost of acquisition, the fair value of equity securities issued is determined at a date set by the market regulator. Capitalised acquisition costs are net of the effect of income tax. Payments made by the acquirer under a guarantee of the value of the consideration increase the cost of acquisition. Identifiable assets and liabilities are valued at “entry value”, which in some cases is different from fair value under IFRS. More intangibles are recognised than under IFRS.
Acquired in-process research must be, and acquired in-process development may be, capitalised and written off in the income statement immediately after the acquisition. The rules for recognising restructuring provisions are less strict than under IFRS, and include certain restructuring of the acquirer. In determining the cost of acquisition, the fair value of equity securities issued by the acquirer is determined at the date control is obtained. Capitalised acquisition costs exclude the effect of income tax. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Payments made by the acquirer under a guarantee of the value of the consideration do not increase the cost of acquisition.
All acquired identifiable intangibles and goodwill are capitalised at fair value and amortised. Acquired in-process research is not capitalised. Acquired in-process development is capitalised if certain criteria are met. Costs of restructuring the acquiree are capitalised if the main features of the plan are announced by the date of acquisition and a detailed plan is finalised by the earlier of three months or when the financial statements are authorised. Negative goodwill is recognised in the income statement, first to match any identified expected costs, and then over the lives of the acquired depreciable assets. In successive share purchases, assets and liabilities acquired in previous transactions need not be revalued.
In a uniting of interests comparatives are restated. There is no guidance on accounting for transactions between enterprises under common control, and practice varies. Negative goodwill is offset first against any positive valuation differences; any remaining amount is capitalised and recognised in income over a period of time. In successive share purchases up to the point of obtaining control, assets and liabilities acquired in previous transactions must be revalued. There is no requirement to restate comparatives in a uniting of interests. Transactions between enterprises under common control are accounted for in the same way as other business combinations. IFRS FR Foreign currency translation An enterprise may select a presentation currency different from its measurement currency. All gains on foreign currency transactions are recognised immediately. Foreign currency translation Financial statements must be presented in the enterprise’s functional (measurement) currency. Unrealised gains on foreign currency transactions may be deferred. Prior period adjustments and other accounting changes © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Prior period adjustments and other accounting changes All errors are corrected in the current period’s financial statements.
Accounting policy changes are effected by restating opening retained earnings of the current period; comparatives are not restated. Errors that are not “fundamental” are adjusted in the current year. * Most accounting policy changes and all corrections of fundamental errors may be effected by either restating comparatives or making an adjustment in the current year. * Events after the balance sheet date The financial statements are adjusted if a post balance sheet event indicates that the going concern basis is not appropriate. Events after the balance sheet date The financial statements are not adjusted for a post balance sheet event that indicates that the going concern principle is no longer appropriate. Specific balance sheet items General
No specific balance sheet format is required. A refinancing after the balance sheet date may affect the classification of a liability at the balance sheet date. Financial assets and liabilities are offset if certain criteria are met. General A standard chart of accounts generally is used. The short-term portion of long-term debt is classified as current even if it will be refinanced on a long-term basis. Financial assets and liabilities cannot be offset. 8 IFRS FR Property, plant and equipment When payment is deferred beyond normal credit terms, cost is the cash price equivalent. Property, plant and equipment may be revalued to fair value. Revaluations must be kept up to date.
Component accounting is used for the separate components of an asset. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Property, plant and equipment Cost always is the contract price. Revaluations do not have to be updated. Component accounting is not required. Intangible assets Many internally developed intangibles, including development costs, must be capitalised once certain criteria are met. All advertising must be expensed as incurred. Intangible assets Development costs normally are expensed as incurred. Expenses may be capitalised more frequently than under IFRS, e. g. start-up and business expansion costs, and advertising.
There is no presumed limit of 20 years in amortising intangibles, although a maximum life of five years applies in some cases. Some intangibles are not amortised. There is no requirement for the annual impairment testing of any intangibles. All capitalised intangibles are amortised. Intangibles amortised over more than 20 years, and capitalised development costs prior to being available for use, must be tested for impairment annually. Revaluation of some intangibles is permitted in limited circumstances. Intangibles cannot be revalued. Investment property Investment property may be stated at fair value. Changes in fair value are recognised in the income statement. Investment property Investment property is accounted for as property, plant and equipment.
Investment property may be revalued only when all long-term financial instruments and property plant and equipment are revalued. Any revaluation surplus is credited directly to equity. 9 IFRS FR Investments in associates and joint ventures An associate relationship is based on the power to exercise significant influence. In assessing significant influence, potential voting rights are taken into account. An investee is treated as a financial asset when acquired and held exclusively for disposal in the near future. * Proportionate consolidation is the benchmark treatment for joint ventures. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Investments in associates and joint ventures
Significant influence is based on de facto significant influence. There is no guidance on potential voting rights. An investee is treated as a long-term investment when held exclusively for subsequent disposal. Jointly controlled entities must be proportionately consolidated. Attributable goodwill is accounted for separately from the investment in an associate. Attributable goodwill is included in the investment in an associate. Financial instruments, including hedging Transaction costs are included in the cost of a financial instrument. There are specific categories into which all financial instruments must be classified. Financial instruments, including hedging
Transaction costs are recognised in the income statement as incurred. Financial instruments are not classified into the same categories as under IFRS, and are not fair valued except in very limited circumstances. Generally only “permanent” impairments are recognised. An impairment is recognised if a financial asset’s recoverable amount is less than its carrying amount. The derecognition of transferred assets uses a financial components approach combined with a risks and rewards approach. * Any liability discount or premium is amortised using the effective interest method. Financial instruments must be evaluated to determine whether there are any liability characteristics.
Such characteristics will lead to classification of these instruments as debt. Split accounting of compound instruments is required where there are both liability and equity characteristics. In-substance debt defeasance does not result in liability derecognition. A financial asset is derecognised only when legal title is transferred. Any liability discount or premium may be amortised on a straight-line basis. An issuer’s financial instruments may be classified on the basis of their legal form. Compound instruments are not split-accounted. A liability may be derecognised on the basis of in-substance debt defeasance. 10 IFRS FR Financial instruments, including hedging (continued) Derivatives are stated at fair value.
Financial instruments, including hedging (continued) Derivatives usually are not shown in the balance sheet other than for the premiums paid and received; only unrealised losses on derivatives are accounted for in the income statement in the absence of hedge accounting. Hedge accounting is permitted more frequently than under IFRS. There are strict criteria governing the use of hedge accounting. Inventories © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Inventories Agricultural produce may be stated at cost at the date of harvest. The cost of agricultural produce is its fair value at the date of harvest, less point-ofsale costs. Biological assets Biological assets are stated at fair value for periods beginning on or after 1 January 2003. Biological assets Biological assets may be stated at cost. Impairment
An impairment exists if an asset’s (cash generating unit’s) carrying amount exceeds the greater of its net selling price and value in use (net present value of future cash flows); this excess is the amount of the impairment loss. Impairment An impairment loss is recognised in the form of additional depreciation when an asset’s net realisable value is lower than its net book value. Equity Some shares must be classified as liabilities. Equity Certain instruments must be presented between liabilities and shareholders’ equity; all other shares usually are classified as equity without regard to their substance. Treasury shares held for trading purposes are recorded as an asset. Dividends usually are recognised as distributions of equity.
Treasury shares held for trading purposes are deducted from equity. Dividends on shares classified as liabilities are recognised as interest in the income statement on an accrual basis. 11 IFRS FR Provisions All provisions must be discounted if the effect thereof is material. Repairs and maintenance provisions are prohibited. Provisions There is no requirement to discount provisions. Provisions for major repairs and maintenance are recognised. Deferred tax Deferred tax generally is recognised for fair value adjustments in a business combination. Deferred tax in respect of temporary differences on associates and joint ventures is not recognised in some circumstances.
Deferred tax is provided in respect of the remeasurement of a hyperinflationary subsidiary’s financial statements. Deferred tax is not discounted. Deferred tax Deferred tax is not recognised on the fair valuation of unamortised intangible assets acquired in a business combination if they cannot be sold separately. Deferred tax in respect of temporary differences on associates and joint ventures is recognised less frequently than IFRS. Deferred tax is not recognised for temporary differences arising from hyperinflation adjustments. Deferred tax balances must be discounted if the timing of the reversal of the temporary differences can be estimated reliably. 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Contingent assets and liabilities Contingent assets and liabilities are disclosed in the notes. Contingent assets and liabilities There are no significant differences from IFRS. Specific income statement items General Expenses may be analysed by either their type or function. General There are no significant differences from IFRS. 12 IFRS FR Revenue Emphasis is placed on the substance of a contract in deciding when to recognise revenue. The percentage-of-completion method is required for long-term contracts. Revenue More emphasis is placed on the legal form of a contract in deciding when to recognise revenue.
The percentage-of-completion method is optional for long-term contracts. The completed contract method is allowed also. There is little specific guidance on revenue recognition. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Government grants Government grants may not be recognised directly in equity. Government grants Investment subsidies are shown as part of shareholders’ equity. Employee benefits A liability in respect of post-employment employee benefits must be recognised. Employee benefits It is not mandatory to recognise a liability for post-employment employee benefits except in a business combination. Share-based payments
There is no guidance on share-based payments, but extensive disclosure is required. Share-based payments There are no disclosure requirements for share-based payments. Interest expense Imputed interest is amortised using the effective interest method. Interest expense Imputed interest may be amortised on a straight-line basis. Income tax Current tax is recognised directly in equity when it relates to an item recognised directly in equity. Income tax Current tax always is recognised in the income statement. 13 IFRS FR Extraordinary and exceptional items Extraordinary items are rare. * Exceptional item is not a defined term under IFRS. Extraordinary and exceptional items Extraordinary items do not exist under French GAAP.
Exceptional items should be disclosed separately from ordinary activities on the face of the income statement. Special topics Leases Finance leases must be capitalised. A lease is classified as finance or operating based on its substance. If a sale and leaseback results in an operating lease that clearly is established at fair value, any profit or loss is recognised immediately. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Leases The capitalisation of finance leases is preferred, but not required. There is no definition of a finance lease under French GAAP. The treatment of sale and leaseback transactions may differ from IFRS. Segment reporting
Segment reporting cannot be omitted on the basis that it may be seriously prejudicial. Segment reporting Segment reporting can be omitted if the directors consider it seriously prejudicial to the enterprise. Segment disclosures are much more limited than under IFRS. Earnings per share The method of calculating EPS is specified. Earnings per share The method of calculating EPS is not specified. Discontinuing operations There are specific disclosure requirements for discontinuing operations. Discontinuing operations There are no rules for discontinuing operations. 14 IFRS FR Related party disclosures Related party transactions need not be disclosed by some enterprises.
Related party disclosures The definition of related parties generally is narrower than under IFRS. Extensive disclosures are required in respect of transactions with directors. Financial instruments disclosure The level of detailed disclosures may vary depending on the quantitative information necessary to understand the financial risks of those instruments. Financial instruments disclosure Financial instrument disclosures are more limited than under IFRS. © 2003 KPMG International, a Swiss nonoperating association. All rights reserved. Non-monetary transactions Generally, exchanges of similar assets do not result in revenue recognition. Non-monetary transactions
Exchanges of non-monetary assets of a similar nature and value are accounted for as a disposal and a separate acquisition. Accompanying financial and other information A financial review by management is encouraged. Accompanying financial and other information A directors’ report is compulsory, which includes a summary of the enterprise’s results for the five preceding years, and the views and comments of the workers’ council. Enterprises of a certain size must prepare a statement of realisable assets and liabilities (half-yearly); and a funds statement, forecast funds statement and forecast income statement (annually). Interim financial reporting
With the exception of the tax charge, generally items are recognised and measured as if the interim period were a discrete period. Interim financial reporting The recognition and measurement rules are the same as for annual financial statements, with no exceptions. 15 IFRS FR Look out for the following publications: IFRS compared with US GAAP and … … Austrian GAAP … Belgian GAAP … Danish GAAP … Dutch GAAP … Finnish GAAP … German GAAP … Greek GAAP … Italian GAAP … Luxembourg GAAP … Norwegian GAAP … Portuguese GAAP … Spanish GAAP … Swedish GAAP … Swiss GAAP … UK GAAP © 2003 KPMG International, a Swiss nonoperating association. All rights reserved.
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