Comparison between U.S. GAAP and International ... - Grant Thornton

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Comparison between U.S. GAAP and International Financial Reporting Standards 104 IFRS so that a single control model can be applied to all entities. The Board has completed its deliberations, other than the effective date of the final standard, and anticipates issuing a final standard in the first quarter of 2011. After considering input from constituents on the IASB’s proposed consolidation model, the FASB has decided not to proceed with an exposure draft that is consistent with the IASB’s published requirements. The FASB plans to issue an exposure draft that would amend the guidance for distinguishing whether a decision maker arrangement represents an agent or principal relationship. The IASB and the FASB are also working on a joint project to provide guidance for assessing whether an entity is an investment company and how to measure those investments. Control is defined as “the power to govern the financial and operating policies so as to obtain economic benefits from its activities” (IAS 27.4). It is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half the voting power of an entity unless, in exceptional circumstances, it can be demonstrated that such ownership does not constitute control. However, control can also exist where the parent owns half or less of the voting power when there is: • Power over more than half of the voting rights through an agreement with other investors • Power to govern the financial and operating policies under statute or an agreement • Power to appoint or remove the majority of board members or equivalent governing body • Power to cast the majority of votes at board meetings or equivalent governing body (IAS 27.13) The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing an entity's power to govern another entity. Management intent or financial ability to exercise or convert is not considered (IAS 27.14-15). U.S. GAAP U.S. GAAP focuses on a controlling financial interest as opposed to the concept of control under IFRS. The usual condition for a controlling financial interest is ownership of a majority voting interest – ownership by one entity, directly or indirectly, of more than fifty percent of the outstanding voting shares of another entity (voting interest model) (ASC 810-10-15-8 and 15-10). Unlike IFRS, potential voting rights are not considered. A majority ownership in some entities does not convey a controlling financial interest. For such entities, called variable interest entities (VIEs), the guidance in ASC 810-10, “Variable Interest Entities” subsections shall be applied to determine if a reporting entity’s variable interests give it a controlling financial interest in the VIE. A reporting entity that holds a direct or indirect (explicit or implicit) variable interest in a legal entity must determine whether the guidance in the “Variable Interest Entities” subsections of ASC 810-10 applies to that legal entity before considering other consolidation guidance. However, the recognition and measurement provisions in ASC 810-10 are indefinitely deferred for certain investment funds (ASC 810-10-65-2). Please refer to Section 8.3, “Special purpose entities/variable interest entities” for a discussion of special purpose entities and variable interest entities. IFRS address special purpose entities (SPEs) but not variable interest entities which is a broader concept than SPEs. Therefore, differences could occur. U.S. GAAP also provides that a general partner in a limited partnership is presumed to control the limited partnership regardless of the general partner’s ownership interest. That presumption can be overcome if the limited © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
Comparison between U.S. GAAP and International Financial Reporting Standards 105 IFRS U.S. GAAP partners have certain rights (ASC 810-20-25). Consolidation procedures The financial statements of the parent and its subsidiaries shall be combined by adding together like items of assets, liabilities, equity, income and expense using uniform accounting policies for similar transactions and other events in similar circumstances (IAS 27.18 and .24). The parent’s investment in each subsidiary and its portion of equity of each subsidiary shall be eliminated. Intragroup balances, transactions, income and expenses shall also be eliminated in full (IAS 27.18 and .20). Noncontrolling interests shall be presented in the consolidated statement of financial position within equity apart from the parent’s equity. Profit and loss and each component of other comprehensive income shall be attributed to the parent and the noncontrolling interests even if the noncontrolling interests have a deficit balance (IAS 27.27 and .28). See Section 8.2, “Noncontrolling interests.” Similar to IFRS, the financial statements of the parent and its subsidiaries shall be combined by adding together like items of assets, liabilities, equity, income and expense. Uniform accounting policies should generally be used for similar transactions and other events in similar circumstances. However, in certain limited situations specialized industry accounting principles that are appropriate at a subsidiary level should be retained in consolidation (ASC 810-10-25-15). Similar to IFRS, intercompany investments, balances, and transactions shall be eliminated (ASC 810-10-45-1). Similar to IFRS (ASC 810-10-45-15 through 45-21). See Section 8.2, “Noncontrolling interests.” Reporting date of subsidiaries Parent and subsidiary financial statements used for consolidation shall be as of the same reporting date. If the reporting period of the parent is different from a subsidiary, the subsidiary shall prepare additional financial statements as of the same date of the parent if practicable. If the financial statements of a subsidiary used to prepare consolidated financial statements are prepared as of a different date than the parent’s, adjustments shall be made for the effects of significant transactions or events that occur between the date of a subsidiary’s financial statements and the date of the parent’s financial statements. In any case, the difference between reporting dates shall not be more than three months (IAS 27.22-.23). A parent and a subsidiary may have different fiscal periods. As long as the difference is not more than about three months, it is acceptable to use the subsidiary’s financial statements for its fiscal year. However, unlike IFRS, adjustments shall not be made for the effects of significant transactions or events that occur between the date of a subsidiary’s financial statements used to prepare consolidated financial statements and the date of the parent’s financial statements. Instead, the effect of intervening events that materially affect the financial statements must be disclosed (ASC 810-10-45-12). Separate parent financial statements Separate financial statements are not required by IFRS but may be by local regulations or by choice (IAS 27.3). If a parent prepares separate financial statements, investments in subsidiaries that are not classified as held-for-sale in accordance with IFRS 5 shall be accounted for at cost or in accordance with IAS 39 If parent-company financial statements are needed in addition to consolidated financial statements, ASC 810- 10-45-11 states that consolidating statements in which one column is used for the parent and other columns for particular subsidiaries or groups of subsidiaries are an effective way of presenting the pertinent information. © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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Comparison between U.S. GAAP and International ... - Grant Thornton

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