Introduction to Financial Statements Prepared with IFRS 1

Vocabulary US GAAP TerminologyIFRS Terminology InventoryStocks Common stock or paid-in capital Share capital-ordinary Additional paid in capitalShare issue premium Minority interestOutside interest Accounts receivableDebtors Accounts payableCreditors Operating profitTrading profit Retained earningsRevenue Reserves 2

Conceptual Framework Both FASBs and IFRSs are based on a theoretical frameworks setting forth: – Assumptions (e.g., materiality, going concern) – Qualitative characteristics (e.g., relevance, reliability) – Elements of financial statements (e.g., assets, liabilities) – These conceptual frameworks are intended to guide standard setters in the formulation of standards and preparers if no specific standards exist. There are some big differences in that while both call for transactions to be recorded at historic cost IFRS allow PP&E and some other long-lived assets be revalued to FV. 3

Fairness Exceptions IFRS calls for management to use a different application if use of IFRS would be so misleading that it would conflict with the objectives of financial statements set out in the IASB Framework. Similar to Rule 203 under US Auditing Standards. – However, if “the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the financial statements or data would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement.” 4

Presentation of Financial Statements IAS1 General purpose financial statements used by investors and others in making economic decisions. – Statement of financial position, income statement, cash flow statement, equity statement, and notes to financials. Most financials have an additional column showing the note number related to the item. IAS1 requires comparative statements (current and prior year) whereas US GAAP does not. (SEC however requires three years except for balance sheet.) Statements prepared using IFRS are presented using multiple formats. 5

Balance Sheet Under GAAP the balance sheet is in the format of A=L+OE With IFRS A-L=OE is acceptable as is Fixed assets + Current assets – S-T Liabilities = L-T Liabilities + Equity Other formats are also used as well 6

Income Statement GAAP gains and losses are increases or decrease in equity from peripheral or incidental transactions. IFRS does not recognize gains and losses as separate elements of financial statements. However, in practice most companies show them consistent with GAAP. Extraordinary (unusual and infrequent in US GAAP) treatment is prohibited under IFRS. Some differences for discontinued operations as well. 7

Discontinued Operations US GAAP Components held for sale or to be disposed of, provided no continuing significant cash flows or involvement with discontinued component IFRS Components held for sale or to be disposed of that are either separate major line of business or geographical area or subsidiary acquired exclusively with intention to resell 8

Performance Measures US GAAP – SEC regulations define key measures and require presentation of certain headings and subtotals in the income statement and – SEC regulations prohibit disclosure of non-GAAP measures in financial statements and accompanying notes. 9

Performance Measures continued IFRS Companies are not required to disclose gross profit or even provide CGS as a line item on the face of the financials. Does not define concepts such as “operating profit” therefore allowing diversity in practice. No prohibitions on presentation of additional metrics that may prove misleading. 10

Classification of Expenses US GAAP SEC requires expenses based on function (e.g. cost of sales, administrative). IFRS Presentation of expenses based on function or nature of the item (e.g. salaries, depreciation). If function is utilized certain disclosures regarding nature of expenses must be included in notes. 11

Statement of Changes in Equity ISA1 requires 1.Profit or loss for period 2.Items of income or expense that are required to be recognized directly in equity 3.Total income and expense for the period (sum of #1 and 2) showing separately the total amount attributable to equity holders of the parent and to minority interest. 4.For each component of equity, the cumulative effect of change in accounting policy and error correction. 12

Revisions in IAS1 Objective of the revision was to present all owner changes in the statement of changes in equity separately from non-owner changes in equity. – Dated Sept Components of comprehensive income are no longer permitted to be presented in the statement of changes in equity. 13

Statement of Cash Flow In U.S. GAAP interest paid and received and dividends received are considered Operating Activities With IFRS this is still the common treatment however: – Interest and dividends received can be classified as Investing Activities (returns on investments) – Interest paid can be classified as Financing Activities (cost of obtaining financial resources) 14

Statement of Cash Flow continued With U.S. GAAP non-cash financing and investing activities are usually presented at the bottom of the SCF. IFRS excludes this presentation on the cash flow statement. Disclosure will be elsewhere in the financial statements. IFRS requires cash flows from Discontinued Operations to be disclosed separately as Operating, Investing, or Financing activities. 15

Other Financial Statement Differences Using IFRS there is no requirement that the currency used in the financials be the predominate operating currency of the entity. – Actually any currency can be utilized. 16