IFRS Financial Statements

Besides the numerous measurement and disclosure differences that exist between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), there are also significant presentation differences.

When opening a set of IFRS financial statements for the first time, CPA Insider™ readers may not immediately notice that the IFRS primary statements contain much less information and have a multitude of notes, which are considered to be an integral part of the financial statements.

The presentation requirements for IFRS financial statements are contained in IAS 1 Financial Statement Presentation. This standard requires a complete set of financial statements to comprise of: two statements of financial position (previously titled the balance sheet), two statements of comprehensive income (previously the income statement and the statement of recognised income and expense), two statements of cash-flows, two years of changes in equity and accounting policies and notes. Three statements of financial position and related notes are only required where there is a retrospective application of an accounting standard or there is a retrospective restatement of items.

This contrasts with the requirements in the U.S. for three years of financial information required for U.S. Securities and Exchange Commission (SEC) registrants for all statements except the balance sheet. All other preparers need only present two years’ worth of information.

The Statement of Financial Position

IFRS does not prescribe a particular format for the statement of financial position. A current/noncurrent presentation of assets and liabilities is by far the most popular method of presentation used. However, a liquidity presentation of assets and liabilities may be used in cases where this provides more relevant and reliable information.

IAS 1 contains lists of the minimum line headings that are to be presented on the face of the relevant primary statement (see table).

A couple of areas to highlight are:

* Deferred tax — Under IFRS, deferred tax assets and liabilities are always classified as noncurrent. Whereas, under U.S. GAAP, classification of deferred tax balances as either current or noncurrent is based on the classification of the related nontax asset or liability for financial reporting.

* Equity — Under IFRS, capital instruments are classified, depending on the substance of the issuer’s contractual obligations, either as liability or equity. Mandatorily redeemable preference shares are classified as liabilities. IFRS does not use the ‘mezzanine equity’ classification that is used in U.S. GAAP for certain redeemable instruments.

The Statement of Comprehensive Income

The concept of total comprehensive income is one that is common between U.S. GAAP and IFRS, with both accounting regimes requiring like information to be presented as part of the primary statements. Under both IFRS and U.S. GAAP, total comprehensive income is required to be presented in the statement of comprehensive income, which may be either one statement or two. However, U.S. GAAP also permits a third option for the presentation of total comprehensive income in the statement of changes in equity, which is not permitted by IFRS. With regard to the format of the income statement, IFRS requires that expenditure is presented by either function or by nature. The choice of presentation should be based on which method provides information that is reliable and more relevant to industry practice and the nature of the company.

Under the nature of expense method, expenses are classified according to their nature (for example, depreciation, purchases of materials, transport costs, employee benefits and advertising costs) and are not reallocated among various functions within the entity.

The Statement of changes in Equity

Under IFRS, the statement of changes in equity shows the total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests and for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period. The reconciliation of changes is equity is required for the current and the prior period.

Under IFRS, there is no requirement to have a separate reserve for other comprehensive income. Items are generally either allocated to a separate named reserve, when they are non-distributable or subject to recycling or posted directly to retained earnings.

The Statement of Cash-flows

The statement of cash-flows under IFRS allocates cash movements into three categories: operating activities, investing activities and financing activities. The format under IFRS is generally similar to that under U.S. GAAP, although there is more specific guidance for allocation of items to categories under U.S. GAAP.

Both accounting regimes currently permit the use of the direct and indirect method.

Conclusion

U.S. preparers and users of accounts should not lose sight of the presentational differences that they may need to be careful of, when interpreting IFRS financial information. In addition while measurement differences will inevitably continue to grab the headlines, CPA firms should not underestimate the differences in presentation and disclosure, which is where a significant amount your firm’s time and costs may incur when drafting a set of IFRS-compliant financial statements for the first-time.

While current differences in presentation exist users and preparers also need to be aware that the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have commenced a joint project looking at financial statement presentation that aims to improve the usefulness of information provided. The release of an amendment to current reporting requirements is intended for the second half of 2010 with further amendments in the second half of 2011. Thus, considerable future changes to the presentation are likely to be on the way for GAAP and existing IFRS financial statements.