International Accounting Standards Similarities & Differences Comparison of IAS

International Accounting Standards

Similarities and Differences

IAS, US GAAP and UK GAAP

September 2001

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Accountants in England and Wales to carry on investment business. Designed by the studio 12614.

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Introduction

Introduction

This publication by PricewaterhouseCoopers is for those who wish to gain a broad understanding of the key similarities

and differences between three accounting frameworks: International Accounting Standards (IAS), US Generally Accepted

Accounting Principles (US GAAP) and UK Generally Accepted Accounting Practice (UK GAAP). The first section provides

a summary of the similarities and differences and then refers to individual sections where key divergences are highlighted

and the likely impact of recent proposals explained.

No summary publication can, of course, do justice to the many differences of detail which exist between IAS, US GAAP

and UK GAAP. Even if the guidance is similar there can be differences in the detailed application, which could have a

material impact on the financial statements. In this publication we have, in particular, focused on the measurement

similarities and differences most commonly found in practice. When applying the individual accounting frameworks,

readers must consult all the relevant accounting standards and, where applicable, their national law. Listed companies

must also follow relevant securities regulations, for example the US Securities and Exchange Commission requirements

and local Stock Exchange listing rules.

This publication takes account of authoritative pronouncements issued under IAS, US GAAP and UK GAAP up to

1 September 2001.

The structure of this publication is as follows:

Page

Summary of similarities and differences 2-10

Accounting framework 11-12

Financial statements 13-19

Consolidated financial statements 20-26

Business combinations 27-33

Revenue recognition 34-36

Expense recognition 37-40

Assets 41-53

Liabilities 54-60

Equity 61

Derivatives and hedging 62-64

Other accounting and reporting issues 65

Earnings per share 65

Related party transactions 66

Segment reporting 67-68

Discontinuing/discontinued operations 69-70

Post balance sheet events 71

Interim financial reporting 72

Operating and financial review 73

Index 74

Glossary 75

2 PricewaterhouseCoopers

Summary of similarities and differences

SUBJECT IAS US GAAP UK GAAP PAGE

Accounting framework

Historical cost. Historical cost, but intangible No revaluations except some Similar to IAS, but derivatives 11

assets, property plant and securities and derivatives at are generally not recognised

equipment (PPE) and fair value. at fair value. Securities may

investment property may be be shown at fair value.

revalued. Derivatives, certain Investment property must be

agricultural assets and most revalued.

securities must be revalued.

True and fair view override. In very rare cases override the Similar to IAS. Similar to IAS. 12

standards where essential to

give “true and fair view”.

First-time adoption of Requires the preparation of No specific guidance, but Similar to US GAAP. 12

accounting frameworks. financial statements as if the particular standards specify

entity had always reported in treatment for first-time

accordance with IAS. adoption of those standards.

Financial statements

Reporting currency. Requires the measurement of Uses a functional currency. In practice it is rare for entities 13

profit using the measurement Does not specify the concept not to use sterling.

currency, however entities of a presentation currency.

may present financial

statements in a different

currency.

Components of financial Two years’ balance sheets, Similar to IAS, except three Similar to IAS. 14

statements. income statements, recognised years required by SEC for

gains and losses, cash flow all statements except the

statements, changes in equity balance sheet.

accounting policies and

notes.

Balance sheet format. Does not prescribe a particular Similar to IAS, items presented Company law specifies various 15

format, however certain items on the face of the balance formats. Items presented are

must be presented on the face sheet are generally presented similar to IAS, except

of the balance sheet. in decreasing order of liquidity. shareholders’ funds are

required to be analysed into

equity and non-equity

elements.

Income statement format. Does not prescribe a standard Present as either a single step Company law specifies four 16

format although expenditure or multiple step format. alternative formats.

must be presented in one of Expenditure must be presented

two formats (function or by function.

nature). Certain items must

be presented on the face of

the income statement.

Exceptional items. Does not use the term, but Similar to IAS, but disclose on Disclose by way of note, or 16

requires separate disclosure of the face of the income where necessary to give a true

items that are of such size, statement. and fair view, on the face of

incidence or nature that the income statement. Classify

require separate disclosure to with related line item.

explain the performance of

the entity.

Disclose on the face of the

income statement or in

the notes.

Extraordinary items. Are very rare, limited to Similar to IAS. Gain or loss Extraordinary items are 16

events outside control of the from extinguishing debt must non-existent.

entity. be classified as extraordinary.

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Summary of similarities and differences

SUBJECT IAS US GAAP UK GAAP PAGE

Financial statements (continued)

Statement of recognised gains Give statement of recognised Disclose total comprehensive Give primary statement of 17

and losses/comprehensive gains and losses as either income, either combined with total recognised gains and

income. separate primary statement income statement, or choose losses (STRGL).

or highlighted in primary one of the two alternatives

statement of changes in as for IAS. Current proposal for a single

shareholders’ equity. performance statement.

Cash flow statements Standard headings, but limited Similar headings to IAS, but More standard headings then 18

– format and method. flexibility of contents. Use more specific guidance given IAS. Use direct or indirect

direct or indirect method. for items included in each method.

category. Use direct or

indirect method.

Cash flow statements Cash includes overdrafts and Cash excludes overdrafts, but Cash includes overdrafts but 18

– definition of cash and cash cash equivalents with includes cash equivalents with excludes cash equivalents.

equivalents. short-term maturities (less than short-term maturities.

3 months).

Cash flow statements No exemptions. Limited exemptions for certain Limited exemptions for certain 18

– exemptions. investment entities. subsidiaries and certain

mutual funds.

Changes in accounting Either restate comparatives Generally include effect in Restate comparatives and 19

policies. and adjust prior year opening current year income prior year opening retained

retained earnings, or include statement. Disclose pro-forma earnings.

effect in current year income comparatives. Retrospective

statement and provide pro- adjustments for specific items.

forma comparatives in

the notes.

Correction of fundamental Either restate comparatives or Restate comparatives. Similar to US GAAP. 19

errors. include effect in current year

income statement with pro￾forma comparatives in the

notes.

Changes in accounting Reported in income statement Similar to IAS. Similar to IAS. 19

estimates. in the current period.

Consolidated financial statements

Definition of subsidiary. Based on voting control or Controlling interest through Similar to IAS. 20

power to exercise dominant majority ownership of voting

influence. shares or by contract. Recent

proposals similar to IAS.

Special purposes entities. Consolidate where the Consolidate based on risks Requires the consolidation of 20

substance of the relationship and rewards. Specific “quasi subsidiaries”.

indicates control. guidance for consolidation of

lease arrangements involving

SPEs. Specific criteria have

to be met for transfers of

financial assets.

Subsidiaries excluded from Only if severe long-term Similar to IAS. Similar to IAS. 20

consolidation. restrictions on parent’s rights,

or subsidiary acquired and

held for re-sale in the near

future. Dissimilar activities

are not a justification.

Definition of associate. Based on significant influence: Similar to IAS. Requires evidence of exercise 22

presumed if 20% interest or of significant influence.

participation in entity’s affairs.

Presentation of associate Use equity method. Show Use equity method. Show Use expanded equity method. 22

results. share of profits and losses. share of post-tax result. Share of operating profit,

exceptional items and tax

shown separately.

4 PricewaterhouseCoopers

Summary of similarities and differences

SUBJECT IAS US GAAP UK GAAP PAGE

Consolidated financial statements (continued)

Disclosures about significant Not required. Give detailed information on Similar to US GAAP. 22

associates. significant associates’ assets,

liabilities and results.

Presentation of joint ventures. Both proportional Predominantly use equity Use gross equity method. 23

consolidation and equity method. Proportional consolidation

method permitted. not permitted.

Foreign currency translation – Translate transactions at rate Similar to IAS. Similar to IAS. 25

individual companies. on date of transaction;

monetary assets/liabilities at

balance sheet rate; non￾monetary items at the

historical rate.

Foreign entities within Use closing rate for balance Similar to IAS. Similar to IAS, but can use 25

consolidated financial sheets, average rate for closing rate for income

statements. income statements. Take statements. Recognise

exchange differences to equity. exchange differences in the

Include in gain or loss on STRGL.

disposal of a subsidiary.

Hyperinflation – foreign entity. Adjust local statements of Remeasure local currency Either adopt IAS or US GAAP 26

foreign entity to current price statements using the reporting method.

levels prior to translation. currency as the functional

currency.

Business combinations

Types. An acquisition is the most All business combinations Similar to IAS. 27

common. Uniting of interests/ are acquisitions.

pooling severely restricted.

Purchase method – fair values Fair value the assets and Similar to IAS, but specific Similar to IAS. 28

on acquisition. liabilities of acquired entity. rules for acquired in-process

research and development

(generally expensed).

Some plant closure and Similar to IAS, but less Very few acquisition

restructuring liabilities relating stringent recognition criteria provisions allowed.

solely to the acquired entity regards timing of

may be provided in fair value implementation of the plan.

exercise, if specific criteria

about restructuring plans

are met.

Purchase method – subsequent Fair values can be corrected Similar to IAS, in that there Similar to IAS. 30

adjustments to fair values. against goodwill up to the end is an allocated period of

of the year after acquisition, up to one year following

if additional evidence of the date of the acquisition.

values becomes available. Adjustments made during

Record subsequent the allocation period relating

adjustments in income to data for which management

statement. was waiting to complete the

allocation are recorded

against goodwill.

Reversals of acquisition Similar to IAS. Very few acquisition

provisions always adjust provisions allowed.

goodwill.

Purchase method – contingent Estimated at acquisition then Not recognised until the Similar to IAS. 27

consideration. subsequently corrected against contingency is resolved or

goodwill. the amount is determinable.

Purchase method – minority State at share of fair value of Usually state at share of State at share of fair value 28

interests at acquisition. net assets or at share of pre-acquisition carrying of net assets.

pre-acquisition carrying value value of net assets.

of net assets.

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Summary of similarities and differences

SUBJECT IAS US GAAP UK GAAP PAGE

Business combinations (continued)

Purchase method – disclosure. Disclosures include names Similar to IAS, plus additional Similar to IAS, but must also 30

and descriptions of combining disclosures regarding the present table showing book

entities, method of accounting reasons for the acquisition, values, fair value adjustments

for acquisition, date of and details of allocations. and fair values of acquired

acquisition, summary of fair Public companies must also assets and liabilities.

values of assets and liabilities present pro-forma income

acquired and impact on statement information as if

results and financial position acquisition occurred at start of

of acquirer. the comparative period.

Purchase method – goodwill. Capitalise and amortise over Capitalise but do amortise. Similar to IAS, although 29

useful life, normally not longer Goodwill should be tested indefinite life may be used in

than 20 years. for impairment at least certain circumstances.

annually at the reporting

unit level.

Purchase method – negative If relates to expected future Reduce proportionately the Recognise as negative asset 29

goodwill. losses/costs, recognise in the fair values assigned to and recognise in the income

income statement when these non-current assets (with statement to match

occur. Otherwise record as certain exceptions). Any depreciation of non-monetary

negative asset and recognise excess is recognised in the assets; any excess over the fair

over useful lives of identifiable, income statement immediately value of such assets is

non-monetary assets. Any as an extraordinary gain. recognised in the income

excess over the fair value of statement over period likely

such assets is recognised in to benefit.

the income statement

immediately.

Uniting of interests method. Severely restricted to “true Prohibited. Restrictions similar, but not 32

mergers of equals”. quite as tough as IAS. Criteria

Requirements focus on lack include size of entities and

of identification of an acquirer. low-level limits on non-share

consideration.

Revenue recognition

Revenue recognition. Based on several criteria, Four key criteria. In principal No specific standard for 34

which require the recognition similar to IAS. Detailed revenue, but practice is

of revenue when risks and guidance for specific similar to IAS.

rewards have been transferred transactions.

and the revenue can be

measured reliably.

Construction contracts. Accounted for using the Similar to IAS, completed Similar to IAS. 36

percentage of completion contract method permitted.

method. Completed contract

method prohibited.

Expense recognition

Interest expense. Interest expense recognised Similar to IAS, effective yield Similar to IAS. 37

on an accrual basis. Effective known as interest method.

yield method used to amortise

non-cash finance charges.

Employee benefits – pension Must use projected unit credit Similar to IAS, although New standard is similar to IAS 37

costs (defined benefit plans). method to determine benefit several minor differences. with some differences. The

obligation. surplus or deficit of the

defined benefit obligation

over plan assets are recognised

immediately in the STRGL.