From the IFRS Institute – May 29, 2020
IFRS Standards do not require companies to prepare interim financial statements, but many companies do so, either by choice or to comply with laws, regulations or contractual requirements. Both IFRS Standards1 and US GAAP2 prescribe specific recognition and measurement requirements for determining interim period balances, the minimum content of interim financial statements and presentation of comparatives. There are a number of differences between the standards that could affect reporting for dual filers or companies considering a conversion. Here we summarize our selection of Top 10 GAAP differences related to interim reporting.
Interim financial reporting under IAS 34
A company is not required to prepare interim financial statements in order for its annual financial statements to comply with IFRS Standards. However, local laws and regulations may require a company to prepare interim financial statements and also specify the frequency – e.g. quarterly or half-yearly.
Companies that prepare interim financial statements may elect to present them in a ‘condensed’ format, in which case the simplified presentation and disclosure requirements of IAS 34 apply. Condensed interim financial statements include at a minimum:
|What to present||For which periods|
|Condensed statement of financial position||At the end of the current interim period and at the end of the immediately preceding financial year|
|Condensed statement of profit or loss and other comprehensive income (OCI)3||For the current interim period and cumulatively for the year to date, and for the comparable interim periods (current and cumulative) of the immediately preceding financial year|
|Condensed statement of changes in equity||Cumulatively for the current year to date and for the comparable interim period of the immediately preceding financial year|
|Condensed statement of cash flows|
|Select explanatory notes||IAS 34 provides some guidance, however judgment is required to determine if material|
Condensed interim financial statements are meant to be read in the context of the last annual financial statements and generally focus on changes since the last annual reporting date.
How is IAS 34 different from ASC 270?
Similar to its US GAAP equivalent (ASC 270), IAS 34 not only deals with presentation and disclosures but also addresses recognition and measurement in the interim period. The two standards are built on two very different premises. Other than income tax, under IFRS Standards items are recognized and measured as if the interim period were a discrete stand-alone period. Under US GAAP, each interim period is viewed as an integral part of the annual period to which it relates. This gives rise to multiple differences in practice.
Here we summarize our selection of top 10 differences.
Recognition and measurement
1. Costs are mostly recognized as incurred under IAS 34; US GAAP may allow smoothing
Under IFRS Standards, costs may be anticipated or deferred at the interim reporting date only if it would also be appropriate to anticipate or defer that type of cost at the annual reporting date. US GAAP permits certain costs to be allocated to interim periods based on estimates of time expired, benefit received or other activity associated with the interim period – e.g. recognizing a proportionate amount of year-end bonuses based on an estimate of the annual amount. Similarly, US GAAP may support accruing advertising expenses based on the annual budgeted spend or deferring advertising expenses beyond the interim period in which the expenditure is made. US GAAP also has specific interim recognition rules for property taxes that may not align with the accounting for levies under IFRS Standards.
2. Costs variances on inventory must be recognized under IAS 34; US GAAP allows deferral
Under IAS 34, losses resulting from cost variances on inventory must be recognized in the interim period in which they arise, even if the company expects to recover them later in the fiscal year. Under US GAAP, such losses may be deferred because the interim financial statements are considered an integral part of the annual period.
3. Interim remeasurements of retirement benefits
Companies preparing interim financial statements are sometimes able to obtain a reliable measurement of the net defined benefit liability (asset) using extrapolation – e.g. by adjusting the opening balance of the net defined benefit liability (asset) for items of income and expense, such as current service cost, net interest on the net defined benefit liability (asset), contributions to the plan and other changes.
Under IFRS Standards, net defined benefit liability (asset) remeasurements are required when there is a settlement, curtailment or a plan amendment. In addition, for interim reporting, significant market fluctuations are considered and that process may trigger the need for an updated actuarial valuation. The potential materiality of the remeasurements should be assessed to (a) determine whether an updated valuation is necessary, and (b) determine their effect on the interim financial statements. The recent market fluctuations caused by COVID-19 may trigger such remeasurements.
Under US GAAP, net defined benefit liability (asset) remeasurements are required when there is a settlement, curtailment or a plan amendment, like IFRS Standards. However, under US GAAP, significant market fluctuations do not trigger remeasurement considerations, unless a company has an established policy for such remeasurements, resulting in potential differences with IFRS Standards.
4. Accounting for changes in tax rates enacted in interim periods differs
Under IFRS Standards, companies account for changes in tax laws enacted or substantively enacted in an interim period either by recognizing the change in the interim period in which it occurs, or by spreading the effect of the change in the tax rate over the remainder of the annual reporting period through adjusting the estimated annual effective tax rate. US GAAP requires changes in tax rates enacted in an interim period to be recognized immediately in the interim period of enactment.
5. Determination of effective tax rate differs
Under IFRS Standards, companies with exposure to multiple tax jurisdictions and/or with different taxable income categories are required to apply separate effective tax rates for each jurisdiction and income category to the extent practicable. A weighted-average rate across jurisdictions is used if it is a reasonable approximation of the effect of using more specific rates. US GAAP uses one overall estimated annual effective tax rate (with some exceptions) to allocate the estimated annual income tax expense or benefit to interim periods.
6. Accounting for changes in deferred tax assets expected recovery differs
Under IFRS Standards, if management’s estimate of the recoverability of unused tax losses changes during an interim period, we believe it is acceptable for changes to be reflected in calculating the expected annual effective tax rate and apportioned between the interim periods.
Under US GAAP, a change in the estimate of the beginning-of-year deferred tax asset valuation allowance is recognized in the interim period in which the change occurs, when it results from a change in judgment about realizability in future years. Changes in the valuation allowance arising from changes in tax law also are recognized in the interim period in which the change occurs. Other changes in the valuation allowance are generally included in the estimated annual effective tax rate.
The above differences may be particularly impactful this year due to the CARES Act, which provides various forms of retrospective income tax relief and allows easier recovery of net operating tax losses. See our Hot Topic, Coronavirus – Accounting and reporting impacts of the CARES Act.
Other GAAP differences in the accounting for income taxes may arise because of the general differences between IFRS Standards and US GAAP on this topic. See our IFRS Perspectives article, Income taxes: Top 10 differences between IFRS and US GAAP.
Presentation and disclosure
7. Form and content of condensed interim financial statements differs
Under IFRS Standards, condensed interim financial statements include, at a minimum, each of the headings and subtotals that were included in the most recent annual financial statements; there is no such requirement under US GAAP4. In addition, IAS 34 requires presentation of a condensed statement of changes in equity. This statement can be omitted under US GAAP, although significant changes in equity are disclosed.
8. Revenue disclosures differ
Under IFRS Standards, a company is only required to disclose in its interim financial statements disaggregated revenue and explain the relationship to revenue for each reportable segment. Other annual disclosures for revenue from contracts with customers typically are not required.
In contrast under US GAAP, interim revenue disclosures are the same as annual disclosures for public companies. Private companies are permitted to provide limited revenue disclosures in interim financial statements under US GAAP.
9. Calculation and presentation of basic and diluted EPS differ
Public companies are required to present both basic and diluted EPS for net income in interim financial statements under both IFRS Standards and US GAAP. Although not explicitly required by IAS 34, companies will generally present EPS for continuing operations in addition to EPS for total operations, as is required under US GAAP.
When there are market fluctuations or one-time events in an interim period, companies may be inclined to provide interim EPS information based on alternative measures. Under IFRS Standards, EPS information based on alternative measures of earnings may be disclosed and explained in the notes to the financial statements. However, such EPS presentation is not permitted in the statement of profit or loss and OCI under IFRS Standards. Under US GAAP, entities may choose to present basic and diluted other per-share amounts in the notes to the financial statements, but cash flow per share is not permitted. Additionally, SEC regulations restrict the use of alternative measures of earnings that are considered non-GAAP measures in filings by SEC registrants.
Under both IFRS Standards and US GAAP, if a contract can be settled in either cash or shares, then it is a potential common share. Under IFRS Standards however, if settlement in cash or shares is at the company’s option, then the company presumes settlement in common shares. Under US GAAP, a company generally presumes settlement in shares, although an existing practice or stated policy of settling in cash may provide a reasonable basis to overcome this presumption. Under US GAAP the cash settlement assessment is performed at each reporting period, and therefore each interim period.
10. Presentation of segment information may differ
Companies reporting segment information in their annual financial statements continue to do so in interim financial statements under both IFRS Standards and US GAAP. IAS 34 requires companies to disclose revenue from external customers, inter-segment revenue, total assets and total liabilities for each reportable segment, if the information is regularly provided to the chief operating decision maker (CODM). US GAAP requires companies to disclose revenue from external customers, inter-segment revenue and total assets, even if such a measure is not regularly provided to the CODM. US GAAP does not require companies to disclose total liabilities.
Irrespective of GAAP, interim reporting often presents inherent challenges for companies, due to uneven revenues and costs in a financial year, and the higher degree of estimation involved. Additionally, dual reporters need to stay vigilant about the difference in approach to interim reporting between IFRS Standards and US GAAP. Additional recognition, measurement and presentation differences exist from those already tracked for annual financial statements. In certain areas, interim reporting under IFRS Standards may appear to have stricter requirements than under US GAAP but be better aligned to annual close procedures. Conversely, interim reporting under US GAAP may offer better alignment to budget and management reporting procedures. Companies may take advantage of accounting policy elections available under both frameworks to achieve better consistency and minimize such differences to the extent possible. Read more in our publication: IFRS Compared to US GAAP.