Implementing IAS

Extract from:

IAS compared with US GAAP and UK GAAP

Assurance Services

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 2003 KPMG International, a Swiss nonoperating association. All rights reserved. KPMG International is a nonoperating Swiss verein which provides no services to clients. The services described herein are provided by member firms. KPMG International and its legally distinct member firms are not, and nothing contained herein shall be construed to place the parties in the relationship of, parent, subsidiaries, agents, partners or joint venturers. No member firm is authorised to obligate International or the other member firms. Copies of the publication IAS compared with US GAAP and UK GAAP can be purchased from KPMG. Please contact any KPMG office, or contact KPMG LLP in the UK's Department of Professional Practice Accounting and Reporting at +44 (0)20 7694 8086.

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About this document

Content This document is an extract from KPMG's December 2002 publication IAS compared with US GAAP and UK GAAP, focusing on recognition, measurement and presentation, rather than disclosure. This document focuses on the preparation of consolidated financial statements by listed enterprises on a going concern basis. Requirements that are specific to stand-alone financial statements are not discussed; neither are specialised industry accounting practices. For each major financial statement line item or accounting area, a brief summary of the key points under IAS for identifying GAAP differences is provided on the left; on the right is a commentary identifying where UK GAAP has significant differences from IAS. However, this document does not describe fully the significant differences; for more information you should refer to the full publication. The requirements of IAS are summarised assuming that the enterprise has adopted IAS already. The special transitional rules that will apply in the period that an enterprise changes to IAS are not discussed. The IASB currently is debating these transitional rules and a new standard is expected by mid-2003. Cut-off date Final pronouncements issued to 31 December 2001 are reflected in this document even if those pronouncements are not effective immediately. Both IAS and UK GAAP are in a process of continual development and change. As a result, a number of the differences highlighted in this document may disappear, and new differences may arise. Future developments In May and June 2002 the IASB published a series of exposure drafts as part of its Improvements Project; comments on the exposure drafts were due in September and October 20 02, and the final standards are expected to be published during 2003. As a result, a number of the significant differences highlighted in this document may disappear, and further differences may arise. Where the document summarises a requirement that is expected to be amended as part of the Improvements Project, it is highlighted with the symbol * to indicate a possible change. In such cases please take particular care to watch for future developments. The requirements of UK GAAP that may change as a result of the Accounting Standards Board's convergence project are highlighted in a similar manner.

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Contents

Regulatory background Generally accepted accounting practice Legal and listing requirements General issues Form and elements of financial statements Statement of recognised gains and losses (Statement of total recognised gains and losses) Statement of cash flows Basis of accounting Consolidation Business combinations Foreign currency translation Prior period adjustments and other accounting changes Events after the balance sheet date Specific balance sheet items General Property, plant and equipment Intangible assets Investment property Investments in associates and joint ventures Financial instruments, including hedging (Financial instruments, including hedging*) Inventories Biological assets Impairment Equity Provisions Deferred tax Contingent assets and liabilities Specific income statement items General Revenue Government grants Employee benefits Share-based payments Interest expense Income tax (Current tax) Extraordinary and exceptional items

5 5 5 5 5 6 6 6 7 7 8 8 8 9 9 9 9 9 10 10 11 11 11 12 12 12 13 14 14 14 14 14 15 15 16 16

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Contents (continued)

Special topics Leases Segment reporting (Segmental reporting) Earnings per share Discontinuing operations (Discontinued operations) Related party disclosures Financial instruments disclosure (Financial instruments disclosure*) Non-monetary transactions Accompanying financial and other information Interim financial reporting

16 16 16 17 17 17 17 17 18 18

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Regulatory background
Generally accepted accounting practice
IAS is the term used to indicate the whole body of IASB authoritative literature. The sources of such accounting requirements are the International Accounting Standards (IAS) themselves and interpretations thereof made by the IASBs Standing Interpretations Committee (such pronouncements are known as SICs). In addition, an Implementation Guidance Committee (IGC) provided interpretive guidance in applying IAS 39. At 31 December 2001 the IASB had stated its intention to issue new standards as International Financial Reporting Standards (IFRS) and to rename the SIC as the International Financial Reporting Interpretations Committee (IFRIC).

Generally accepted accounting practice

The term generally accepted accounting practice has no formal meaning in the UK. The term is used informally in the UK to denote the corpus of practices forming the basis for determining what constitutes a true and fair view: that is, broadly, accounting standards and, where relevant, the accounting requirements of company law and The Listing Rules of the Financial Services Authority (FSA).

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Legal and listing requirements

The IASB does not carry out any inquiry or enforcement role.

Legal and listing requirements

The Companies Act 1985 establishes a framework for the enforcement of generally accepted accounting practice.

General issues
Form and elements of financial statements
The following must be presented: balance sheet; s income statement; s a statement of recognised gains and losses or a statement of changes in equity, which incorporates recognised gains and losses; s statement of cash flows; and s notes to the financial statements, including accounting policies.
s

Form and elements of financial statements

A statement of total recognised gains and losses must be presented as a separate statement. There are exemptions from presenting a statement of cash flows.

In limited circumstances consolidated financial statements need not be prepared.

There are more extensive exemptions from preparing group financial statements.

5 IAS UK

Form and elements of financial statements (continued) There is a general requirement to report transactions in accordance with their substance.

Form and elements of financial statements (continued) There is comprehensive guidance on reporting transactions in accordance with their substance on a risks and rewards basis.

Statement of recognised gains and losses

The statement of recognised gains and losses may be incorporated into the statement of changes in equity.
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Statement of total recognised gains and losses

The statement of total recognised gains and losses cannot be combined with the reconciliation of movements in shareholders funds.

Statement of cash flows

The statement is based on cash and cash equivalents. Cash and cash equivalents include bank overdrafts in some cases. Interest and dividends may be classified as operating or as investing (if received) or financing (if paid). Taxes usually are classified as operating. The cash flows of foreign subsidiaries are translated at the exchange rates at the dates of the cash flows.

Statement of cash flows

The statement is based on cash; there are no cash equivalents. Cash includes all bank overdrafts repayable on demand. Interest, equity dividends paid and taxation are presented as separate classes of items.

The cash flows of foreign subsidiaries (i.e. those not dependent on the reporting currency of the parent) may be translated at closing rates.

Basis of accounting
Many items in the financial statements are revalued, on either an optional or compulsory basis. If an enterprises measurement currency is hyperinflationary, it must make current purchasing power adjustments.

Basis of accounting
The revaluation of assets other than property is rare.

There are no special requirements when the reporting entitys functional (measurement) currency is hyperinflationary.

6 IAS UK

Consolidation
Consolidation is based on the power to control.

Consolidation
Consolidation is required if dominant influence is actually exercised, regardless of whether formal power exists. Subsidiaries excluded from consolidation are equity accounted if significant influence remains. Minority interests must be computed based on the carrying amounts on consolidation.

Subsidiaries excluded from consolidation are treated as financial assets.

Minority interests are computed based on either the carrying amounts in the subsidiary or the carrying amounts on consolidation.*
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Business combinations
The acquired assets and liabilities exclude those that do not meet the recognition criteria under other standards. Negative goodwill is recognised in the income statement, first to match any identified expected costs, and then over the lives of the acquired depreciable assets.

Business combinations
The acquired assets and liabilities may include those that do not meet the recognition criteria under other standards. Negative goodwill is taken to the profit and loss account to match the depreciation or sale of the acquired non-monetary assets with the balance in the periods expected to benefit. Internal transaction costs cannot be capitalised. Issue costs of equity shares are deducted from the gross proceeds and the net amount credited to equity shareholders funds. A best estimate of contingent consideration is recognised at the date of acquisition even if payment is not probable. Payments made as a guarantee of the value of the purchase consideration increase the cost of acquisition. Costs of restructuring an acquired entity are charged to the profit and loss account.

Directly attributable internal transaction costs are capitalised. Registration and issue costs of equity securities are included in the cost of acquisition.

Contingent consideration is recognised when it is probable and reliably measurable.

Payments made as a guarantee of the value of the purchase consideration do not increase the cost of acquisition. Costs of restructuring the acquiree are capitalised if the main features of the plan are announced by the date of acquisition and a detailed plan is finalised by the earlier of three months or when the financial statements are authorised. The fair value of acquired deferred tax assets includes a reassessment of the recoverability of the acquirers deferred tax assets.

The fair value of deferred tax assets excludes previously unrecognised amounts of the acquirer.

7 IAS UK

Business combinations (continued) Subject to limited exceptions, adjustments to goodwill must be made by the end of the first full financial year following the acquisition. There is no guidance on accounting for transactions between enterprises under common control, and practice varies.

Business combinations (continued) Only provisional fair values may be adjusted by the end of the first full financial year following the acquisition. There are special rules governing group reconstructions.

Foreign currency translation

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Foreign currency translation

In translating foreign entities (i.e. those not dependent on the reporting currency of the parent), the closing rate may be used for the profit and loss account. Fair value adjustments and goodwill arising on the acquisition of foreign entities (i.e. those not dependent on the reporting currency of the parent) must be retranslated at each year-end. The financial statements of a foreign entity in a hyperinflationary economy may be measured in a stable currency. When financial statements are translated into a reporting currency other than the functional currency, equity is not retranslated at the closing rate at each balance sheet date. Cumulative exchange differences are not recycled to the profit and loss account on the sale or termination of a foreign entity.

In translating foreign entities, revenue and expenses are translated at the exchange rates at the dates of the transactions, or appropriate average rates. Fair value adjustments and goodwill arising on the acquisition of a foreign entity need not be retranslated at the closing rate at each balance sheet date.*

If the measurement currency of a foreign entity is hyperinflationary, current purchasing power adjustments are made to its financial statements prior to translation. When financial statements are translated into a presentation currency other than the measurement currency, equity (excluding the current years profit or loss) is retranslated at the closing rate at each balance sheet date. Cumulative exchange differences are recycled to the income statement on the sale or termination of a foreign entity.

Prior period adjustments and other accounting changes

Most accounting policy changes and all corrections of fundamental errors may be effected by either restating comparatives or making an adjustment in the current year.*

Prior period adjustments and other accounting changes

Most accounting policy changes and all corrections of fundamental errors are dealt with by restating comparatives.

Events after the balance sheet date

Dividends that are declared, proposed or approved after the balance sheet date are not recognised as liabilities at the balance sheet date.

Events after the balance sheet date

Dividends that are proposed, declared or approved after the year-end are recognised as liabilities at the year-end.*

8 IAS UK

Specific balance sheet items

General
No specific balance sheet format is required. A refinancing after the balance sheet date may affect the classification of a liability at the balance sheet date.
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General
Balance sheet formats are specified by law. Post balance sheet date refinancings do not affect the classification of debt at the year-end.

Property, plant and equipment

Revaluations need not be performed by an external valuer. Revaluations carried out on an ad hoc basis are not allowed.

Property, plant and equipment

Revaluations by an external valuer are required. Previous ad hoc valuations may remain frozen under FRS 15s transitional rules.

Intangible assets
Many internally developed intangibles, including development costs, must be capitalised once certain criteria are met.

Intangible assets
Development costs do not have to be capitalised.

Internally generated intangibles, excluding development costs, may be capitalised only if they have a readily ascertainable market value. All capitalised intangibles are amortised. An indefinite useful economic life is permitted for intangibles (excluding development costs), in which case annual impairment testing is required.

Investment property
Investment property excludes property held under operating leases. The classification of a dual-use investment property is split only if the portions could be sold separately. Investment property may be stated at fair value, with changes therein recognised in the income statement.

Investment property
Investment property may include property held under operating leases. The part of a dual-use property that is let out is classified as an investment property; it is not necessary that it be capable of separate disposal. Investment property must be stated at open market value. Changes in market value generally are recorded directly in reserves.

9 IAS UK

Investments in associates and joint ventures

Significant influence is assessed by reference to the investors power to exercise significant influence. The investors share of losses of an associate is recognised until the equity investment is reduced to zero and thereafter to the extent of obligation.* Proportionate consolidation is the benchmark treatment for jointly controlled entities.
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Investments in associates and joint ventures

Significant influence is assessed by reference to the investors actual exercise of significant influence, rather than the power to exercise. In equity accounting, usually losses continue to be recognised even if the investment is reduced below zero. Proportionate consolidation is not allowed for joint ventures (as defined).

The equity method of accounting is an available alternative only if a joint venture is established in a structure separate from the venturers. No gain or loss is recognised where similar assets are contributed by each venturer for an equity interest in a jointly controlled entity.

The availability of the equity method of accounting depends on the nature of operations rather than the legal structure. There is no restriction on the recognition of a gain or loss where similar assets are contributed by each venturer for an equity interest in a joint venture.

Financial instruments, including hedging

The amortised cost basis of accounting is restricted to certain categories of financial instruments. Changes in the fair value of available-for-sale assets may be recorded either directly in equity or in the income statement.*

Financial instruments, including hedging*

The availability of the amortised cost basis is not as restricted as under IAS.

Generally, only market makers would mark-to-market through the profit and loss account. There is no equivalent of the available-for-sale category, although investments may be revalued through the STRGL with no later recycling.

The derecognition of transferred assets uses a financial components approach combined with a risks and rewards approach.* Shares must be evaluated to determine whether there are any liability characteristics. Such characteristics will lead to classification of these instruments as debt. Split accounting of compound instruments is required where there are both liability and equity characteristics.

Transfers of financial assets are dealt with on a risk and rewards basis.

Shares are classified as shareholders funds.

There is no split accounting for inseparable equity elements of a compound instrument.

10 IAS UK

Financial instruments, including hedging (continued) Gains and losses from debt extinguishments are not extraordinary items.

Financial instruments, including hedging* (continued) The gain or loss on repurchase or early settlement of debt is presented within or adjacent to interest. There is no comprehensive standard on hedging. A hedge of any future transaction usually is held off balance sheet. A non-derivative cannot be used to hedge a future transaction, but may hedge a recognised asset or liability or net investment. The ineffective portion of a net investment hedge always is reported in the profit and loss account immediately. Hedge gains and losses are never taken to shareholders funds for later recycling.

There is detailed guidance on hedging. All hedging instruments are stated at fair value. Non-derivatives may be used to hedge foreign currency exposure in fair value hedges, cash flow hedges, and hedges of a net investment in a foreign entity. The ineffective portion of a net investment hedge is recognised in the income statement immediately only if the hedging instrument is a derivative. Gains and losses on hedges of anticipated transactions are recognised in equity, and then adjusted against the carrying amount of an asset acquired or liability incurred.*

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Inventories
The cost of inventory may be determined using LIFO.* The cost of agricultural produce is its fair value less point-of-sale costs at the date of harvest.

Inventories
LIFO is used very rarely.* Agricultural produce is stated at the lower of cost and net realisable value.

Biological assets
Biological assets are stated at fair value for periods beginning on or after 1 January 2003.

Biological assets
There are no special requirements for biological assets.

Impairment
Annual impairment testing is not required for property, plant and equipment.

Impairment
Annual impairment testing is required for tangible fixed assets with lives of over 50 years. Cash flows must be monitored for five years after a value in use test.

Cash flows need not be monitored after a value in use test.

11 IAS UK

Impairment (continued) An impairment loss on a revalued asset is recognised in the same way as a downwards revaluation. Other impairment losses are recognised in the income statement. Reversals of impairment are allowed, although restricted in respect of goodwill.

Impairment (continued) Impairment losses caused by a clear consumption of economic benefits must be recognised in the profit and loss account even if the asset is a revalued one. UK GAAP is more restrictive on impairment reversals.

Equity
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Equity
All shares are classified as part of shareholders funds.

Some shares must be classified as liabilities. Dividends on shares classified as liabilities are recognised as interest in the income statement on an accruals basis. The presentation of treasury stock acquired in connection with an equity compensation plan is not specified. Dividends on shares recognised as equity are not recognised as a distribution until the enterprise has an obligation to pay. Share dividends are not dealt with specifically in IAS.

Own shares held in connection with an employee share option scheme are presented as assets. Dividends are recognised as a distribution in the year to which they pertain.*

Scrip dividends are measured at the amount of the cash alternative. An analysis of dividends and shareholders funds between equity and non-equity components is required.

Provisions
Provisions for future operating losses are prohibited.

Provisions
Provision for the sale or termination of an operation includes estimated future operating losses.

Deferred tax
In general deferred tax is recognised on all asset revaluations, including fair value adjustments in a business combination, and even if rollover relief is expected.

Deferred tax
In general deferred tax is not recognised on asset revaluations, including fair value adjustments in a business combination. Provision is not made on taxable gains if it is probable that rollover relief will be claimed.

12 IAS UK

Deferred tax (continued) Deferred tax assets are recognised when recovery is probable.

Deferred tax (continued) Deferred tax assets are recognised to the extent that they are more likely than not to be recovered. Deferred tax on intragroup transactions is computed at the tax rate applicable to the selling entity. Goodwill generally is not adjusted if deferred tax assets acquired in a business combination are recovered in excess of the original estimate. The recognition of deferred tax in respect of timing differences on subsidiaries, associates and joint ventures is less frequent than under IAS. Deferred tax is not recognised in respect of the remeasurement of assets or liabilities into the reporting currency as a result of changes in exchange rates or indexing for tax purposes. The discounting of deferred tax is permitted. Under FRS 17 pension assets and liabilities are presented net of the related deferred tax.

Where assets are sold intragroup the deferred tax is computed at the tax rate applicable to the buying enterprise. Goodwill is adjusted if deferred tax assets acquired in a business combination are recovered in excess of the original estimate.
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Deferred tax in respect of temporary differences on subsidiaries, associates and joint ventures is not recognised in some circumstances. Deferred tax is provided in respect of the remeasurement of a hyperinflationary subsidiarys financial statements.

The discounting of deferred tax is not permitted. All assets and liabilities are presented gross of the related deferred tax.

Contingent assets and liabilities

Reduced disclosures are permitted when full disclosure could be seriously prejudicial to the enterprise.

Contingent assets and liabilities

Companies must give the disclosures required by the Companies Act 1985, even if this could be seriously prejudicial.

13 IAS UK

Specific income statement items

General
The income statement does not follow a prescribed format. Unrealised profits may be recognised in the income statement.

General
Profit and loss account formats are specified by law. A company may not recognise unrealised profits in the profit and loss account.

Revenue
There is a specific standard dealing with revenue recognition. Restrictions on advertising barter transactions do not include a time limit on comparable non-barter transactions, and there is no requirement to match to nonbarter transactions on a one-for-one basis.

Revenue
There is no standard dealing with revenue recognition. The recognition of advertising barter transactions is more restrictive than IAS.

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Government grants
Government grants related to assets may be either deducted from the cost of the asset, or carried separately as deferred income. Government grants relating to biological assets are recognised as revenue when receivable and unconditional.

Government grants
Companies may not deduct grants from the cost of fixed assets.

Grants related to biological assets are deferred until the related inventories are expensed.

Employee benefits
Comparison with UK SSAP 24 defined benefit plans The accounting is not different for foreign schemes. A defined contribution plan is one under which the enterprise pays fixed contributions into a separate entity and has no further obligations. All other plans are defined benefit plans.

Employee benefits
SSAP 24 defined benefit plans There is a more flexible approach to foreign schemes. In practice, defined benefit accounting is applied only by the participants in group defined benefit schemes where the share of surplus or deficit can be attributed.

14 IAS UK

Employee benefits (continued) The rate used to discount plan liabilities is based on rates applicable to corporate or government bonds. Plan assets are recognised at fair value. Defined benefit obligations are measured using the projected unit credit method. Past service costs are spread on a straight-line basis over the period until they vest. There are explicit limits on the recognition of a net pension asset. Actuarial gains and losses do not need to be recognised to the extent that they are outside the corridor. Comparison with UK FRS 17 defined benefit plans A multi-employer defined benefit plan cannot be treated as a defined contribution plan when all participating employers are part of the same group. Actuarial gains and losses do not need to be recognised to the extent that they are outside the corridor.

Employee benefits (continued) Scheme liabilities are discounted at a long-term stable rate.

Scheme assets are valued on an actuarial basis. There is significant flexibility in respect of actuarial methods and assumptions. Past service costs fall under the general rules for actuarial gains and losses to the extent that they are covered by a surplus; otherwise they are recognised immediately. Actuarial gains and losses are spread; there is no corridor.

2003 KPMG International, a Swiss nonoperating association. All rights reserved.

FRS 17 defined benefit plans The multi-employer exemption also is available for certain participants in group defined benefit schemes. Actuarial gains and losses are recognised immediately in full in the STRGL.

Share-based payments
There is no guidance on share-based payments.

Share-based payments
The expense recognised in respect of share schemes is based on intrinsic value.

Interest expense
In the case of specific borrowings, capitalised interest costs are net of investment income on the temporary investment of borrowings.

Interest expense
Investment income on the temporary investment of borrowings is not deducted from the amount eligible for capitalisation.*

15 IAS UK

Income tax
Current tax expense is based on enacted or substantively enacted tax rates.

Current tax
There are no significant differences from IAS.

Extraordinary and exceptional items

Extraordinary items are rare.* There is no specific guidance on the presentation and disclosure of exceptional items.
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Extraordinary and exceptional items

Extraordinary items effectively are abolished. Specific rules govern the presentation and disclosure of exceptional items.

Special topics
Leases
Operating lease incentives are recognised over the lease term.

Leases
Operating lease incentives are spread over the period to the review date on which the rent is first expected to be adjusted to the prevailing market rate. A lease of land may be classified as a finance lease. A lessor recognises income based on the net cash investment in a finance lease. Any profit on a sale and leaseback that results in a finance lease is left unrecognised.

A lease of land is not classified as a finance lease unless title is expected to pass. A lessor recognises income based on the net investment in a finance lease. If a sale and leaseback results in a finance lease, any profit is deferred.

Segment reporting
Segmental disclosures are required of enterprises with publicly traded equity or debt securities, or those which are in the process of issuing such securities.

Segmental reporting
More companies are required to provide segmental disclosures than under IAS.

The disclosures are less extensive than under IAS.

16 IAS UK

Earnings per share

Basic EPS is adjusted for preference share dividends.

Earnings per share

Dividends on all non-equity shares are excluded from earnings used to calculate basic EPS. A contract that can be settled in cash or in equity shares at either partys option is not treated as a potential ordinary share if there is a reasonable basis for concluding that it will be settled in cash. For option-type employee share schemes, the issue price of the shares is increased by the amount of any cost of the scheme.

Where a contract may be settled in either cash or shares it is treated as a potential ordinary share in all cases.*

There is no requirement to increase the issue price of shares in an option-type employee share scheme for the cost of the scheme.

2003 KPMG International, a Swiss nonoperating association. All rights reserved.

Discontinuing operations
Extensive disclosures in respect of discontinuing operations are required.

Discontinued operations
The disclosures are less comprehensive than under IAS.

Related party disclosures

Related party transactions need not be disclosed by some enterprises.

Related party disclosures

There are more exemptions than under IAS,* but extensive disclosures in respect of transactions with directors are required.

Financial instruments disclosure

Interest rate risk disclosures are before taking into account the effect of hedging. Detailed currency risk disclosures are not required specifically. Detailed credit risk disclosures are required. Extensive hedging disclosures are required.

Financial instruments disclosure*

Interest rate disclosures are after taking into account the effect of hedging. Detailed currency risk disclosures are required. No credit risk disclosures are required. Hedging disclosures are less extensive than under IAS.

Non-monetary transactions
Profits on the exchange of dissimilar assets are recognised in the income statement.

Non-monetary transactions
Any unrealised profit arising on the exchange of non-monetary assets is recognised in the STRGL.

17 IAS UK

Accompanying financial and other information

A financial review by management is encouraged.

Accompanying financial and other information

There are detailed requirements for the disclosure of information in addition to the financial statements.

Interim financial reporting

Interim financial reporting is not mandatory under IAS.
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Interim financial reporting

The Listing Rules require interim results of listed companies to be published for the half year.

18 IAS UK

Look out for the following publications: IAS compared with US GAAP and Austrian GAAP Belgian GAAP Danish GAAP Dutch GAAP Finnish GAAP French GAAP German GAAP Greek GAAP Italian GAAP Luxembourg GAAP Norwegian GAAP Portuguese GAAP Spanish GAAP Swedish GAAP Swiss GAAP

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