20-f ifrs-us gaap towards convergence v1.8...

US CAPITAL MARKETS

Towards ConvergenceA Survey of IFRS to US GAAP Differences

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The authorship and compilation of this survey was primarily performed by Dave Cook,James O’Donoghue and Purvi Domadia, members of the Capital Markets Group.

The Capital Markets Group at Ernst &Young is dedicated to serving our clients in theircross-border finance raising transactions and activities and in their ongoing financialreporting obligations both in the United States and Globally.

About Ernst & YoungErnst &Young, a global leader in professional services, is committed to restoring the public’strust in professional services firms and in the quality of financial reporting. Its 114,000 peoplein 140 countries pursue the highest levels of integrity, quality, and professionalism in providinga range of sophisticated services centered on our core competencies of auditing, accounting,tax, and transactions. Further information about Ernst &Young and its approach to a variety ofbusiness issues can be found at www.ey.com/perspectives. Ernst &Young refers to the globalorganization of member firms of Ernst &Young Global Limited, each of which is a separatelegal entity. Ernst &Young Global Limited does not provide services to clients.

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Contents Overview 3

Overall analysis 8

Reported differences 18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Presentation of financial statements Consolidated financial statements Business combinations Associates and joint ventures Foreign currency translation Intangible assets Property, plant and equipment Investment property Impairment Capitalisation of borrowing costs Financial instruments: recognition and measurement Financial instruments: shareholders’ equity Financial instruments: derivatives and hedge accounting Inventory and long-term contracts Leasing Taxation Provisions Revenue recognition Government grants Segmental reporting Employee share option plans Pension costs Post-retirement benefits other than pensions Other employee benefits Earnings per share Cash flow statements Related party transactions Post balance sheet events

18 19 23 28 29 30 33 36 36 38 40 42 43 47 48 50 54 57 58 58 59 60 64 64 66 66 66 66

2 T O W A R D S C O N V E R G E N C E – A SURVEY OF IFRS/US GAAP DIFFERENCES

CONTENTS

First-time adoption of IFRS 67

Industry sector analysis 70

Air Transport 71

Chemicals 77

Extractive Industries 82

Financial Services 92

Pharmaceuticals 106

Telecommunications 113

Utilities and Energy 123

Appendix A – Convergence update 133

Appendix B – Form 20-F financial statement requirements 139

Appendix C – Abbreviations used 142

Appendix D – The companies surveyed 143

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Overview One of our key tasks at Ernst & Young is to support our clients with their IFRS to US GAAP accounting and reporting.

This is a survey of publicly available IFRS to US GAAP reconciliation information filed by SEC foreign private issuers, timed to coincide with the first-time adoption of IFRS across the globe. The 130 companies included in our survey are some of the largest companies in the world markets; 42% of the companies surveyed are in the 2006 Financial Times Global 500.

It will, in our view, be of great interest and we believe of significant value to preparers of IFRS and US GAAP financial information and also those interested in a ‘one-time snap shot’ of the current state of convergence in the year of adoption.

We also hope that users will look to this as a useful aide memoir of reported IFRS to US GAAP differences in terms of generally accepted disclosure and reporting practice.

Whilst both the IASB and the FASB are committed to convergence and much progress has been made, currently we have identified almost 200 reported IFRS to US GAAP differences in this survey with companies’ reported results still significantly impacted by differences between the two frameworks.

The SEC has made consistency of application and presentation of IFRS financial information one of the key issues surrounding the possible elimination of the IFRS to US GAAP reconciliation requirement and we are already seeing both a vigorous and robust cross-border and industry comparison in the comment letter process.

This survey provides an analysis of IFRS to US GAAP differences reported by companies which prepare financial statements under IFRS with reconciliations to US GAAP. It is based on Form 20-F annual report filings for fiscal years ended between 31 December 2005 and 31 March 2006 and filed with the SEC before 15 July 2006.

We have prepared the survey in four parts:

• an analysis of the IFRS to US GAAP differences reported;

• a compendium of extracts from Form 20-F filings illustrating reported differences between IFRS and US GAAP;

• a discussion of the IFRS first-time adoption rules; and

• an analysis of the IFRS to US GAAP differences reported for seven industry sectors.

The SEC expected the implementation of IFRS throughout the European Union (EU) in 2005 to result in a very significant proportion of non-US companies registered with the SEC (‘foreign private issuers’ or ‘FPIs’) preparing local financial statements in accordance with IFRS with reconciliations to US GAAP. Of approximately 1,200 FPIs, about 500 are Canadian and, prior to 2005, about 40 of the remaining 700 FPIs prepared financial statements under IFRS locally. This number was expected to reach 300 by the end of 2005 and closer to 400 by 2007.

At the end of 2005, over 240 FPIs were incorporated in the EU. There are 112 companies from EU countries in our sample. The remaining EU FPIs are not included in our survey as they either did not file a Form 20-F before 15 July 2006 for a fiscal year ended between 31 December 2005 and 31 March 2006 or the Form 20-F that was filed did not include IFRS financial statements reconciled to US GAAP. The other 18 companies are incorporated in non-EU countries but file with the SEC financial statements under IFRS, reconciled to US GAAP.

The survey includes only companies that filed financial statements under IFRS or IFRS as endorsed by the EU.

We did not include filings by companies filing local financial statements prepared in accordance with a local body of accounting principles which incorporates IFRS, for example, companies in Australia.


OVERVIEW

Companies in the EU must comply with accounting standards adopted by the European Commission and it is therefore possible that financial statements prepared by EU companies comply with IFRS as adopted by the European Commission but will not comply with IFRS. However, the differences between IFRS and IFRS as adopted by the EU concern only a ‘carve-out’ for certain provisions on hedge accounting on the adoption of IAS 39 Financial Instruments: Recognition and Measurement.

We did not include reconciliations for earlier years presented as, in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, many companies have taken advantage of a number of exemptions and exceptions from full retrospective application of IFRS and, accordingly, the financial statements for comparative periods may not be prepared on an entirely consistent basis.

The compendium of extracts from Form 20-F filings illustrating reported differences between IFRS and US GAAP does not include those areas of difference that are specific to financial services (banking and insurance) companies, as many of the transactions and accounting issues for banking and insurance companies are unique to those industries. However, the more significant sector differences between IFRS and US GAAP as identified by the financial services companies included in the survey are discussed in the Financial Services sector analysis.

We have not verified the propriety of the reported differences nor performed any audit procedures for the purpose of expressing an opinion on the extracts included in this survey and, accordingly, we do not express an opinion thereon.

Although the implementation of IFRS has brought about greater consistency in accounting, recognition, measurement and disclosure, it is evident that IFRS financial statements have retained elements of national legacy accounting, particularly in areas where there is an absence of specific IFRS standards. For the companies in our survey, all of which have dual IFRS and US GAAP reporting requirements, we found that in areas where there is a lack of specific IFRS guidance, many have applied US GAAP accounting for their IFRS financial statements. However, in some cases, companies have continued to use their previous local GAAP or industry practice under IFRS and report an IFRS to US GAAP difference.

For example, accounting for sales incentives, including loyalty programmes and long-term contract incentives, is not specifically addressed under IFRS (although IFRIC has issued a draft Interpretation on customer loyalty programmes). Under US GAAP, there is specific guidance for accounting for sales incentives. Our survey identified three companies, from different industry sectors and incorporated in different countries, which apply different accounting treatments for sales incentives and consequently report IFRS to US GAAP differences. Extracts from the Form 20-F filings for the three companies, France Telecom, Skyepharma and TNT, describing these differences are included below.

NOTE 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract] Description of US GAAP adjustments [extract] Revenue recognition (S) [extract] … As described in Note 2.1.8 to these consolidated financial statements, France Telecom accounts for certain sales incentives, both with and without renewal obligations, in accordance with the interpretation made by the French standard setter (“CNC”). Under US GAAP, France Telecom accounts for certain sales incentives given to customers with renewal obligations in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (“EITF 01-9”), and thereby recognizes such sales incentives upon the renewal of the customer. …

Extract 1: France Telecom

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37 Summary of Material Differences between IFRS and U.S. GAAP [extract] Description of U.S. GAAP Adjustments [extract] (8) Revenue recognition [extract] … Under U.S. GAAP, the Company has accounted for contingent marketing contributions as a reduction of up-front consideration received in determining the revenue to be recognized. If the contingent marketing contributions do not reach the contractually agreed reimbursements, the difference would be recognized as revenue at the time further marketing contributions are no longer required. Under IFRS, marketing contributions are expensed as incurred, in line with the timing of the resulting expected product sales. …

O 34 DIFFERENCES BETWEEN IFRS AND US GAAP [extract] Other differences [extract] LONG TERM CONTRACT INCENTIVES Under IFRS, expenses related to long term contract incentive payments made to induce customers to enter or renew long term service contracts may be deferred and accounted for over the contract period. Under US GAAP such payments may not qualify for deferral, and must be recognised fully in income in the initial period that the cost is incurred. We have paid certain long term contract incentives totalling €6 million that did not qualify for deferral under US GAAP. As a result, under US GAAP, such payments were recognised immediately in the income statement, while under IFRS they have been deferred and will be recognised over the term of the contract. This difference resulted in an adjustment to the US GAAP net income and shareholders’ equity in the current year to reflect the reversal of the related annual charge to the income statement recorded under IFRS.

Another common source of difference is the propensity for IFRS to allow alternative accounting treatments where only one of the allowed treatments is consistent with US GAAP. Some of the areas where alternative accounting treatments have resulted in IFRS to US GAAP differences are as follows:

• Under IAS 23 Borrowing Costs, entities have a choice of applying the benchmark treatment, which is to expense all borrowing costs as incurred, or the allowed alternative treatment, which is to capitalise borrowing costs arising on qualifying assets. Generally, there is no such choice under US GAAP, since FAS 34 Capitalization of Interest Cost requires capitalisation of interest costs for qualifying assets that require a period of time to get them ready for their intended use.

33% of the companies in our survey reported differences as a result of expensing borrowing costs under the benchmark treatment in IAS 23.

• Under IAS 19 Employee Benefits, if actuarial gains and losses are recognised in the period in which they occur, a company may choose to recognise them outside of profit or loss in a statement of recognised income and expense. Recognition of actuarial gains and losses other than through the income statement generally is not permitted under US GAAP.

32% of the companies recognised actuarial gains and losses in a statement of recognised income and expense and reported a difference.

Extract 2: Skyepharma

Extract 3: TNT


OVERVIEW

• Under IAS 31 Interests in Joint Ventures, companies are allowed to account for investments in jointly controlled entities using either the equity method or proportionate consolidation. US GAAP generally does not permit proportionate consolidation except for an investment in an unincorporated entity in either the construction industry or an extractive industry where there is a longstanding practice of its use. This was intended to be a narrow exception. To illustrate for practical purposes, an entity is in an extractive industry only if its activities are limited to the extraction of mineral resources (eg, oil and gas exploration and production) and do not involve related activities.

15% of the companies in our survey applied proportionate consolidation for interests in joint ventures, including companies in each of the industry sectors we analysed, except Air Transport. However, none of the oil and gas companies reported a difference in this respect.

• Under IAS 16 Property, Plant and Equipment, companies may choose either the cost model or the revaluation model as an accounting policy and apply the chosen policy to an entire class of property, plant and equipment. US GAAP generally requires tangible fixed assets to be recorded at depreciated historical cost.

10% of the companies report a difference as a result of applying the revaluation model under IFRS.

Differences can also relate to local fiscal or other regulatory requirements. For example, in certain countries payroll taxes are charged on share-based payment arrangements. IFRS 2 Share-based Payment does not specifically address the accounting for payroll taxes relating to share-based payments, such as UK National Insurance. Generally, under IFRS, payroll taxes relating to share-based payments are accrued systematically over the option vesting period based on the intrinsic value at each reporting date. Under US GAAP, a liability for payroll taxes relating to a share-based payment generally is not recognised until the option is exercised.

Our survey identified twelve companies that reported a reconciling difference in respect of payroll taxes on share options. The twelve companies are incorporated in the United Kingdom (six), Sweden (two), Finland (two), Norway (one) and Switzerland (one). The following extract from Inmarsat provides a description of this difference.

34. Summary of differences between International Financial Reporting Standards and United States Generally Accepted Accounting Principles [extract]

(g) Stock option costs [extract] … Under IFRS, the liability for National Insurance on stock options is accrued based on the fair value of the options on the date of grant and adjusted for subsequent changes in the market value of the underlying shares. Under US GAAP, this expense is recorded upon exercise of stock options.

Differences can arise even where the accounting guidance would suggest otherwise. This may be due to the application of different transitional arrangements on adoption of directly equivalent IFRS and US GAAP standards or different dates on which the standards are adopted. For example, 11% of the companies in the survey have adopted IFRS 2 Share-based Payment and FAS 123(R) Share-Based Payment and have reported differences relating to the transition provisions rather than to differences in the accounting guidance.

Extract 4: Inmarsat

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This difference is illustrated by the following extract from Nokia.

39 Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles [extract]

Share-based compensation [extract]

The Group maintains several share-based employee compensation plans, which are described more fully in Note 24. As of January 1, 2005 the Group adopted IFRS 2. Prior to the adoption of IFRS 2, the Group did not recognize the financial effect of share-based payments until such payments were settled. In accordance with the transitional provisions of IFRS 2, the Standard has been applied retrospectively to all grants of shares, share options or other equity instruments that were granted after November 7, 2002 and that were not yet vested at the effective date of the standard.

…

Effective January 1, 2005, the Group adopted the Statement of Financial Accounting Standards No. 123 (R), Share Based Payment (FAS 123R), using the modified prospective method. Under the modified prospective method, all new equity-based compensation awards granted to employees and existing awards modified on or after January 1, 2005, are measured based on the fair value of the award and are recognized in the statement of income over the required service period. Prior periods have not been revised.

The retrospective transition provision of IFRS 2 and the modified prospective transition provision of FAS 123(R) give rise to differences in the historical income statement for share-based compensation. Further, associated differences surrounding the effective date of application of the standards to unvested shares give rise to both current and historical income statement differences in share-based compensation. Share issue premium reflects the cumulative difference between the amount of share based compensation recorded under US GAAP and IFRS and the amount of deferred compensation previously recorded in accordance with APB 25.

…

Extract 5: Nokia


OVERALL ANALYSIS

Overall analysis The survey of 130 reconciliations identified almost 200 unique IFRS to US GAAP differences from a combined total of over 1,900 reconciling items. These almost 200 unique differences were allocated to 28 areas of accounting, or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the reconciliations.

A total of 225 differences relating to taxation were reported by 126 of the 130 companies surveyed, despite the supposedly similar ‘full provision’ approaches to accounting for taxation under IFRS and US GAAP. This makes taxation the third most reported category of difference, after pensions and post-retirement benefits and business combinations. The reported differences reflect the many and often significant methodology differences that exist in the computation of deferred tax between IFRS and US GAAP. However, the main reason for the number of reported differences relating to taxation is that a high proportion of other IFRS to US GAAP income and equity reconciliation adjustments have to be tax effected. Although reconciling items are shown gross and not net of tax, many companies do not quantify the effect of taxation methodology differences separately from the deferred tax effect of other reconciliation items. It is therefore not possible to provide a meaningful analysis of taxation differences.

Also, the survey included 102 companies that are first-time adopters of IFRS. These companies reported a total of 397 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. However, companies do not separately identify the impact of first-time adoption differences in their reconciliations, so we have allocated those differences to the appropriate underlying areas of accounting or categories.

Many companies that were not first-time adopters of IFRS report differences due to the transitional provisions on adoption of specific accounting standards under IFRS and/or US GAAP, including standards that impact the accounting for business combinations, share-based payments and pensions. These differences have been allocated to the appropriate underlying categories of difference.

After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.

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Business combinations 258

Foreign currency translation 90

Intangible assets 45

Impairment 87

Capitalisation of borrowing costs 47

Financial instruments – recognition and measurement 126

Financial instruments – shareholders’ equity 41

Financial instruments – derivatives and hedge accounting 159

Leasing 61

Provisions and contingencies 125

Revenue recognition 46

Share-based payments 152

Pensions and post-retirement benefits 311

Category of differences Number of differences


OVERALL ANALYSIS

Business combinations Of the 130 companies surveyed, 122 companies reported a difference relating to business combinations.

Of the 258 differences allocated to the business combinations category, 95 (37%) relate to the application of exemptions for first-time adoption of IFRS under IFRS 1 First-time Adoption of International Financial Reporting Standards. Under IFRS 1, a first-time adopter may elect to not apply IFRS 3 Business Combinations fully retrospectively to business combinations completed in prior years.

57 (22%) of the differences relate to purchase price measurement and allocation. These differences include purchase price measurement date differences, different recognition criteria for contingent consideration, different accounting for in-process research and development assets and differences in the recognition of restructuring provisions.

When the purchase consideration includes equity instruments, the date on which the value of the consideration is measured differs between IFRS and US GAAP. Under IFRS, the date of exchange is used while US GAAP specifies that measurement is based on a reasonable period of time before and after the terms of the acquisition are agreed and announced. Also, IFRS requires that if the purchase consideration includes a contingent element and payment of that element is probable, and the amount can be reliably measured, the contingent consideration should be recorded at the date of acquisition. Under US GAAP, contingent consideration is usually recorded only once the contingency is resolved.

Under IFRS, purchase consideration allocated to acquired in-process research and development projects that meet the IFRS 3 recognition criteria, should be capitalised and amortised over their useful economic lives. Under US GAAP, a portion of the purchase price paid in a business combination is assigned to in-process research and development, including tangible assets to be used in research and projects that have no alternative future use, and charged to expense at the acquisition date.

Under IFRS 3, the acquirer should not recognise liabilities for future losses or other costs expected to be incurred as a result of the combination. US GAAP may allow the acquirer’s intentions to be taken into account, to an extent, when measuring the liabilities acquired in a business combination.

20 (8%) of the differences relate to the measurement of, or accounting for, minority interests, including the acquisition of minority interests. Under IFRS, on initial acquisition of a controlling interest in a business, any minority interest is recorded at fair value. Under US GAAP, only the portion of the assets and liabilities acquired is recorded at fair value. The minority interest usually represents the minority’s share of the carrying amount of the subsidiary’s net assets. After the initial acquisition of a subsidiary, if an additional portion of that subsidiary is subsequently acquired, under IFRS, the difference between the purchase consideration and the consolidated amount of the net assets acquired is recorded as goodwill. Under US GAAP, the incremental portion of the assets and liabilities is generally recorded at fair value, with any excess being allocated to goodwill, creating a difference in the carrying values of assets and liabilities acquired and goodwill.

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19 (7%) of the differences relate to the excess of the acquirer’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities over the cost of the combination. Under IFRS, where the acquirer’s interest in the fair value of the identifiable assets and liabilities exceeds the cost of the combination, any excess, after a reassessment of the purchase price allocation, is recognised immediately in profit or loss. Under US GAAP, negative goodwill arising on a business combination should be allocated to proportionately reduce the value of most categories of non-current, non-financial assets acquired. Any balance of negative goodwill remaining is recognised as an extraordinary gain.

Foreign currency translation

Differences relating to foreign currency translation were reported by 82 companies.

Of the 90 differences allocated to this category, 75 (83%) relate to the application of IFRS 1 exemptions for first-time adoption of IFRS. Under IFRS 1, a first-time adopter may elect not to apply IAS 21 The Effects of Changes in Foreign Exchange fully retrospectively. Under this exemption, the cumulative translation difference for all foreign operations is reset to zero.

Intangible assets A total of 45 differences allocated to the intangible assets category were reported by 36 companies.

22 (49%) of the differences relate to capitalised development costs. Under IFRS, when the technical and economic feasibility of a project can be demonstrated, and further prescribed conditions are satisfied, project development costs must be capitalised. Under US GAAP, development costs that are not covered by specific accounting guidance are generally expensed as incurred.

9 (20%) of the differences relate to acquired in-process research and development. In-process research and development projects acquired other than as part of a business combination are capitalised under IFRS if the cost of acquiring the projects meets the definition of an intangible asset. Under US GAAP, the costs of acquired research and development projects, or assets used in research and development projects, that have no alternative future use, are generally charged to expense as incurred.

7 (16%) of the differences relate to the capitalisation of software development costs. Under IFRS, certain development costs are capitalised once technical and economic feasibility can be demonstrated and other conditions are satisfied. Under US GAAP, although most development costs are expensed as incurred, there is specific guidance for software development costs that requires certain costs incurred during certain development activities to be capitalised. However, the application of the IFRS and US GAAP guidance often results in differences due to either the individual costs that are capitalised or the specific development activities for which the costs are capitalised.

Impairment 62 companies reported a total of 87 differences relating to impairment. Of these 87 differences, 33 (38%) concern the reversal of previous impairment write-downs. Under IFRS, impairment losses are reversed for an asset other than goodwill if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. US GAAP generally prohibits the reversal of an impairment loss, except for long-lived assets held for sale.


OVERALL ANALYSIS

29 (33%) of the differences relate to the evaluation of impairment for long-lived assets, other than goodwill. Under IFRS, impairment is both assessed and measured based on discounted cash flows. Under US GAAP, an undiscounted cash flow evaluation is first performed to confirm impairment before any impairment is measured based on fair value. An impairment charge reported under IFRS may be reversed under US GAAP as a result of the undiscounted cash flow evaluation.

23 (26%) of the differences are the result of goodwill impairment. Under IFRS, impairment evaluations are based on cash generating units, which are the smallest identifiable groups of assets whose cash flows are independent of other asset groups. Under US GAAP, impairment evaluations are based on reporting units, which are operating segments as defined for segmental reporting purposes or one level below an operating segment. Impairment assessments at different levels under IFRS and US GAAP are a common source of reconciling items.

Financial instruments – recognition and measurement

Differences relating to the recognition and measurement of financial instruments were reported by 70 companies.

Of the 126 differences allocated to this category, 26 (20%) relate to the presentation of deferred costs, including finance fees. Under IFRS, debt issue costs are usually shown as a reduction of the liability and amortised over the life of the debt. Under US GAAP, such costs are sometimes capitalised as a separate asset and amortised over the life of the debt.

23 (18%) of the differences relate to the measurement of investments in non-exchange listed or privately held companies. Under IFRS, investments in equity securities should be measured at fair value unless the fair value cannot be reliably measured. Under US GAAP, in most situations, investments in non-listed equity securities are accounted for based on historical cost, as fair value measurement is only available where there are readily determinable fair values and fair values are readily determinable only if sales prices are currently available on a recognised securities exchange.

12 (10%) of the differences relate to insurance, assurance and related investment contracts. IFRS currently permits companies to account for assets and liabilities of insurance and investment contracts with discretionary participation features and their related deferred acquisition costs under a company’s previous GAAP. As most companies in the Financial Services sector elected to apply their previous GAAP, the differences reported do not reflect consistent IFRS to US GAAP differences.

13 (10%) of the differences relate to assets designated as held at fair value through profit and loss. Under IFRS, financial assets may be classified into four categories: held at fair value through profit and loss; held to maturity investments; loans and receivables; and available-for-sale. Under US GAAP, the categories are trading securities, held-to-maturity (debt) securities, and available-for-sale securities.

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8 (6%) of the differences relate to securitisation transactions. Under US GAAP, a securitisation can only be recognised as a sale and achieve off-balance sheet treatment if the transaction meets the derecognition criteria and the other party in the securitisation is either a qualifying special purpose entity (‘QSPE’) or is otherwise not required to be consolidated. IFRS has similar requirements for off-balance sheet treatment of securitisations but does not have an equivalent of the QSPE concept.

Financial instruments – shareholders’ equity

A total of 41 differences relating to shareholders’ equity were reported by 38 companies.

Of these 41 differences, 26 (63%) relate to convertible debentures/bonds. Where a financial instrument (eg, convertible debt) comprises both debt and equity elements, IFRS requires, on initial recognition, its carrying value to be allocated between the debt and equity components, each of which is accounted for separately as debt or equity. This allocation is made by calculating the fair value of the debt component of the instrument and allocating the remainder of the fair value of the instrument as a whole to the equity component. Once this allocation is made, it is not changed. US GAAP normally does not permit an allocation of part of the proceeds to the conversion feature. However, if the conversion feature is ‘in the money’ at the commitment date, then the intrinsic value of the conversion feature is allocated to additional paid in capital.

10 (24%) of the differences relate to the treatment of preference shares. Under IFRS, the issuer must determine whether the preferred shares are a liability or a form of equity based on the rights associated with the shares. When distributions to holders of the preference shares, whether cumulative or non-cumulative, are non discretionary the shares are a liability. Under US GAAP often these preference shares are treated as temporary equity.

Financial instruments – derivatives and hedge accounting

85 companies reported differences relating to derivatives and hedge accounting.

Of the 159 differences allocated to this category, 64 (40%) are due to the exemptions available to first-time adopters. Many companies applied hedge accounting under their previous GAAP, but did not designate hedges under FAS 133 Accounting for Derivative Instruments and Hedging Activities. Under the IFRS 1 and IAS 39 transition exemptions, transactions accounted for as hedges under previous GAAP may continue to receive hedge accounting treatment if hedge documentation (including effectiveness testing) was prepared under IFRS no later than the date of transition (or the beginning of the first IFRS reporting period, if comparatives are not restated). Alternatively, previously hedged transactions are accounted for as discontinued hedges under IFRS if no hedge documentation was prepared. For transactions that did not meet the US GAAP hedge criteria in the comparative period, including the designation and documentation requirements, differences will arise, whether or not hedge accounting continues under IFRS.

32 (20%) of the differences are due to hedge relationships under IFRS not meeting the designation and documentation requirement under US GAAP. This is usually not because there are any substantive differences between the IFRS and US GAAP requirements, but rather because companies elect not to designate and document the hedge relationships under US GAAP.


OVERALL ANALYSIS

Leasing A total of 61 differences relating to leasing transactions were reported by 49 companies.

Of these differences, 38 (62%) relate to deferred gains on sale and operating leaseback arrangements. Under IFRS, IAS 17 Leases requires the gain on a sale and operating leaseback transaction to be recognised immediately where the sale price is established at fair value. If the sales price is below fair value, any profit or loss is recognised immediately, except where the loss is compensated for by below-market future lease payments, in which case the loss is deferred and amortised in proportion to the lease payments over the period of expected use. If the sale price is above fair value the difference between the sale price and fair value should be deferred and amortised over the period for which the asset is expected to be used. Under US GAAP, FAS 28 Accounting for Sales with Leasebacks (an amendment of FASB Statement No. 13) generally requires any gain arising on a sale and operating leaseback to be deferred and recognised in proportion to the gross rental charged to expense over the lease term.

4 (7%) of the differences relate to leases involving real estate. Under IFRS, leases involving land and buildings are accounted for using the same principles as for other types of asset, but the land and buildings elements are considered separately for the purposes of lease classification. Under IAS 40 Investment Property, a property interest held under an operating lease that otherwise satisfies the definition of an investment property may be classified as an investment property (carried under the fair value model) and accounted for as if it were a finance lease. US GAAP contains specific rules on accounting for leases involving real estate and, unless the lease transfers ownership to the lessee by the end of the lease term or there is a bargain purchase option, a leasehold interest in land should be accounted for as an operating lease.

4 (7%) of the differences relate to deferred gains on sale and operating leaseback arrangements when the seller has a continuing involvement in the assets. IFRS does not contain special rules on such transactions. Under US GAAP, a seller generally would not recognise a sale where the sale and leaseback transaction allows for some continuing involvement by the seller in the property.

Provisions and contingencies

A total of 125 differences relating to provisions and contingencies were reported by 74 companies.

Of these 125 differences, 45 (36%) relate to costs associated with restructurings or other employee terminations and early retirement, as the recognition criteria for certain provisions or elements of provisions are different under IFRS and US GAAP.

19 (15%) of the differences are due to discounting of provisions. Under IFRS, IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires the time value of money to be taken into account when making a provision. Under US GAAP, discounting generally is only possible where both the amount of the liability and the timing of payments are either fixed or reliably determinable.

18 (14%) of the differences relate to asset retirement obligations. Although the rules on asset retirement obligations are similar, it remains possible for a measurement difference to occur (1) when the liability does not arise from a legal obligation or (2) when there are changes in cost estimates or discount rates.

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17 (14%) of the differences are in connection with provisioning for onerous contracts, mostly leases. Under IFRS, a provision should be recognised when a contract is considered onerous. Under US GAAP, onerous contract losses generally can be recognised only when legal notice of termination has been given or an agreement to terminate has been made or, for onerous leases, when the leased premises have been vacated.

Provisions for major overhaul, guarantees and contingencies make up the remaining differences in this category.

Revenue recognition 35 companies reported a total of 46 differences relating to revenue recognition.

Of these differences, 12 (26%) relate to up-front fees. IFRS does not provide specific guidance for accounting for up-front fees, so the general rules on revenue recognition apply. Under US GAAP, up-front fees, even if non-refundable, are earned as the products and or services are delivered or performed over the term of the arrangement or the expected period of performance.

10 (22%) of the differences relate to multiple element arrangements and long-term service arrangements. IFRS does not provide any specific guidance for multiple element arrangements. US GAAP provides specific guidance which states that multiple deliverables within a revenue arrangement should be divided into separate units of accounting if certain criteria are met at the inception of the arrangement and as each item is delivered. Deferral of revenue recognition often occurs when deliverables in a multiple element arrangement cannot be treated as separate units of accounting.

5 (11%) of the differences in the revenue recognition category relate to regulated pricing. Under FAS 71 Accounting for the Effects of Certain Types of Regulation, an entity accounts for the effects of regulation by recognising a ‘regulatory’ asset (or liability) that reflects the increase (or decrease) in future prices approved by the regulator. Under IFRS, there is no specific guidance which addresses this issue.

4 (9%) of the differences relate to sales incentives offered to vendors. Under IFRS, certain sales incentives given to customers with renewal obligations are accrued for. Under US GAAP, sales incentives generally are recognised upon the renewal of the contract.

Share-based payments A total of 152 differences relating to share-based payments were reported by 74 companies.

Of these differences, 50 (33%) relate to the application of IFRS 1 exemptions for first-time adoption of IFRS. Under IFRS 1, a first-time adopter is not required to apply IFRS 2 Share-Based Payment to equity instruments granted on or before 7 November 2002 or granted after 7 November 2002 but vested before the later of (1) the date of transition to IFRS and (2) 1 January 2005.


OVERALL ANALYSIS

48 (32%) of the differences relate to the adoption of the fair value model for accounting for share-based payments under IFRS compared to the application of the intrinsic value model under US GAAP or as a result of the transition provisions on adoption of IFRS 2 and FAS 123(R) Share-Based Payment. Under US GAAP, many companies were still accounting for share-based payments under the intrinsic value method in accordance with APB 25 Accounting for Stock Issued to Employees. FAS 123(R), which requires the application of a fair value model, is effective for most public companies no later than the first fiscal year beginning after 15 June 2005.

12 (8%) of the differences are in connection with payroll taxes on share-based payments. Under IFRS, in most instances, payroll taxes should be recognised over the same period as the related share-based payment expense. Under US GAAP, payroll taxes generally are recognised only on the exercise of the stock options.

Pensions and post-retirement benefits

Differences relating to pensions and post-retirement benefits were reported by 100 companies.

Of the 311 differences allocated to pensions and post-retirement benefits, 86 (28%) relate to the recognition of a minimum pension liability under US GAAP. IFRS does not have any similar requirement. Recognition of a minimum pension liability may have little impact on equity for a first-time adopter of IFRS as the full pension liability recognised under the IFRS 1 exemptions against shareholders’ equity may be greater than the pension liability, including an additional minimum liability, under US GAAP.

75 (24%) of the differences are due to the application of exemptions on first-time adoption of IFRS. Under the IFRS 1 transitional exemptions, companies can take a one-time charge for past service cost directly to shareholders’ equity. Under US GAAP, prior service costs generally are recognised in income over the expected remaining service lives of the employees.

42 (14%) of the differences relate to the recognition of current period actuarial gains and losses through the statement of recognised income and expense or net income under IFRS. Under IAS 19 Employee Benefits, an entity may choose to recognise actuarial gains or losses in the period in which they occur, but outside profit and loss in a statement of recognised income and expense. Under US GAAP, actuarial gains and losses generally should be recognised in income over the future service lives of relevant employees.

37 (12%) of the differences are in connection with plan amendments and past service costs. Under IFRS, past service cost are recognised immediately if the benefits are fully vested; otherwise the costs are recognised on a straight-line basis over the remaining vesting period. Under US GAAP, prior service costs generally are recognised in income over the expected remaining service lives of the employees.

17

Other Other accounting areas or items for which differences are reported include proportionate consolidation, consolidation of special purpose entities and taxation.

Proportionate consolidation: Under IFRS, an entity may choose to account for a jointly controlled entity using the equity method or, alternatively to apply proportionate consolidation. Under US GAAP, an entity generally should apply the equity method, because US GAAP does not permit proportionate consolidation except where the investee is in either the construction industry or an extractive industry where there is a longstanding practice of its use. This was intended to be a narrow exception. To illustrate for practical purposes, an entity is in an extractive industry only if its activities are limited to the extraction of mineral resources (eg, oil and gas exploration and production) and do not involve related activities.

Special purpose entity consolidation: Under IFRS, SIC–12 Consolidation – Special Purpose Entities requires that a special purpose entity (‘SPE’) is consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by the entity. Under US GAAP, the variable interest model introduced by FIN 46(R) Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51 determines control (and consolidation) of a variable interest entity (‘VIE’). Differences occur where entities that are considered to be VIEs under US GAAP are not SPEs under IFRS and vice versa.

Taxation: The differences identified in respect of income taxes are due in part to certain methodology differences between IFRS and US GAAP but primarily reflect the tax effects of the other reconciling differences. Many companies disclose income tax differences as a single reconciliation item and it is therefore impossible to quantify the impact of methodology differences, if any.


PRINCIPAL DIFFERENCES

Reported differences Differences between IFRS and US GAAP may be categorised broadly into those arising from differences in recognition and measurement requirements and those relating to differences in disclosure requirements. This section focuses on the major recognition and measurement differences, but also includes some disclosure differences.

The differences presented are those that relate to IFRS and US GAAP requirements applicable for reporting periods ended between December 2005 and March 2006.

We have not verified the propriety of the reported differences nor performed any audit procedures for the purpose of expressing an opinion on the extracts included in this survey and, accordingly, we do not express an opinion thereon.

1 Presentation of financial statements

1.1 Discontinued operations

The measurement and presentation requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are similar to the US rules on reporting discontinued operations under FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. However, differences can occur in practice.

The following extracts from Royal Ahold and Electrolux illustrate differences arising due to differences in the definitions of discontinued operations and groups of assets held for sale.

Note 37 a. Reconciliation of net income (loss) and shareholders’ equity from IFRS to US GAAP [extract] 9. Non-current assets held for sale and discontinued operations [extract] Classification as held for sale and discontinued operations [extract]

The criteria for recognizing non-current assets or disposal groups as assets held for sale are similar under IFRS and US GAAP. However certain divestments and planned divestments meet the definition of a discontinued operation under US GAAP, but not under IFRS. Under IFRS, the divestment must represent a separate major line of business or geographical area of operations, whereas under US GAAP, a component of an entity can be classified as a discontinued operation.

…

Furthermore, equity investees such as investments in joint ventures and associates cannot qualify as assets held for sale or discontinued operations under US GAAP. Under IFRS, investments in joint ventures and associates accounted for under the equity method can qualify as assets held for sale and discontinued operations. In 2005 Ahold completed the sale of its 50% interest in Paiz Ahold to Wal-Mart Stores Inc. Paiz Ahold is accounted for as a discontinued operation under IFRS in 2005 (with retrospective reclassification of results of operations in the comparative figures), but not under US GAAP.

The reclassification of line items in the consolidated statements of operations related to discontinued operations is retrospective under both IFRS and US GAAP. Until 2004, Ahold reclassified non-current assets (and disposal groups) held for sale retrospectively under US GAAP, as permitted under SFAS No. 144 “Accounting for the impairment or disposal of long-lived assets.” Since IFRS does not permit such retrospective reclassification of non-current assets (and disposal groups) held for sale, the Company decided to change its accounting policy in this respect as from 2005. As a result, non-current assets (and disposal groups) held for sale are reclassified prospectively as from 2005 under US GAAP.

Extract 6: Royal Ahold

19

Note 29 US GAAP information [extract] Discontinued Operations [extract] …

The divestment of the Indian operation on July 7, 2005, is classified as discontinued operations under US GAAP. However, as the transaction does not represent a major line of business, it has not been classified as discontinuing operations under IFRS.

…

2 Consolidated financial statements The principal standard for consolidated financial statements under IFRS is IAS 27 Consolidated and Separate Financial Statements and the principal guidance under US GAAP is ARB 51 Consolidated Financial Statements and FAS 94 Consolidation of all Majority-Owned Subsidiaries. Guidance for the consolidation of controlled special purpose entities (SPEs) is primarily provided under IFRS by SIC-12 Consolidation – Special Purpose Entities and under US GAAP by FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and FIN 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.

Differences between consolidated financial statements under IFRS and under US GAAP can arise in practice as a result of differences in the specific guidance in various areas, including, but not limited to:

• the definition of a subsidiary;

• different reporting dates;

• the carrying amount and presentation of minority interests;

• the purchase of a non-controlling interest; and

• the consolidation of special purpose entities.

The FASB issued an exposure draft on consolidated financial statements in June 2005. It is targeted that a final statement will be issued in mid-2007 which will eliminate many of the differences relating to the accounting and reporting of minority interests.

Certain of the differences in consolidated financial statements under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

Extract 7: Electrolux



2.1 Definition of a subsidiary

The definitions of a subsidiary under IFRS and US GAAP may result in reported GAAP differences as illustrated by China Petroleum & Chemical in the following extract.

39. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract] (i) Companies included in consolidation [extract]

Under IFRS, the Group consolidates less than majority owned entities in which the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities, and proportionately consolidates jointly controlled entities in which the Group has joint control with other venturers. However, US GAAP requires that any entity of which the Group does not have a controlling financial interest not be consolidated nor proportionately consolidated, but rather be accounted for under the equity method. Accordingly, certain of the Group's subsidiaries, of which the Group owns between 40.72% to 50% of the outstanding voting stock, and the Group's jointly controlled entities are not consolidated nor proportionately consolidated under US GAAP and instead accounted for under the equity method. This exclusion does not affect the profit attributable to equity shareholders of the Company or the total equity attributable to the equity shareholders of the Company reconciliations between IFRS and US GAAP.

…

2.2 Minority interests

2.2.1 Carrying amount of minority interests

The balance sheet measurement of a minority interest in an acquired subsidiary may differ between IFRS and US GAAP as reported by Lafarge in the extract below.

Note 36- Summary of Differences Between Accounting Principles Followed by the Group and U.S. GAAP [extract]

1. Differences in accounting for business combinations under IFRS and U.S. GAAP [extract] (b) Fair value adjustments related to minority interests [extract]

Under both Previous GAAP and IFRS, when the Group initially acquires a controlling interest in a business, any portion of the assets and liabilities considered retained by minority shareholders is recorded at fair value. Under U.S. GAAP, only the portion of the assets and liabilities acquired by the Group is recorded at fair value. This gives rise to two differences:

(i) Operating income was different between Previous GAAP and U.S. GAAP, and continues to be different under IFRS because of the difference in basis of assets that are amortized. This difference is offset entirely by a difference in the minority interest’s participation in the income of the subsidiary.

…

Extract 8: China Petroleum & Chemical

Extract 9: Lafarge

21

2.2.2 Presentation of minority interests

The following extract illustrates a difference in balance sheet presentation of minority interests following the revision of IAS 1 Presentation of Financial Statements, effective for accounting periods beginning on or after January 1, 2005.

Summary of differences between IFRS (as adopted by the EU) and US GAAP [extract]

Material differences between IFRS (as adopted by the EU) and US GAAP [extract] n. Reclassification of minority interest IFRS requires the presentation of minority interest within equity on the face of the balance sheet. Under US GAAP, minority interest is presented as a separate item on the face of the balance sheet outside of equity.

2.3 Purchase of a non-controlling interest

Lafarge reports a difference on the acquisition of an additional portion of a consolidated subsidiary.


1. Differences in accounting for business combinations under IFRS and U.S. GAAP [extract] (b) Fair value adjustments related to minority interests

(ii) After an initial acquisition of a subsidiary, if an additional portion of that subsidiary was subsequently acquired, under both Previous GAAP and IFRS, the purchase consideration in excess of the net assets acquired was recorded as goodwill. Under U.S. GAAP, the incremental portion of the assets and liabilities was recorded at fair value, with any excess being allocated to goodwill, thus creating a difference in the carrying value of both assets and goodwill.

2.4 Special Purpose Entities

Accounting for special purpose entities (SPEs) has been addressed by the Standing Interpretations Committee (SIC) in SIC-12 under IFRS and by both the FASB in FAS 140 and the SEC in FIN 46 under US GAAP. However, there are still differences between the IFRS and US GAAP approaches to identifying the relationship between the reporting entity and its SPE or variable interest entity (VIE). It is therefore possible that an SPE or VIE consolidated under US GAAP may not require consolidation as an SPE under IFRS, and vice versa.

The following extract provides an example of a VIE that is consolidated under US GAAP but not under IFRS.

38. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP) [extract]

(13) Consolidation of variable interest entities [extract]

…

At the end of 2004, Telenor sold a 51% stake in Kjedehuset (previously wholly owned) to independent third parties and at the same time entered into certain franchise and service agreements with these parties. Kjedehuset is a trade association for independent mobile phone dealers in Norway and acts as a conduit for marketing support and receives a bonus from Telenor. Telenor concluded that Kjedehuset is a VIE and that it was the primary beneficiary. Hence Telenor consolidated the company in 2004 and 2005.

Under IFRS, consolidation is based on the concept of control and the concept of FIN 46R does not apply. Therefore entities consolidated based on variable interest under FIN 46R will generally not be consolidated under IFRS.

Extract 10: Reuters

Extract 11: Lafarge

Extract 12: Telenor



As described in the following extracts from Endesa and International Power, it is also possible for a consolidated subsidiary under IFRS to be deconsolidated under US GAAP when the subsidiary is a VIE and the group is not the primary beneficiary.

29. Differences Between IFRS and United States Generally Accepted Accounting Principles [extract] 16. Classification differences between IFRS and U.S. GAAP [extract] 16.3 Deconsolidation of Endesa Capital Finance, LLC [extract]

…

In March 2003, Endesa Group created a variable interest entity (“VIE”), Endesa Capital Finance, LLC (“Endesa Capital Finance”) to issue €1,500 million of preference shares. The Financial Accounting Standards Board (“FASB”) released Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46R”), which requires that all primary beneficiaries of variable interest entities consolidate that entity. FIN 46R is effective immediately for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. According to this Interpretation, Endesa Capital Finance is a VIE and Endesa Group is not the primary beneficiary. Accordingly, under U.S. GAAP, Endesa Group should not consolidate Endesa Capital Finance. Consequently, the loan payable to Endesa Capital Finance remains outstanding on the U.S. GAAP consolidated financial statements.

…

44 Financial information prepared under US Generally Accepted Accounting Principles (US GAAP) [extract] Significant differences between Adopted IFRSs and US GAAP [extract]

l) Deconsolidation of variable interest entities

Under IFRS, the Group consolidates 100% of the assets and liabilities of entities over which it exercises control and excludes any minority share from total equity attributable to equity holders of the parent.

Control is achieved where the Group has the power to govern the financial and operating policies of the entity so as to obtain benefit from its activities.

In December 2003, the US Financial Accounting Standards Board issued FIN 46R (Consolidation of Variable Interest Entities). This statement is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and addresses the consolidation of variable interest entities (VIEs). FIN 46R requires the consolidation of a VIE by the primary beneficiary if the majority of the expected losses are absorbed and/or a majority of the entity’s expected residual returns are received by the primary beneficiary.

An entity is a VIE if the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support or as a group the holders of the equity investment at risk lack the characteristics of a controlling financial interest, such as the ability through voting rights to make decisions about an entity’s activities, the obligation to absorb the expected losses of the entity and the right to receive the expected residual returns of the entity.

Under the provisions of FIN 46R the Group has deconsolidated three entities: Subsidiary

% Ownership

Region

Al Kamil Power Company SAOG ................................................................. 65% Middle East Perth Power Partnership................................................................................. 70% Australia Thai National Power Company Limited ........................................................ 100% Asia

Each of the deconsolidated entities holds power generation assets with long-term sales contracts. An analysis of the sales contracts identified that the Group does not absorb the majority of the expected losses and expected residual returns of these entities and therefore cannot be the primary beneficiary as defined by FIN 46R.

…

Extract 13: Endesa

Extract 14: International Power

23

3 Business combinations The primary standards for business combinations are IFRS 3 Business Combinations and FAS 141 Business Combinations. Business combinations within the scope of the relevant standards under both US GAAP and IFRS generally are accounted for using the purchase method. However, although the basic principles of purchase accounting in FAS 141 and IFRS 3 are comparable, there are various differences that can cause measurement and disclosure differences in practice.

Differences relating to goodwill and other intangible assets are discussed in section 6.

Differences between IFRS and US GAAP can arise as a result of differences in the application of the purchase method of accounting for business combinations, including, but not limited to those relating to:

• the measurement date for the cost of the acquired entity;

• accounting for contingent consideration;

• step acquisitions;

• accounting for acquired in-process research and development;

• provisions for post acquisition reorganisation costs;

• deferred taxation;

• minority interests;

• the measurement of the fair value of goodwill and other intangible assets;

• accounting for goodwill and negative goodwill; and

• transactions between entities under common control.

Under a joint project, both the IASB and the FASB issued exposure drafts on business combinations in June 2005. It is targeted that final statements will be issued in mid-2007 which will eliminate many of the differences arising from subsequent business combinations.

Certain of the differences in accounting for business combinations under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.



3.1 The cost of the acquired entity

A The date at which the fair value of consideration is measured

Where the purchase consideration includes equity instruments that have been issued by the acquirer, the measurement of the instruments issued may be different under IFRS and US GAAP.

France Telecom reports a difference in this respect.

Note 38.1 - SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

Description of US GAAP adjustments [extract] Other business combinations (B) [extract] 2004 and 2003 Acquisition of Orange SA minority interest [extract] … Different measurement dates were used in valuing the securities issued in accounting for the acquisition of the minority interest in Orange SA by France Telecom between IFRS and US GAAP resulted in an adjustment of €0 million and €328 million to the consolidated net income and shareholders’ equity, respectively, for the year ended December 31, 2005 and 2004. Under IFRS, as was also allowed under French GAAP, securities issued as consideration are measured at their fair value at the date of exchange. Under US GAAP, securities issued as consideration are measured at their fair value over a reasonable period of time around the transaction announcement date. …

B Contingent consideration

The accounting for contingent consideration is reported as a difference by WPP.

Notes to the Reconciliation to US Accounting Principles [extract] 1 Significant differences between IFRS and US Generally Accepted Accounting Principles [extract] (b ) Contingent consideration [extract]

Under IFRS, the Group provides for contingent consideration as a liability when it considers the likelihood of payment as probable. Under US GAAP, contingent consideration is not recognised until the underlying contingency is resolved and consideration is issued or becomes issuable. At 31 December 2005, the Group’s liabilities for vendor payments under IFRS totalled £220.0 million (2004: £298.6 million), of which £180.6 million (2004: £244.2 million) is dependent on the future performance of the interests acquired. As these liabilities are represented by goodwill arising on acquisitions, there is no net effect on equity share owners’ funds. Under US GAAP, however, a balance sheet classification difference arises such that liabilities and goodwill would each be reduced by the amount indicated as of each year end. This difference represents a continuing difference between IFRS and US GAAP.

…


Extract 16: WPP

25

3.2 Determining the fair value of identifiable assets acquired and liabilities assumed

The principal areas where differences can occur are discussed below.

A Step-acquisitions

UBS describes differences in accounting for the acquisition of a subsidiary in a series of transactions on a step-by-step basis in the following extract.

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally Accepted Accounting Principles (US GAAP) [extract]

Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP [extract]

c. Purchase accounting under IFRS 3 and FAS 141

With the adoption of IFRS 3 on 31 March 2004, the accounting for business combinations generally converged with US GAAP with the exception of the measurement of minority interests and the recognition of a revaluation reserve in the case of a step acquisition.

Under IFRS, minority interests are recognized at the percentage of fair value of identifiable net assets acquired at the acquisition date whereas under US GAAP they are recognized at the percentage of book value of identifiable net assets acquired at the acquisition date. In most cases, minority interests would tend to have a higher measurement value under IFRS than under US GAAP.

Furthermore, IFRS requires that in a step acquisition the existing ownership interest in an entity be revalued to the new valuation basis established at the time of acquisition. The increase in value is recorded directly in equity as a revaluation reserve. Under US GAAP, the existing ownership interest remains at its original valuation.

B In-process research and development

Bayer reports a difference in respect of acquired in-process research and development.

[44] U.S. GAAP information [extract] c. In-process research and development

IFRS does not consider that in-process research and development (“IPR&D”) is an intangible asset that can be separated from goodwill, unless both the definition and the criteria for the recognition of an intangible asset are met.

Under U.S. GAAP IPR&D is considered to be a separate asset that needs to be written-off immediately following an acquisition when the feasibility of the acquired research and development has not been fully tested and the technology has no alternative future use.

During 2002, IPR&D has been identified for U.S. GAAP purposes in connection with the Aventis CropScience and Visible Genetics acquisitions. Fair value determinations were used to establish €138 million of IPR&D related to both acquisitions, which was expensed immediately for U.S. GAAP purposes. The independent appraisers used a discounted cash flow income approach and relied upon information provided by the Group management. The discounted cash flow income approach uses the expected future net cash flows, discounted to their present value, to determine an asset’s current fair value.

As a whole, the reversal of the amortization of IPR&D recorded under IFRS as a component of other operating expense and selling expense amounted to €3 million, €21 million and €12 million, in 2005, 2004 and 2003, respectively. Amortization expense recorded under IFRS decreased in 2005 as compared to prior periods as only IPR&D capitalized separately from goodwill continues to be amortized due to the adoption of IFRS 3 and IAS 38 (revised).

Furthermore, the adjustments in 2004 and 2005 reflect the sale of IPR&D, related to the Triticonazole and Crop Improvement business, that was capitalized under IFRS as a result of the Aventis CropScience acquisition. The adjustments amount to €5 million and €17 million in 2005 and 2004, respectively, and represent the residual book value under IFRS at the time of sale.

Extract 17: UBS

Extract 18: Bayer



C Provisions for reorganisations and future losses

A difference relating to provisions for subsequent reorganisations is reported by Reuters in the following extract.


Material differences between IFRS (as adopted by the EU) and US GAAP [extract] h. Restructuring [extract] … Under IFRS, liabilities for terminating or reducing the activities of an acquired company are only recognised as part of allocating the cost of a combination if they exist at the date of acquisition and meet certain recognition criteria. Provisions for future losses or other costs expected to be incurred as a result of a business combination are not recognised. Under US GAAP, the Group applies the provisions of EITF 95-3 ‘Recognition of liabilities in connection with a purchase combination’, which requires recognition of certain costs incurred in respect of exit activities and integration if specified conditions are met, as part of purchase accounting.

D Deferred taxation

Lafarge reports a difference related to tax contingencies.

Note 36 - Summary of Differences Between Accounting Principles Followed by the Group and U.S. GAAP [extract]

3. Income taxes [extract] (d) Accounting for tax contingencies in business combinations

Under IAS 12, if tax contingencies of the acquiree, which were not recognized at the time of the combination are subsequently recognized, the resulting debit is taken to income for the period. Under U.S. GAAP, the Group adjusts goodwill to reflect revisions in estimates and/or the ultimate disposition of these contingencies with the provisions of SFAS No. 109 “Accounting for Income Taxes” and EITF 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination”.

E Minority interests

France Telecom reports a difference in respect of minority interests.

Note 38.1 - SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

Description of US GAAP adjustments [extract] Other business combinations (B) [extract]

2005 Acquisition of Amena [extract]

…

(4) Under IFRS, as France Telecom acquired less than 100% of Amena, the minority interest is stated at the minority’s proportion of the net fair value of acquired assets and liabilities assumed. However, under US GAAP, fair values are assigned only to the share of the net assets acquired by France Telecom.

…

Extract 19: Reuters

Extract 20: Lafarge


27

3.3 Negative goodwill

Trinity Biotech reports a difference related to negative goodwill in the following extract.

35. DIFFERENCES BETWEEN IFRS AS ADOPTED BY THE EU AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES [extract] (a) Goodwill: [extract]

…

Negative goodwill arises when the net amounts assigned to assets acquired and liabilities assumed exceed the cost of an acquired entity. Under IFRS as adopted by the EU, if the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the acquirer shall (a) reassess the identification and measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination and (b) recognise immediately in profit or loss any excess remaining after that reassessment.

Under US GAAP, goodwill is not amortised, but is instead subject to impairment tests annually, or more frequently if indicators of impairment are present. On December 31, 2004 and December 31, 2005, the Group performed its annual impairment tests of goodwill and indefinite-lived intangible assets, and concluded that there was no impairment in the carrying value of goodwill at those dates.

Negative goodwill is allocated to reduce proportionately the values assigned to the acquired non-current assets, any excess is recognised in income as an extraordinary gain.

…

3.4 Entities under common control

The definition of a business combination in FAS 141 and the scope of IFRS 3 both exclude transfers of net assets or exchanges of equity interests between entities under common control.

An example of a difference related to a common-control transaction is provided by TDC in the following extract.

Note 33 Reconciliation to United States Generally Accepted Accounting Principles (US GAAP) [extract]

b) Formation of the Group

In accordance with IFRS, certain items of property, plant and equipment acquired upon the formation of the Group were restated at fair value, whereas goodwill and rights were capitalized. The capitalized excess values are amortized over the useful lives of the assets. Under US GAAP, the transfer of assets between parties under joint control was accounted for using the pooling-of-interests method. Accordingly, restatement of property, plant and equipment to fair value and any capitalization of goodwill and rights related to the formation of the Group were eliminated in the Consolidated Financial Statements.

Extract 22: Trinity Biotech

Extract 23: TDC



The China Southern Airlines extract below describes a similar accounting difference for a transaction between two government-controlled entities.

51. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract] (a) CNA/XJA Acquisitions

As disclosed in Note 1 to the consolidated financial statements prepared under IFRSs, the Group acquired the airline operations and certain related assets and liabilities of CNA and XJA with effect from December 31, 2004. Under IFRSs, the purchase method of accounting was applied to such business combination such that at December 31, 2004 only the acquired assets and assumed liabilities are included in the consolidated financial statements of the Group. The results of the acquired operations and their related cash flows were included in the consolidated financial statement of the Group beginning January 1, 2005.

Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. A combination of entities under common control is accounted for in a manner similar to a “pooling-of-interests”. Consequently, the assets and liabilities of CNA and XJA are reflected at their historical net asset carrying values and the U.S. GAAP consolidated financial statements of the Group are restated to include the historical carrying values of assets and liabilities of CNA and XJA, and their results of operations and cash flows for all the periods presented.

4 Associates and joint ventures The principal guidance for accounting for associates and joint ventures under IFRS is IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures and under US GAAP is APB 18 The Equity Method of Accounting for Investments in Common Stock.

Both IFRS and US GAAP generally require investments over which an entity has significant influence, but not control, to be accounted for using the equity method. The application of the equity method under IAS 28 will in many cases not be different from the accounting treatment required by APB 18. However, there may be a presentational difference between IFRS and US GAAP in the treatment of joint ventures.

Differences between IFRS and US GAAP can arise as a result of differences in the specific guidance for accounting for associates and joint ventures in various areas, including, but not limited to:

• the scopes of the respective standards;

• the definition of an associate;

• accounting for joint ventures;

• different reporting dates;

• different accounting policies;

• impairment; and

• the commencement of equity method accounting.

Certain of the differences in accounting for associates and joint ventures under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

4.1 Joint ventures

IAS 31 Interests in Joint Ventures allows entities to account for investments in jointly controlled entities using either the equity method or proportionate consolidation. US GAAP generally does not permit proportionate consolidation.

Extract 24: China Southern Airlines

29

Bayer reports a difference in accounting for joint ventures in the following extract.

[44] U.S. GAAP information [extract] Additional U.S. GAAP disclosures [extract] Proportional consolidation [extract]

The Group accounts for its investment in 5 joint ventures in 2005 using the proportional consolidation method, which is the benchmark treatment specified under IAS 31. Under U.S. GAAP, investments in joint ventures generally are accounted for under the equity method. The differences in accounting treatment between proportionate consolidation and the equity method of accounting have no impact on the Group’s consolidated stockholders’ equity or net income. Rather, they relate solely to matters of classification and display. The SEC permits the omission of such differences in classification and display in the reconciliation to U.S. GAAP provided certain criteria have been met.

…

5 Foreign currency translation The principal standards on foreign currency translation are IAS 21 The Effects of Changes in Foreign Exchange Rates under IFRS and FAS 52 Foreign Currency Translation under US GAAP. Although IAS 21 and FAS 52 have similar fundamental approaches, there may be differences between the two standards in practice. Also, accounting for hyperinflationary economies under IAS 29 Financial Reporting in Hyperinflationary Economies may be different from the US GAAP approach (see 5.1 below).

Differences between IFRS and US GAAP can arise as a result of foreign currency translation differences, including, but not limited to those relating to:

• hyperinflation;

• the impairment of a foreign operation; and

• the disposal of a foreign operation.

Certain of the differences in accounting for foreign currency translation under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

5.1 Hyperinflation

TeliaSonera reports a difference in accounting for associated companies in hyperinflationary economies in the following extract.

36 U.S. GAAP [extract] Differences in principles [extract] Associated companies in hyperinflationary economies

Under IFRS, when the functional currency for a subsidiary or an associated company is the currency of a hyper-inflationary economy, the reported non-monetary assets and liabilities, and equity are restated in terms of the measuring unit current at the balance sheet date. The restated financial statements are translated into SEK at the closing rate. The restating effects are recognized as financial revenue or expense and in income from associated companies, respectively.

Under U.S. GAAP, the temporal method should be used to translate the financial statements of subsidiaries and equity accounted investees where they are denominated in currencies of highly-inflationary economies. The remeasurement of the financial statements is done as if the reporting currency of the parent had been the functional currency.

Extract 25: Bayer

Extract 26: TeliaSonera



5.2 Impairment of a foreign operation

A difference resulting from the inclusion of accumulated foreign currency translation differences as part of the carrying amount of the net investment in a foreign operation that is held for sale when evaluating impairment under US GAAP is described by Royal Ahold in the following extract.

Note 37 a. Reconciliation of net income (loss) and shareholders’ equity from IFRS to US GAAP [extract] 9 Non-current assets held for sale and discontinued operations [extract]

Impairment of assets held for sale

Differences in the impairment of assets held for sale result from differences in the carrying value of these assets between IFRS and US GAAP. The majority of these differences are related to goodwill and the cumulative currency translation adjustment, which is included in the carrying value tested for impairment under US GAAP when the Company has committed to a plan to dispose of assets that will cause the cumulative translation adjustment to be included in net income. The Company recorded an additional impairment loss under US GAAP of EUR 158 in 2004 (2005: nil) as these assets or disposal groups had a higher carrying value under US GAAP compared to IFRS. Unrealized cumulative translation adjustments of EUR 185 (2005: nil) respectively have been taken into account in determining the carrying amount while performing the impairment test of non-current assets or disposal groups held for sale under US GAAP in 2005 and 2004, respectively. The difference in impairment causes a difference in the result on divestment as stated in the next section.

5.3 Disposal of a foreign operation

Unilever disclosed a difference related to cumulative translation differences on a partial disposal in the extract below.

Additional information for US investors [extract] Currency Recycling

Under IFRSs, the gain from cumulative translation differences arising from the partial repayment of capital of a subsidiary is recognised within the income statement. Under US GAAP, currency translation gains and losses are only recycled to the income statement on the sale or upon the complete or substantially complete liquidation of the investment.

6 Intangible Assets The principal standard under IFRS for intangible assets is IAS 38 Intangible Assets. The principal US GAAP standard for the initial measurement of intangible fixed assets acquired as part of a business combination is FAS 141 Business Combinations. FAS 142 Goodwill and Other Intangible Assets addresses the accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition and the accounting and reporting for intangible assets (including those acquired in a business combination) subsequent to their acquisition. Internally generated intangible assets are covered by a number of other standards under US GAAP, including, but not limited to FAS 2 Accounting for Research and Development, FAS 71 Accounting for the Effects of Certain Types of Regulation and FAS 86 Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.


Extract 28:Unilever

31

Differences between IFRS and US GAAP in accounting for intangible assets can arise in practice as result of differences in the specific guidance in various areas, including, but not limited to:

• initial recognition, when acquired separately or as part of a business combination;

• subsequent measurement;

• regulatory assets;

• emission rights;

• general research and development;

• computer software development;

• start-up costs; and

• amortisation.

Certain of the differences in accounting for intangible assets under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

6.1 Initial recognition and measurement

Differences in the application of the IFRS and US GAAP guidance can result in classification differences between tangible and intangible assets. For example, both mineral rights and computer software for internal use may be intangible assets under IFRS but tangible assets under US GAAP, a difference disclosed by Lafarge in the extract below.


6. Items affecting the presentation of consolidated financial statements [extract] d) Intangible assets

Under IFRS, mineral rights are classified as “Intangible assets”. In accordance with EITF 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets”, mineral rights should also be reclassified to quarries, within tangible assets, for purposes of U.S. GAAP.

6.2 Regulatory assets

Scottish Power reports a difference in respect of regulatory assets for which guidance is provided under US GAAP by FAS 71 Accounting for the Effects of Certain Types of Regulation.

44 Summary of differences between IFRS and US Generally Accepted Accounting Principles (‘GAAP’) [extract] (c) Description on US GAAP adjustments [extract] (ii) US regulatory net assets [extract]

FAS 71 ‘Accounting for the Effects of Certain Types of Regulation’ establishes US GAAP for utilities in the US whose regulators have the power to approve and/or regulate rates that may be charged to customers. FAS 71 provides that regulatory assets may be capitalised if it is probable that future revenue in an amount at least equal to the capitalised costs will result from the inclusion of that cost in allowable costs for ratemaking purposes. Due to the different regulatory environment, no equivalent GAAP applies under IFRS.

Under IFRS, no regulatory assets are recognised. …

Extract 29: Lafarge

Extract 30: Scottish Power



6.3 Emission rights

Endesa reports a difference related to CO2 emission allowances for which guidance under IFRS is provided by IFRIC 3 Emission Rights.

29. Differences Between IFRS and United States Generally Accepted Accounting Principles [extract] 16 Classification differences between IFRS and U.S. GAAP [extract] 16.1 CO2 emission allowances [extract]

Under IFRS as indicated in Note 3.d the Group is recording CO2 Emission allowances received as an intangible asset and deferred income by their fair value at date they are granted by each respective Government. Such intangible assets are not subsequently revalued and are excluded when delivered to each respective Government.

As indicated in Note 3.k, under IFRS Endesa records a provision against earnings considering the same cost of the respective intangible asset for those amounts that the Group has been granted. In this respect the Company recorded in earnings a part of Endesa’s deferred income for the same amount of emission rights used.

In addition, any shortfall of emissions allowance after consideration of amounts granted is recorded as a provision at fair value against earning for the amount considered necessary to buy such allowances. Such provision is reviewed and recorded in every period at its fair value with any change recorded in earnings.

Under U.S. GAAP the Group has eliminated from Endesa’s balance sheet all intangible asset, deferred income, provision for emission granted and all respective income and expenses from Endesa’s income statement since the Company is not recording any accounting effect for emissions granted or used under the granted amount. In addition in U.S. GAAP the Group has maintained the provision at fair value through earnings for those rights that Endesa will need to buy.

…

6.4 General research and development

IAS 38 requires some development costs to be capitalised, whereas FAS 2 Accounting for Research and Development Costs generally requires development costs to be expensed as incurred. The treatment of computer software development costs is discussed in section 6.5.

FIAT reports a difference related to research and development costs that do not relate to internally developed computer software for internal use.

(38) Significant differences between IFRS and United States generally accepted accounting principles (US GAAP) [extract]

Description of reconciling items [extract] (b) Expensing of development costs recognized as intangible assets, net [extract] Under IFRS, costs relating to development projects are recognized as intangible assets when certain criteria are met as indicated in note “Significant accounting policies”. Under US GAAP, capitalization of development costs is prohibited, unless such costs pertain to specific elements of internally developed computer software capitalized in accordance with SOP 81-1 – Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. As a result, all costs incurred related to development projects that do not relate to internally developed computer software and that have been capitalized under IFRS are expensed as incurred under US GAAP. Amortization expenses, net result on disposal and impairment charges of previously capitalized development costs recorded under IFRS have been reversed under US GAAP. …

Extract 31: Endesa

Extract 32: FIAT

33

6.5 Computer software development

The treatment of certain computer software development costs under US GAAP is addressed by FAS 86 Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed and SOP 98-1 Accounting for the costs to develop or obtain software for internal use.

GlaxoSmithKline reports a difference related to accounting for costs of developing software for internal use in the following extract.

38 Reconciliation to US accounting principles [extract] Summary of material differences between IFRS and US GAAP [extract] Other

• computer software - under IFRS, the Group capitalises costs incurred in acquiring and developing computer software for internal use where the software supports a significant business system and the expenditure leads to the creation of a durable asset. For US GAAP, the Group applies SOP 98-1, ‘Accounting for the Costs of Computer Software Developed or Obtained for Internal Use’, which restricts the categories of costs which can be capitalised.

6.6 Accounting for start-up costs

Under IFRS, IAS 11 Construction Contracts allows direct costs incurred in the securing of a contract to be capitalised. Under US GAAP, SOP 98-5 Reporting on the Costs of Start-up Activities generally requires the costs of start-up activities to be expensed as incurred. The following extract from Swisscom provides an example of this difference.

44. Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles [extract]

j) Outsourcing contracts As described in Note 2.16, start-up and integration costs are accrued and recorded as expense over the contract period. Furthermore, at the end of each period, Swisscom establishes a provision for the excess of the direct attributable costs over the expected benefits for the entire contract life. Under U.S. GAAP, Swisscom recognizes start-up and integration costs as incurred and does not record a provision for future losses, to the extent applicable, on such contracts; rather, the losses are recognized in the period in which they are incurred. Under IFRS, Swisscom capitalized CHF 18 million of start-up and integration costs and recorded a provision of CHF 34 million for future losses at December 31, 2005. Accordingly under U.S. GAAP the net amount of CHF 16 million was reversed. No amounts were recorded in prior years.

7 Property, plant and equipment The principal standard for accounting for property, plant and equipment under IFRS is IAS 16 Property, Plant and Equipment. Under US GAAP, there is no single comprehensive standard that deals with all aspects of accounting for property, plant and equipment or tangible fixed assets. Instead, there are many standards and interpretations that deal with elements of accounting for specific categories of property, plant and equipment.

Differences between IFRS and US GAAP can arise as a result of differences in the guidance on accounting for property, plant and equipment in various areas, including, but not limited to:

• impairment measurement (see section 9);

• the scope of IAS 16;

• the definition of costs to be capitalised;

• capitalisation of interest costs;

Extract 33: GlaxoSmithKline

Extract 34: Swisscom



• decommissioning costs;

• subsequent expenditure;

• revaluation of property, plant and equipment;

• depreciation methods;

• changes in depreciation method and useful economic life; and

• major inspection or overhaul costs.

Certain of the differences in accounting for property, plant and equipment under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

7.1 Scope

Differences in the scopes of the guidance for property, plant and equipment under IFRS and US GAAP can result in accounting differences, as illustrated by the following disclosure by Stora Enso related to biological assets.

Note 32- Summary of differences between International Financial Reporting Standards and Generally Accepted Accounting Principles in the United States of America [extract]

k) Biological assets

Under IFRS, Stora Enso’s forest assets in the form of standing trees are recorded at fair value on the balance sheet with changes in the fair values recorded in the income statement. In 2003, 2004 and 2005, respectively, the pre-tax amounts of €10.9 million, €7.1 million and (€6.7) million were recorded in the income statement (see note 13). The land on which the trees grow is recorded at cost.

Under U.S. GAAP, timber and timberlands are recorded at cost, and reforestation cost is capitalized, less depletion for the cost of timber harvested. Depletion is computed by the units-of-production method. As a result, the fair market values recorded under IFRS are reversed under U.S. GAAP and cost of timber harvested, which amounted to €13.2 million during 2003, €6.7 million during 2004 and €1.8 million during 2005, is recorded in the income statement under U.S. GAAP.

7.2 Start-up costs

SOP 98-5 Reporting on the Costs of Start-up Activities under US GAAP addresses the capitalisation of start-up costs. Rio Tinto reports a difference where certain start-up costs are capitalised and amortised under IFRS but expensed as incurred under US GAAP.

52 Reconciliation to US Accounting Principles [extract] Start up costs

Under US GAAP, Statement of Position 98-5, ‘Reporting on the Costs of Start-up Activities’, requires that the costs of start up activities are expensed as incurred. Under IFRS, some of these start up costs qualify for capitalisation and are depreciated over the economic lives of the relevant assets.

7.3 Decommissioning costs

Guidance for decommissioning costs is provided under IFRS by IAS 16, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, and under US GAAP by FAS 143 Accounting for Asset Retirement Obligations.

Extract 35: Stora Enso

Extract 36: Rio Tinto

35

Royal Ahold reports a difference in respect of changes in discount rates.

Note 37 a. Reconciliation of net income (loss) and shareholders’ equity from IFRS to US GAAP [extract] 4 Provisions [extract]

Discounting [extract]

…

There is no difference between IFRS and US GAAP related to the initial recognition of asset retirement obligations. However SFAS No. 143 “Accounting for Asset Retirement Obligations,” does not permit the Company to revalue the obligation based on changes in the discount rate unless upward revisions are made to the original estimate of undiscounted cash flows, whereas under IFRS, the obligation is required to be revalued based on changes in the discount rate.

7.4 Revaluation

ING reports a difference relating to the revaluation of property, plant and equipment under IFRS.

2.4. SHAREHOLDERS’ EQUITY AND NET PROFIT ON THE BASIS OF US GAAP [extract]

2.4.1 VALUATION AND INCOME RECOGNITION DIFFERENCES BETWEEN IFRS-EU AND US GAAP [extract] Property in own use

Under IFRS-EU, property in own use is measured at fair value with changes in fair value recognized in equity. Negative revaluation reserves on a property-by-property basis are charged to the profit and loss account. Subsequent recoveries are recognized as income up to the original cost. Depreciation over the fair value is charged to the profit and loss account. On disposal any revaluation reserve remains in equity and any difference between the carrying amount of the property and the sales price is reported in the profit and loss account. Under US GAAP, property in own use is measured at cost less depreciation and impairment. Depreciation over the cost basis is charged to the profit and loss account. Realized results on disposal are reported in the profit and loss account. Impairments are an adjustment to the cost basis and are not reversed on subsequent recovery.

7.5 Major inspection or overhaul

In the following extract, Steamship Company Torm describes a change in accounting policy under US GAAP to conform to the policy adopted under IFRS and avoid a reconciling difference.

NOTE 23 - RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP) [extract]

a) Dry-docking costs [extract]

As of January 1, 2005, TORM changed its method of accounting for vessel dry-docking costs under US GAAP from the accrual method to the deferral method. Under the accrual method, dry-docking costs had been accrued as a liability and an expense on an estimated basis in advance of the next scheduled dry-docking. Subsequent payments for dry-docking were charged against the accrued liability. Under the deferral method, costs incurred in replacing or renewing the separate assets that constitute the dry-docking costs are capitalized and depreciated on a straight-line basis over the estimated period until the next dry-docking. Dry-docking activities include, but are not limited to, inspection, service on turbocharger, replacement of shaft seals, service on boiler, replacement of hull anodes, applying of antifouling and hull paint, steel repairs and refurbishment and replacement of other parts of the vessel. This change was made to conform to prevailing shipping industry accounting practices and the Group's accounting under IFRS. …


Extract 38: ING

Extract 39: Steamship Company Torm



8 Investment properties There is no specific US standard dealing with accounting for investment properties held directly by a reporting entity that is not a real estate investment entity. Under IFRS, IAS 40 Investment Property gives entities the option to account for investment property either on a fair value basis or on an historical cost basis in accordance with IAS 16.

UBS reports a change in policy to the fair value method under IFRS in the following extract.

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally Accepted Accounting Principles (US GAAP) [extract]

Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP [extract]

l. Investment properties

From 1 January 2004, UBS changed its accounting for investment properties from the cost less depreciation method to the fair value method. Under the fair value method, changes in fair value are recognized in the income statement, and depreciation is no longer recognized. Under US GAAP, investment properties continue to be carried at cost less accumulated depreciation.

9 Impairment IAS 36 Impairment of Assets is the relevant standard for impairment under IFRS and should be applied to most types of assets, with some exceptions that include inventories, deferred tax assets and financial instruments. Under US GAAP, there are two standards; FAS 142 Goodwill and Other Intangible Assets deals with accounting for the impairment of goodwill and other non-amortised intangible assets; and FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets deals with accounting for impairment of other tangible and intangible fixed assets.

Despite similar overall approaches to impairment, differences can arise in practice due to differences in the IFRS and US GAAP guidance in several areas including, but not limited to the requirement for an impairment review and the reversal of impairment charges.

Certain of the differences in accounting for impairment under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

9.1 Assets other than goodwill that are subject to amortisation

The extract below from Royal Dutch Shell illustrates a difference resulting from the application of the FAS 144 undiscounted cash flows recoverability test.

Notes to the Consolidated Financial Statements [extract]

38 Information on US GAAP [extract] Impairments

Impairments under IFRS are based on discounted cash flows. Under US GAAP, only if an asset’s estimated undiscounted future cash flows are below its carrying amount is a determination required of the amount of any impairment based on discounted cash flows. There is no undiscounted test under IFRS.

Extract 40: UBS

Extract 41: Royal Dutch Shell

37

9.2 Goodwill and intangible assets that are not amortised

The amount of the impairment may not be the same under IFRS and US GAAP as a result of differences between cash generating units and reporting units as illustrated by Nokia in the following extract.


Impairment of goodwill [extract]

Under IFRS, goodwill is allocated to “cash generating units”, which are the smallest group of identifiable assets that include the goodwill under review for impairment and generate cash inflows from continuing use that are largely independent of the cash inflows from other assets. Under IFRS, the Group recorded an impairment of goodwill of EUR 151 million related to Amber Networks in 2003 as the carrying amount of the cash generating unit exceeded the recoverable amount of the unit.

Under US GAAP, goodwill is allocated to “reporting units”, which are operating segments or one level below an operating segment (as defined in FAS 131, Disclosures about Segments of an Enterprise and Related Information). The goodwill impairment test under FAS 142 compares the carrying value for each reporting unit to its fair value based on discounted cash flows.

The US GAAP impairment of goodwill adjustment reflects the cumulative reversal of impairments recorded under IFRS that do not qualify as impairments under US GAAP.

Upon completion of the 2003 annual impairment test, the Group determined that the impairment recorded for Amber Networks should be reversed under US GAAP as the fair value of the reporting unit in which Amber Networks resides exceeded the book value of the reporting unit. The annual impairment tests performed subsequent to 2003 continue to support the reversal of this impairment.

…

9.3 Reversal of impairment charges

An impairment loss may be recognised in one year under IFRS but not under US GAAP, as a result of the undiscounted cash flows recoverability test (see section 9.1.1), and then reversed in the following year under IFRS because the asset is no longer impaired. This difference is illustrated by China Petroleum & Chemical in the following extract.

39 SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

(e) Reversal of impairment of long-lived assets

Under IFRS, impairment charges are recognized when a long-lived asset’s carrying amount exceeds the higher of an asset’s fair value less costs to sell and value in use, which incorporates discounting the asset’s estimated future cash flows.

Under US GAAP, determination of the recoverability of a long-lived asset held for use is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for a long-lived asset is based on the assets carrying value and the fair value of the asset.

In addition, under IFRS, a subsequent increase in the recoverable amount of an asset is reversed to the consolidated statements of income to the extent that an impairment loss on the same asset was previously recognized as an expense when the circumstances and events that led to the write-down or write-off cease to exist. The reversal is reduced by the amount that would have been recognized as depreciation had the write-off not occurred. Under US GAAP, an impairment loss establishes a new cost basis for the impaired asset and the new cost basis should not be adjusted subsequently other than for further impairment losses.

For the years presented herein, the US GAAP adjustment represents the effect of reversing the recovery of previous impairment charges recorded under IFRS. Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by RMB 532 and RMB 456 as of December 31, 2004 and 2005.

Extract 42: Nokia




10 Capitalisation of borrowing costs The principal standards for the capitalisation of borrowing costs are IAS 23 Borrowing Costs under IFRS and FAS 34 Capitalization of Interest Cost under US GAAP. Differences may arise either because borrowing costs have been expensed in accordance with the benchmark treatment under IAS 34, or as a result of other areas of difference between the accounting guidance for the capitalisation of borrowing costs under IFRS and US GAAP, including, but not limited to:

• the definition of qualifying assets;

• attributable borrowing costs;

• the treatment of foreign exchange differences; and

• the treatment of net investment proceeds.

Certain of the differences relating to the capitalisation of borrowing costs under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

10.1 General principles

In the following extract, Swisscom reports a difference as a result of not capitalising qualifying interest costs under IFRS.

44. Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles [extract]

a) Capitalization of interest cost

Under IFRS Swisscom expenses all interest costs as incurred. U.S. GAAP requires interest costs incurred during the construction of property, plant and equipment to be capitalized. The U.S. GAAP reconciliation includes adjustments arising from the application of the method prescribed by Statement of Financial Accounting Standards (SFAS) No. 34, “Capitalization of Interest Cost”.

The effect of capitalization of interest cost, corresponding additional depreciation expense on the increased amount of property, plant and equipment and the disposal of property would be as follows: CHF in millions 2005 2004 2003 Interest capitalized during year 22 6 8 Depreciation expense (8) (10) (9) Net income statement effect 14 (4) (1) CHF in millions 2005 2004 2003 Gross amount capitalized 132 110 104 Accumulated depreciation (74) (66) (56) Net amount capitalized 58 44 48

In 2005, the capitalization rate is higher than in prior years because debt with lower interest rates has matured and been paid off.


39

10.2 Qualifying assets

The definitions of qualifying assets are different under IFRS and US GAAP as illustrated in the following extracts from Repsol and China Petroleum & Chemical.

(42) DIFFERENCES BETWEEN IFRS AND GENERAL ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA [extract] 17. Borrowing costs [extract]

Under IFRS, borrowing cost on specific or general-purpose financing that are directly attributable to the acquisition for assets that necessarily take a substantial period of time to get ready for its intended use or sale are capitalized.

Under U.S. GAAP, capitalization of interest on qualifying assets (i.e. work in progress) is required. There is no mention under U.S. GAAP for a qualifying asset to take a substantial period of time to get ready for its use.

…


(f) Capitalized interest on investment in associates

Under IFRS, an investment accounted for by the equity method is not considered a qualifying asset for which interest is capitalized. Under US GAAP, an investment accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee’s activities include the use of funds to acquire qualifying assets for its operations, is a qualifying asset for which interest is initially capitalized and subsequently amortized when the operation of the qualifying assets begin. Accordingly, the carrying amount of the investment in associates under IFRS was lower than the amount under US GAAP by RMB 526 and RMB 486 as of December 31, 2004 and 2005.

10.3 Attributable borrowing costs

Lihir Gold, reports a difference in respect of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset.

NOTE 30: RECONCILIATION TO US GAAP [extract] (iii) Borrowing cost capitalization as part of mine properties: Under IFRS, interest incurred on funds that are borrowed specifically for the purpose of obtaining a qualifying asset is capitalized. Under U.S. GAAP SFAS 34 “Capitalization of Borrowing Cost”, the amount of borrowing cost to be capitalized is the portion of borrowing cost incurred that theoretically could have been avoided if expenditures for the assets had not been made. The interest cost need not have arisen from borrowings specifically used to acquire the asset.

Extract 45: Repsol


Extract 47: Lihir Gold



10.4 Foreign exchange differences

A difference relating to the treatment of foreign exchange differences is reported by China Petroleum & Chemical.


(a) Foreign exchange gain and losses

In accordance with IFRS, foreign exchange differences on funds borrowed for construction are capitalized as property, plant and equipment to the extent that they are regarded as an adjustment to interest costs during the construction period. Under US GAAP, all foreign exchange gains and losses on foreign currency debt are included in current earnings. For the years presented herein, the US GAAP adjustments represent the amortization effect of such originating adjustments described above. Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by RMB 295 and RMB 241 as of December 31, 2004 and 2005.

11 Financial instruments: recognition and measurement The principal standards dealing with financial instruments under IFRS are IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement. IAS 32 and IAS 39 apply in principle to all types of financial instruments, but exclude from their scope certain financial instruments to the extent that they are accounted for under other standards such as, for example, IFRS 4 Insurance Contracts, IAS 17 Leases, IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures.

Guidance on accounting for financial instruments under US GAAP can be found in a range of standards, including FAS 107 Disclosures about Fair Value of Financial Instruments, FAS 114 Accounting by Creditors for Impairment of a Loan (an amendment of FASB Statements No. 5 and 15), FAS 115 Accounting for Certain Investments in Debt and Equity Securities, FAS 133 Accounting for Derivative Instruments and Hedging Activities and FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125.

The US GAAP literature is generally more detailed than the guidance under IFRS as it has been developed over a longer period and there are differences, sometimes subtle, in the guidance under IFRS and US GAAP in various areas, including, but not limited to:

• the normal purchase or sale exemption;

• loan commitments;

• the definition of financial instruments;

• the recognition of assets and liabilities;

• derecognition of financial assets;

• troubled debt restructurings;

• off-balance sheet transactions and accounting for the substance of transactions;

• securitised assets;

• categories of financial assets;


41

• measurement of financial assets;

• impairment of financial assets; and

• categories of financial liabilities.

Certain of the differences in the recognition and measurement of financial instruments under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

11.1 Securitised assets

Guidance for the consolidation of a special purpose entity (SPE) is provided under IFRS by SIC-12 Consolidation – Special Purpose Entities and under US GAAP by FAS 140.

FIAT reports a difference arising from the consolidation of an SPE under IFRS that is not consolidated under US GAAP.


Description of reconciling items [extract] (g) Securitization of financial assets

Under IFRS, in accordance with SIC 12 Consolidation – Special Purpose Entities, a Special Purpose Entity (“SPE”) is consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by the entity. In all of the Group’s securitization transactions, the subscription of the junior asset-backed securities by the Group entails its control in substance over the SPE, which is consequently consolidated. Under US GAAP, the Group follows SFAS No. 140 –Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”) and other related US GAAP guidance related to the Group’s securitization of financial assets and extinguishments of liabilities. The rules in SFAS No. 140 have a more limited scope than SIC 12 and are therefore applied only when the assets transferred are financial assets and the SPE is a Qualifying Special Purpose Entity; in these cases, securitized portfolios are derecognized for US GAAP purposes. This reconciling item principally includes gains arising from the securitization transactions on the retail portfolio of receivables of financial services companies, realized under US GAAP and not yet realized under IFRS. Additionally, in accounting periods subsequent to a securitization, the fair value of beneficial interests in securitized financial assets that are classified as available for sale is recorded within other comprehensive income under US GAAP in accordance with SFAS No. 115 – Accounting for Certain Investments in Debt and Equity Securities.

11.2 Measurement of investments in equity securities

Differences between IAS 39 and FAS 115 can give rise to measurement differences between IFRS and US GAAP, as described by Electrolux and Nokia.

Note 29 US GAAP information [extract] Securities

In accordance with IFRS (IAS 39), financial assets categorized as “available for sale” are recognized at fair value. For Electrolux such category includes investments with a temporary disposal restriction. Under US GAAP, financial assets for which the sale is restricted by contractual requirements are recorded at cost and subject to write down for impairment. Under US GAAP Electrolux recognizes distributions from investments recorded at cost as dividend income or receipt.

Extract 49: FIAT




39. Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles [extract]

Marketable securities and unlisted investments Under IFRS, all available-for-sale investments, which includes all publicly listed and non-listed marketable securities, are measured at fair value and gains and losses are recognized within shareholders’ equity until realized in the profit and loss account upon sale or disposal. Under US GAAP, the Group’s listed marketable securities are classified as available-for-sale and carried at aggregate fair value with gross unrealized holding gains and losses reported as a component of other comprehensive income (loss). Investments in equity securities that are not traded on a public market are carried at historical cost, giving rise to an adjustment between IFRS and US GAAP.

12 Financial instruments: shareholders’ equity Neither IFRS nor US GAAP explicitly provide rules on the recognition of equity in the balance sheet. Generally, equity instruments are recognised when an entity recognises a corresponding asset or derecognises a corresponding liability.

In practice, there are accounting and presentational differences resulting from differences in the guidance between IFRS and US GAAP in various areas, including, but not limited to:

• the distinction between debt and equity;

• split accounting where a financial instrument comprises a debt and equity element;

• convertible debt with a premium put; and

• treasury shares.

Certain of the differences in accounting for shareholders’ equity under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

12.1 Distinction between debt and equity

The principal standards for distinguishing between debt and equity are FAS 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity under US GAAP and IAS 32 Financial Instruments: Disclosure and Presentation under IFRS. Differences in the definitions and requirements under these standards and other specific IFRS and US GAAP guidance can result in the same instrument being classified differently between debt and equity under IFRS and US GAAP.

In the following extract, Unilever describes a difference where preference shares are classified as debt under IFRS but as equity under US GAAP.

Additional information for US investors [extract] Preference shares

Under IAS 32, Unilever recognises preference shares that provide a fixed preference dividend as borrowings with preference dividends recognised in the income statement. Under US GAAP such preference shares are classified in shareholders’ equity with dividends treated as a deduction to shareholder’s equity.

Extract 51: Nokia

Extract 52:Unilever

43

Conversely, it is possible for a subordinated debt instrument to be classified as debt under US GAAP but equity under IFRS, as illustrated by Barclays in the extract below.

63 Differences between IFRS and US GAAP accounting principles [extract] Classification of debt and equity IFRS US GAAP

From 1st January 2005, certain subordinated instruments issued by the Group are treated as equity under IFRS where they contain no present obligation to deliver cash or another financial asset to a holder. If these are held in foreign currency, the instrument is translated into the reporting currency at the exchange rate ruling on the date of issuance.

The subordinated instruments issued by the Group which are treated as equity under IFRS are treated as debt instruments under US GAAP and are translated at the rate ruling at the balance sheet date.

12.2 Split accounting

Split accounting may be applied under both IFRS and US GAAP where a financial instrument (eg, convertible debt) comprises a debt and an equity element. However, the detailed guidance for split accounting differs between IFRS and US GAAP.

WPP reports a difference related to debt issued with a warrant which was not issued at a significant discount.

Notes to the Reconciliation to US Accounting Principles [extract] 1 Significant differences between IFRS and US Generally Accepted Accounting Principles [extract] (i ) Convertible debt [extract]

Under IFRS, convertible debt is classified into both liability and equity elements, as described in the note on accounting policies in the financial statements. Under US GAAP, APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, requires the issuer of a conventional convertible debt instrument issued without a substantial discount to account for the convertible debt entirely as a liability. …

13 Financial instruments: derivatives and hedge accounting The principal standards for derivatives and hedge accounting are IAS 39 Financial Instruments: Recognition and Measurement under IFRS and FAS 133 Accounting for Derivative Instruments and Hedging Activities under US GAAP.

There are various areas of difference between the guidance in IAS 39 and in FAS 133 that may give rise to reconciling differences, including, but not limited to:

• embedded derivatives;

• the presentation of certain cash flow hedges;

• designation and effectiveness of hedges;

• short-cut method of hedge effectiveness testing;

• partial term hedges;

• net hedging;

Extract 53: Barclays

Extract 54: WPP



• portfolio hedging of interest rate risk;

• non-derivative hedging instruments;

• hedging held-to-maturity investments;

• hedging intragroup transactions and monetary items, including hedges of net investments in foreign operations;

• hedging firm commitments; and

• hedging commitments to acquire or dispose of a subsidiary, a minority interest or an equity method investee.

Certain of the differences in derivatives and hedge accounting under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

13.1 Embedded derivatives

Although IFRS and US GAAP generally identify the same embedded derivatives, differences may arise in practice. Rio Tinto reports one such difference in the extract below.

52 Reconciliation to US Accounting Principles [extract] Mark to market of derivative contracts [extract]

…

The US standard, FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, is similar but not identical to IAS 39. In 2005, an additional loss of US$4 million (US$1 million gain after tax and minorities) was recognised in US GAAP earnings primarily as a result of the recognition at fair value of additional embedded derivatives for US GAAP. For IFRS, the currency exposures in these contracts are not recognised in the balance sheet because the currency of the contract is considered to be ‘commonly used’ in the counterparty’s country of operation.

…

13.2 Cash flow hedges

In the following extract, BASF reports a difference resulting from the presentation of a cash flow hedge as a basis adjustment against the carrying amount of the hedged item.

5. Reconciliation of net income and stockholders’ equity to U.S. GAAP [extract]

(c) Accounting for financial instruments

The guidelines for accounting for financial instruments according to IAS 39 “Financial Instruments: Recognition and Measurement” and SFAS 133 “Accounting for Derivatives and Hedging Activities” are very similar in concept. The reconciliation items relate to the differing treatment of fair value changes of derivatives within equity, which are a component of a cash-flow hedge for a future transaction. According to IAS 39, for hedging future transactions, there is an option regarding the accounting treatment of these fair value changes. BASF has chosen the option to net these changes in valuation against the acquisition costs of the non-financial assets or debts. The other option allows the valuation changes to be charged to the income statement in the same period in which the hedged transaction flows through the income statement. According to SFAS 133, only the second method is allowed, while netting against acquisition costs is prohibited. This timing difference leads to a difference in equity and has no impact on income.


Extract 56: BASF

45

13.3 Designation and effectiveness of hedges

Reuters reports a difference resulting from not designating derivative instruments as hedge instruments under FAS 133.


Material differences between IFRS (as adopted by the EU) and US GAAP [extract] i. Derivative instruments [extract] … Under IFRS, the Group has designated certain derivatives as hedges of foreign net investments and fair value hedges of borrowings. For net investment hedges, fair value movements arising from these derivatives are recognised in a hedging reserve, until transferred to the income statement on disposal or impairment of the underlying item. For fair value hedges, fair value movements are adjusted in the carrying value of borrowings; movements in the fair value of the fair value hedges are recognised in the income statement, together with movements in the fair value of the item being hedged. To the extent that hedges are ineffective, gains and losses are recognised in the income statement. Under US GAAP, the Group adopted FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ as amended by FAS 138, on 1 January 2001. FAS 133 introduced new rules in respect of hedge accounting and the recognition of movements in fair value through the income statement. As a result of the adoption, all derivatives and embedded derivative instruments, whether designated in hedging relationships or not, are carried on the balance sheet at fair value. The Group has not designated any of its derivative instruments as qualifying hedge instruments under FAS 133. Accordingly, changes in the fair value of derivative and embedded derivative instruments have been included within the income statement under US GAAP. …

13.4 Short-cut method

IAS 39 has no equivalent to the ‘short-cut method’ for hedge effectiveness testing under US GAAP. This difference is reported by HSBC in the following extract.

47 Differences between IFRSs and US GAAP [extract]

Derivatives and hedge accounting [extract]

US GAAP

…

• The US GAAP ‘shortcut method’ permits an assumption of zero ineffectiveness in hedges of interest rate risk with an interest rate swap provided specific criteria have been met. IAS 39 does not permit such an assumption, requiring a measurement of actual ineffectiveness at each designated effectiveness testing date.

…

Impact

• HSBC’s North American subsidiaries continue to follow the ‘shortcut method’ of hedge effectiveness testing for certain transactions in their US GAAP reporting. Alternative hedge effectiveness testing methodologies are sought under IFRSs for these hedging relationships.

…

Extract 57: Reuters

Extract 58: HSBC



13.5 Partial term hedges

A partial-term hedge where a portion of the cash flows or fair value of an asset or liability is designated as a hedged item under IAS 39 may fail to meet the effectiveness testing requirements of FAS 133. The following extract from France Telecom illustrates this difference.

Note 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

Description of US GAAP adjustments [extract] Derivative Instruments and Hedging Activities (L) [extract]

…

In addition, in 2005 some derivatives were entered into, to hedge partial maturity of certain debts. Under IFRS, those derivatives qualified for hedging, which was not allowed under US GAAP.

…

13.6 Non-derivative hedging instruments

US GAAP is more restrictive than IAS 39 in the designation of a non-derivative financial asset or financial liability as a hedging instrument in a hedge of a foreign currency risk. The following extracts illustrate this difference as it applies to British Airways.

2 Accounting policies [extract] Derivatives and financial instruments [extract] Cash flow hedges [extract]

…

Certain loan repayment instalments denominated in US dollars and Japanese yen are designated as cash flow hedges of highly probable future foreign currency revenues. Exchange differences arising from the translation of these loan repayment instalments are taken to equity in accordance with IAS 39 requirements and subsequently reflected in the income statement when either the future revenue impacts income or its occurrence ceases to be probable.

…

Note 36 – Differences between IFRS and United States Generally Accepted Accounting Principles [extract] (f) Derivative instruments [extract]

…

Under US GAAP all derivative financial instruments are accounted for under SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ and recorded on the balance sheet at their fair value. Similar to IAS 39, SFAS 133 requires that changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the instrument is designated as part of a hedge transaction. SFAS 133 does not allow debt instruments to be utilised as hedging instruments, and therefore exchange differences arising from the retranslation of debt instruments are recorded in the income statement in the period they arise.

…


Extract 60: British Airways


47

14 Inventory and long-term contracts The principal standards for inventory and long-term contracts are IAS 2 Inventories under IFRS and ARB 43 Chapter 4 Inventory Pricing under US GAAP. Reconciling differences may arise in practice as a result of differences between these standards and other guidance under IFRS and US GAAP in several areas, including, but not limited to:

• costing methodology;

• impairment and reversals of impairment; and

• construction contracts.

Certain of the differences in accounting for inventory and long-term contracts under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

14.1 Inventory costs

Although the principles contained in IAS 2 for determining the costs of inventory are comparable to those under US GAAP, there may be differences in practice. For example, both IFRS and US GAAP permit the use of the first-in, first-out and weighted average costing methods, but only US GAAP permits the last-in, first-out costing method, as illustrated by Hanson in the following extract.

33 US accounting information [extract] a) Comparison of International and US accounting principles [extract] Inventory valuation Under IFRS, valuing inventory on a last-in-first-out (LIFO) basis is not permitted. However, under US GAAP, where the inventory is valued on a LIFO basis for tax purposes in the local state, the same methodology must be used for accounting purposes.

14.2 Reversal of impairment

Unlike IFRS, US GAAP generally does not permit an impairment to be reversed once it has been recognised. Alcatel reports a difference in this respect.

Note 39 – Summary of differences between accounting principles followed by Alcatel and U.S. GAAP [extract] (j) Reversal of inventory write-down

Under IAS 2 “Inventories” (“IAS 2”), inventories are written-down if cost becomes higher than net realizable value. An assessment of the net realizable value is made at each reporting period. When there is clear evidence of an increase of the net realizable value because of changes in economic circumstances, the amount of the write-down is reversed even if the inventories remain unsold.

Under U.S. GAAP, ARB No 43 “Restatement and Revision of Accounting Research Bulletins” states that following a write-down “such reduced amount is to be considered the cost for subsequent accounting purposes” and it is therefore not permitted to reverse a former write-down before the inventory is either sold or written off.

Extract 62: Hanson

Extract 63: Alcatel



15 Leasing The principal standard for lease accounting under IFRS is IAS 17 Leases. Under US GAAP, the principal standard is FAS 13 Accounting for Leases, but there is also specific US GAAP guidance for various categories of leases, most notably FAS 98 Accounting for Leases for real estate transactions and FAS 28 Accounting for Sales with Leasebacks for sale and leaseback transactions.

Although the overall approaches of IFRS and US GAAP are broadly comparable, differences may arise in practice. The differences that may result in reconciling differences include, but are not limited to those relating to:

• leases involving real estate; and

• sale and leaseback transactions.

Certain of the differences in accounting for leases under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

15.1 Leases involving real estate

Royal Ahold reports a difference in accounting for real estate leases in the following extract.

Note 37 a. Reconciliation of net income (loss) and shareholders’ equity from IFRS to US GAAP [extract] 5 Real estate [extract]

…

Other

This item mainly relates to accounting for leases with land and building components. Under IFRS, a finance lease that includes both land and building is viewed as two separate components. The land component is classified as an operating lease unless title is transferred or the lease contains a bargain purchase option. The building component is classified separately as a finance lease. Under US GAAP, bifurcation of a finance lease including land and building is not required if the land component is less that 25% of the total property value. The reconciling item represents the difference between the operating lease expenses of the land recognised on a straight line basis under IFRS and the additional depreciation and interest expenses of the land that is capitalized under US GAAP.


49

15.2 Sale and leaseback transactions

One specific area of difference relates to the treatment of sale and leaseback transactions involving real estate, as FIAT and Nokia report in the following extracts.


Description of reconciling items [extract] (h) Sale and leaseback transactions

This difference relates principally to a sale and leaseback transaction entered into during 2005. The events leading to this transaction are described below.

In 1998, the Group entered into a real estate sale-leaseback transaction. The Group determined that the counterparty to the transaction Corso Marconi Immobilare (“CMI”), should be considered a special purpose entity (“SPE”) and should be consolidated under IFRS and under US GAAP because the majority owner of the SPE made only a nominal capital investment, the activities of the SPE were virtually all on the Group’s behalf, and the substantive risks and rewards of the SPE rested with the Group. In 2005, the Group obtained legal ownership of the underlying properties of CMI and entered into a sale and leaseback transaction with an entity in which the Group acquired an insignificant equity interest. Under IFRS, the Group determined that the transaction qualified as a sale and operating leaseback because substantially all risks and rewards of ownership were transferred to the buyer and the transaction was established at fair value. Accordingly, a gain of 117 million euros was recognized under IFRS. Under US GAAP, sale and leaseback accounting for real estate transactions is only permitted in certain limited circumstances as described in SFAS No. 98 – Accounting for Leases. Because of the Group’s retained equity interest in the buyer, under US GAAP this transaction has been accounted for under the finance method, whereby the sale proceeds have been reported as a financing obligation and the properties remain on the balance sheet. The gain realized under IFRS has been deferred and the assets continue to be depreciated.


Sale and leaseback transaction In 2005, the Group entered into a sale and leaseback transaction. Under the agreement, the Group has a potential liability related to a pending zoning change scheduled to be final in 2006. Under IFRS, the transaction qualified as a sale and leaseback as the potential liability related to the zoning change is considered to be remote. Accordingly, the Group recorded a gain on the sale of the property and rental expense associated with the subsequent leaseback. Under US GAAP, the transaction did not qualify for sale and leaseback accounting as the clause is deemed to create continuing involvement by the Group. Accordingly, the transaction is accounted for as a capital lease until the potential obligation lapses with the zoning change expected in 2006. Once the potential obligation lapses and continuing involvement ceases, the transaction can be accounted for as a sale and the corresponding gain can be realized. Until that time, the amount of the asset will remain on the US GAAP balance sheet and rental payments are recorded as a reduction of the principal amount of the obligation and as interest expense. The US GAAP sale and leaseback adjustment reflects the reversal of the gain on sale of the property and rental expense recorded under IFRS net of interest expense recorded under US GAAP.

Extract 65: FIAT

Extract 66: Nokia



16 Taxation The principal standards for accounting for taxation under IFRS and US GAAP are IAS 12 Income Taxes and FAS 109 Accounting for Income Taxes. Despite the ‘full provision’ approaches to accounting for taxation under both IAS 12 and FAS 109, deferred taxation is one of the most common items reported in reconciliations between IFRS and US GAAP. The principal reason for this is that a high proportion of other adjustments to net income and shareholders’ equity will have consequential effects on the deferred tax provision. However, differences can also arise in practice as a result of differences in the specific IFRS and US GAAP guidance in several areas, including, but not limited to:

• exceptions from the general approaches under IAS 12 and FAS 109;

• temporary differences arising from investments in subsidiaries, associates and joint ventures;

• deferred tax on elimination of intragroup profits;

• equity instrument awards to employees;

• the retranslation of non-monetary assets for tax purposes;

• applicable tax rates;

• recognition of amounts in either income or equity;

• recognition of deferred tax assets;

• deferred tax arising from business combinations;

• classification of amounts as either current of non-current assets or liabilities; and

• presentation of a reconciliation of expected and reported tax expense.

Certain of the differences in accounting for taxation under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

16.1 Exceptions from the general approach

Exceptions from the full provision approach to accounting for taxation under either IAS 12 or FAS 109 can result in reported differences as described by Altana in the following extract.

(32) Reconciliation to U.S. GAAP [extract] J) Differences in accounting for income taxes standards [extract]

…

In accordance with IAS 12, deferred taxes are not recognized for temporary differences resulting from the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit. As described in adjustment b), EITF No. 98-11 determines that the principle outlined in SFAS No. 109 should be used to record the assigned value of an asset in which the amount paid differs from the tax basis of the asset.

…

Extract 67: Altana

51

16.2 Temporary differences arising from investments in subsidiaries, associates and joint ventures

In the following extract, Vodafone describes a difference relating to the recognition of a liability for the difference between the carrying amount and the tax basis of an investment in a foreign associate.

38. US GAAP information [extract] Summary of differences between IFRS and US GAAP [extract] h. Income taxes [extract] … Under IFRS, the Group does not recognise a deferred tax liability on the outside basis differences in its investment in associates to the extent that the Group controls the timing of the reversal of the difference and it is probable the difference will not reverse in the foreseeable future. Under US GAAP, the Group recognises deferred tax liabilities on these differences.

16.3 Deferred tax on elimination of intragroup profits

Novo Nordisk reports a reconciling item for deferred tax on intragroup profits eliminated on consolidation.

38 Reconciliation to US GAAP [extract] (i) Tax arising from the difference between IFRS and US GAAP and differences related to deferred taxes [extract] Impact of temporary differences related to intercompany profits

Under IFRS and US GAAP, unrealised profits resulting from intercompany transactions are eliminated from the carrying amount of assets, such as inventories. In accordance with IFRS, the Group calculates the tax effect with reference to the local tax rate of the company that holds the inventory (the buyer) at period-end. However, US GAAP requires that the tax effect is calculated with reference to the local tax rate in the seller’s or manufacturer’s jurisdiction.

In prior years, the differences between the IFRS and US GAAP calculations have been immaterial; hence no reconciliation item has been reported. Due to a significant increase in internal profits in 2005, Novo Nordisk has incorporated the difference between IFRS and US GAAP figures amounting to DKK 466 million.

16.4 Equity instrument awards to employees

Cadbury Schweppes reports a difference relating to share-based payments.

42. Summary of differences between IFRS and US Generally Accepted Accounting Principles [extract] (e) Deferred taxation [extract]

…

For US GAAP, deferred tax assets for share awards are recorded based on the recorded compensation expense. Under IFRS deferred tax assets are recognised based on the intrinsic gain at the year-end. The amount recognised in the Income Statement is capped at the tax effected share award charge, with any excess being recognised directly through reserves.

…

Extract 68: Vodafone

Extract 69: Novo Nordisk

Extract 70: Cadbury Schweppes



16.5 Computation – retranslation of non-monetary assets for tax purposes

A difference between IFRS and US GAAP may arise when non-monetary assets and liabilities of an entity, which are measured in its functional currency, have a tax base that is determined in a different currency. This difference is illustrated by TMM in the following extract.

27. RECONCILIATION OF DIFFERENCES BETWEEN IFRS AND U.S. GAAP: [extract]

d. Significant differences between IFRS and U.S. GAAP: [extract]

v. Deferred taxes

As mentioned in Note 4, income tax is recorded in accordance with IAS 12 (revised), which, among other provisions, requires the recognition of deferred taxes for non-monetary assets indexed for tax purposes. Under U.S. GAAP, the Company follows the guidelines established in SFAS No. 109 “Accounting for Income Taxes”. This statement does not permit recognition of deferred taxes for differences related to assets and liabilities that are remeasured from local currency into the functional currency using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes.

For U.S. GAAP purposes the deferred tax computation on non-monetary assets and liabilities is based on current historical pesos whereas for IFRS purposes amounts in historical US dollars are considered for book purposes. The deferred tax adjustment included in the consolidated results and stockholders’ equity reconciliation, also include the effect of deferred taxes on the other U.S. GAAP adjustments.

Lafarge reports a similar difference in respect of an entity operating in a hyperinflationary economy.


3. Income taxes [extract] (a) Accounting for deferred taxes in hyperinflationary economies

IAS 12 requires us to recognize deferred tax assets and liabilities for temporary differences related to assets and liabilities that are remeasured at each balance sheet date in accordance with the provisions of IAS 29, Financial Reporting in Hyperinflationary Economy as described in Note 2(d).

Pursuant to SFAS 109, “Accounting for Income Tax” (“SFAS 109”), U.S. GAAP prohibits recognition of a deferred tax liability or asset for differences related to assets and liabilities that are remeasured at each balance sheet date. Deferred taxes recorded in entities in hyperinflationary economies have been reversed for U.S. GAAP purposes.

16.6 Computation – applicable tax rate

Cadbury Schweppes reports a difference in the tax rates applied under IFRS and US GAAP in the extract below.

42. Summary of differences between IFRS and US Generally Accepted Accounting Principles [extract]

(e) Deferred taxation [extract]

The fundamental basis of recognising deferred taxes is the similar under both IFRS and US GAAP, however certain detailed differences exist.

Under IFRS, deferred tax is based on tax rates and laws that have been enacted, or substantively enacted. For US GAAP, only tax rates and laws that have been enacted are taken into account. …

Extract 71: TMM

Extract 72: Lafarge

Extract 73: Cadbury Schweppes

53

16.7 Income or equity?

A difference in the recognition of deferred tax movements as either income or equity is reported by Vivendi in the following extract.

Note 34. Supplemental disclosures required under US Generally Accepted Accounting Principles (US GAAP) and US Securities and Exchange Commission (SEC) [extract]

34.10.3 Changes in deferred taxes originally charged or credited to equity

The tax effects of items charged or credited directly to equity during the current year are allocated directly to equity. A deferred tax item originally recognized by a charge or credit to shareholders’ equity may change either from changes in assessments of recovery of deferred tax assets or from changes in tax rates, laws or other measurement attributes. — Under IFRS, consistent with the initial treatment, IAS 12 requires that the resulting change in deferred taxes be charged or credited directly to equity. — Under US GAAP, FAS 109 requires allocation of the resulting change in deferred taxes to continuing operations, i.e. in the statement of earnings. — In 2005, €48 million were credited to equity under IFRS, and to tax income under US GAAP. — In 2004, no material reconciling difference was generated.

16.8 Deferred tax assets

The following extract from Hanson provides an example of a difference relating to the recognition of deferred tax assets.

33 US accounting information [extract] a) Comparison of International and US accounting principles [extract] Deferred tax [extract] … Under IFRS, deferred tax assets are recognised for future deductions and utilisations of tax carry forwards to the extent that it is more likely than not that suitable taxable profit is expected to be available. Under US GAAP, deferred tax assets are recognised at their full amounts and reduced by a valuation allowance to the extent it is more likely than not that suitable taxable profits will not be available. Differences in deferred taxation may occur as a result of accounting adjustments between IFRS and US GAAP.

16.9 Deferred tax arising from business combinations

Tele2 reports a difference in respect of subsequent recognition of deferred tax assets arising from loss carry-forwards acquired in a business combination.

Note 39 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract] Explanation of current differences between IFRS and US GAAP [extract] a) Valuation of acquired loss carry-forwards

According to IFRS, an amount representing acquired loss carry-forwards, which on the date of acquisition is valued at zero, but which in subsequent years is valued and recognized as an income tax benefit, is reported as a write down of goodwill in the income statements after an adjustment for the remaining amortization period of the original acquisition.

According to US GAAP, acquired loss carry-forwards subsequently recognized are not reported as an income tax benefit, but instead directly reduce goodwill related to the acquisition when a valuation allowance was recognized for the related deferred tax asset at the acquisition date.

Extract 74: Vivendi

Extract 75: Hanson

Extract 76: Tele2



In the following extract, Sanofi-Aventis describes a difference relating to tax benefits on stock option awards in a business combination.

G. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract] 2-c Income taxes [extract]

Deferred tax related to acquired stock options

Under U.S. GAAP, the expected tax benefit from fully vested option awards granted to employees of an acquiree in a purchase business combination should not result in a deferred tax asset on the business combination date. Any future deduction resulting from the exercise of the options should be recognized as an adjustment to the purchase price of the acquired business when realized to the extent that this deduction does not exceed the fair value of the awards at the business combination date. The tax benefit associated with any “excess” deduction is recognized in additional paid in capital. Under IFRS, the expected tax benefit from vested option awards results in the recognition against goodwill of a deferred tax asset on the date the business combination is consummated. Any future deduction resulting from the exercise of the options should then be recognized directly in equity.

16.10 Presentation

In the extract below, Lafarge describes a difference in the classification of deferred tax amounts as current or non-current assets or liabilities.


6. Items affecting the presentation of consolidated financial statements [extract] (c) Deferred tax assets and liabilities

IFRS prohibits separate accounting for deferred taxes between current and non-current. Under IFRS, deferred tax accounts are classified as non-current in the balance sheet.

17 Provisions Under IFRS, IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains broad principles for accounting for provisions and specific guidance on accounting for restructuring costs. US GAAP has no equivalent general standards on provisions, but has several standards on specific topics, including FAS 143 Accounting for Asset Retirement Obligations and FAS 146 Accounting for the Costs Associated with Exit or Disposal Activities. FAS 5 Accounting for Contingencies provides guidance for evaluating whether a liability should be recognised.

The differences in accounting for provisions that may give rise to reconciling differences include, but are not limited to those relating to:

• discounting;

• measurement when there is a range of possible outcomes;

• costs of a major inspection or overhaul;

• environmental and decommissioning costs;

Extract 77: Sanofi-Aventis

Extract 78: Lafarge

55

• onerous executory contracts;

• vacant leasehold property; and

• restructuring costs.

Certain of the differences in accounting for provisions under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

17.1 Discounting

Differences in discounting provisions may arise in practice, as illustrated by Electrolux in the following extract.

Note 29 US GAAP information [extract] Discounted provisions

Under IFRS and US GAAP, provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Under IFRS, where the effect of time value of money is material, the amount recognized is the present value of the estimated expenditures. IAS 37 states that long-term provisions shall be discounted if the time value is material. According to US GAAP discounting of provisions is allowed when the timing of cash flow is certain.

17.2 Major inspection or overhaul

The treatment of the costs of a major inspection or overhaul may differ under IFRS and US GAAP. In the following extract, Steamship Company Torm describes a change in accounting policy under US GAAP to conform to the policy adopted under IFRS and avoid a reconciling difference.

NOTE 23 - RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP) [extract]

a) Dry-docking costs [extract]

As of January 1, 2005, TORM changed its method of accounting for vessel dry-docking costs under US GAAP from the accrual method to the deferral method. Under the accrual method, dry-docking costs had been accrued as a liability and an expense on an estimated basis in advance of the next scheduled dry-docking. Subsequent payments for dry-docking were charged against the accrued liability. Under the deferral method, costs incurred in replacing or renewing the separate assets that constitute the dry-docking costs are capitalized and depreciated on a straight-line basis over the estimated period until the next dry-docking. Dry-docking activities include, but are not limited to, inspection, service on turbocharger, replacement of shaft seals, service on boiler, replacement of hull anodes, applying of antifouling and hull paint, steel repairs and refurbishment and replacement of other parts of the vessel. This change was made to conform to prevailing shipping industry accounting practices and the Group's accounting under IFRS. …


Extract 80: Steamship Company Torm



17.3 Provisions for onerous executory contracts

In the following extract, Telenor reports a difference which arises when a provision for an onerous contract under IFRS is reversed under US GAAP.

38. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP) [extract]

(18) Provisions

Under IFRS, provisions are recognised when Telenor has a minimum payment obligation from an agreement (onerous contract) but has decided not to use the services under the agreement in future periods.

Under US GAAP, a liability cannot be recognized before the contract is terminated or Telenor stop using the benefits from the contract.

17.4 Accounting for restructuring costs

A difference in accounting for restructuring provisions under IAS 37 and FAS 146 is reported by FIAT in the extract below.


Description of reconciling items [extract] (f) Restructuring provisions

The Group from time to time puts into effect corporate reorganization and restructuring plans. The principal difference between IFRS and US GAAP with respect to accruing for restructuring costs is that IFRS places emphasis on the recognition of the costs of the exit plan as a whole, whereas US GAAP requires that each type of cost is examined individually to determine when it may be accrued. As it relates to the Group’s restructuring plans, the principal difference in accounting for restructuring costs relates to termination benefits paid pursuant to the Group’s restructuring plans.

Under IFRS, the Group applies the provision of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets in order to assess restructuring liabilities at the balance sheet date. Under IAS 37, a provision for restructuring costs is recognized when the Group has a constructive obligation to restructure.

Under US GAAP, termination benefits are recognized in the period in which a liability is incurred, which depends on whether the termination costs relate to (i) contractual termination benefits or special termination benefits accounted for under SFAS No. 88, (ii) an on-going severance plan accounted for under SFAS No. 112 – Employers’ Accounting for Post-employment Benefits, or (iii) one-time termination benefits accounted for under SFAS No. 146 – Accounting for Costs Associated With Exit or Disposal Activities. The application of US GAAP often results in a later recognition of restructuring costs for the Group’s restructuring activities.

Extract 81: Telenor

Extract 82: FIAT

57

18 Revenue recognition The principal standard for revenue recognition under IFRS is IAS 18 Revenue. In contrast, under US GAAP there are many individual pronouncements that cover particular categories of transaction or particular industries. Additionally, the SEC staff has issued SAB 104 Revenue Recognition in Financial Statements.

Differences can arise in practice as a result of differences in the specific IFRS and US GAAP guidance for revenue recognition in several areas, including, but not limited to:

• long-term service arrangements;

• multiple-element arrangements;

• software transactions; and

• disposals of land and buildings.

Certain of the differences in revenue recognition under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

18.1 Long-term service arrangements

United Utilities reports a difference in respect of long-term service arrangements as described in the following extract.

33 Summary of differences between International Financial Reporting Standards and accounting principles generally accepted in the United States of America [extract] (i) Revenue and related profit recognition [extract] The revenue recognition adjustment principally relates to revenues under long-term service contracts in the group’s Vertex outsourcing business and relates to the recognition of up-front fees and the treatment of planned reductions in fees over the terms of such contract. Under IFRS, revenues under such contracts are generally recognised using the percentage completion method and applying a cost-to-cost methodology. Application of a cost-to-cost methodology is explicitly permitted by IAS 18 ‘Revenue’, for long-term service contracts. Furthermore, IAS 18 emphasises matching of revenues and expenses. … Under US GAAP, revenues under long-term service contracts must be recognised based upon proportional performance under the contract. This is similar to the percentage completion method; however, use of a cost-to-cost methodology for determining proportional performance under service contracts is not considered acceptable. Instead emphasis is placed on the customers’ perspective under the contract. …

18.2 Multiple-element arrangements

TDC reports a reconciling item in respect of transactions that have multiple elements.

Note 33 Reconciliation to United States Generally Accepted Accounting Principles (US GAAP) [extract]

f) Revenue recognition

In accordance with IFRS, elements in revenue arrangements with multiple deliverables are recognized as separate units of accounting, independent of any contingent element related to the delivery of additional items or other performance conditions. Under US GAAP, multiple element contracts as from June 15, 2003 are recorded in accordance with EITF No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” under which the amount allocable to a delivered item is limited to the amount that is not contingent upon the delivery of additional items or meeting other performance conditions.

Extract 83: United Utilities

Extract 84: TDC



18.3 Software revenue recognition

Spirent Communications reports a difference in revenue recognition for sales of software.

39. Differences between International Financial Reporting Standards and United States Generally Accepted Accounting Principles [extract] (a) Revenue recognition Under IFRS, multiple-element arrangements with hardware, software and post contract support (“PCS”) components are accounted for as two or more separate transactions only where the commercial substance is that the individual components operate independently of each other because they are capable of being provided separately from one another and it is possible to attribute reliable fair values to every component. To the extent that a separate component comprises a product sale of hardware or software, revenue is recognized at the time of delivery and acceptance and when there are no significant vendor obligations remaining. Terms of acceptance are dependent upon the specific contractual arrangement agreed with the customer. Revenue is recognized on other components as the Group fulfills its contractual obligations and to the extent that it has earned the right to consideration. Under US GAAP, the rules for revenue recognition under multiple-element arrangements are detailed and prescriptive. These rules include the requirement that revenues be allocated to the respective elements of such an arrangement on the basis of Vendor Specific Objective Evidence (“VSOE”) for each element. Statement of Position (“SOP”) 97-2 ‘Software Revenue Recognition’ sets out precise requirements for establishing VSOE for valuing elements of a multiple-element arrangement. When VSOE for individual elements of an arrangement cannot be established in accordance with SOP 97-2, revenue is generally deferred and recognized over the term of the final element. Under US GAAP, the Group does not have VSOE for certain elements of certain multiple-element arrangements with customers in the Service Assurance division of our Communications group. The terms of these arrangements with customers include, among other terms, PCS for hardware and software and the provision of product roadmaps, which contain expected release dates of planned updates and enhancements. The existence of a particular item on the roadmap does not, in itself, create a contractual obligation to deliver that item; however, under US GAAP an implied obligation is deemed to exist. As a consequence of the terms of these arrangements revenue is deferred under US GAAP and does not start to be recognized until delivery or discharge of the obligation in respect of the final element of the arrangement for which VSOE is not determinable. If this final element is PCS, then revenue is recognized over the remaining term of the PCS contract. The Service Assurance division has a number of multi-year contracts for PCS and this has the effect of extending the period over which revenue is recognized for US GAAP. Direct costs of the delivered products for which revenue recognition is deferred are also deferred. The above gives rise to an IFRS to US GAAP difference in respect of revenue recognition in the reconciliations of both net income and shareholders’ equity.

19 Government grants The principal standard for accounting for government grants under IFRS is IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. There is no prescribed treatment for government grants under US GAAP. However, accounting practice under US GAAP is generally the same as the required IFRS treatment.

20 Segmental reporting The principal standards for segmental reporting under IFRS and US GAAP are IAS 14 Segmental Reporting and FAS 131 Disclosures about Segments of an Enterprise and Related Information.

A broadly similar level of detail is required under both IFRS and US GAAP but differences in disclosure may arise in practice.

Extract 85: Spirent Communications

59

21 Employee share option plans The principal standards for accounting for share-based payment are IFRS 2 Share-based Payment under IFRS and FAS 123(R) Share-Based Payments under US GAAP.

Since the publication of FAS 123(R), both IFRS and US GAAP have similar requirements for accounting for share-based payments. However, differences between IFRS and US GAAP may arise in practice in specific areas, including, but not limited to:

• identifying the grant date;

• share-based transactions other than with employees;

• employee share purchase plans;

• modifications to the terms of an award;

• payroll taxes;

• income taxes; and

• earnings per share.

Certain of the differences in accounting for share-based payments under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

21.1 Grant date

France Telecom reports a difference where the grant date under IFRS was considered to be earlier than the grant date under US GAAP.

NOTE 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

Description of US GAAP adjustments [extract]

Share based payment (J) [extract]

Employee share offers [extract]

…

The IFRS accounting for the plan is described in Note 2.1.22 to these consolidated financial statements. Under IFRS, at the grant date, which France Telecom considers to be the date on which the main terms of the employee share offer were announced, the fair value of stock options, employee share issues and share grants without consideration is determined. The fair value of employee share offers are recorded immediately in personnel costs, with an adjustment to equity. Other share-based payments are recognized as personnel costs on straight-line basis over the vesting period and in equity for equity-settled plans or in debt for cash-settled plans.

Under US GAAP France Telecom recognized €122 million and €424 million as of December 31, 2005 and 2004, respectively, in compensation expense, including compensation for all potential “bonus shares”, based on the fair value of the shares issued at the grant date, which was determined to be the end of the subscription period. All such compensation expense was recognized in the second halves of 2005 and 2004. As these shares were previously issued and outstanding, there is no effect on France Telecom’s capital structure.




21.2 Payroll taxes

Nokia reports a difference in respect of the recognition of payroll taxes.


Social security cost on share-based payments

Under IFRS, the Group recognizes a provision for social security costs on unvested equity instruments based upon local statutory law, net of deferred compensation, which is recorded as a component of total equity. The provision is considered as a cash-settled share-based payment and is measured by reference to the fair value of the equity benefits provided and the amount of the provision is adjusted to reflect changes in Nokia’s share price.

Under US GAAP, a liability for social security costs on unvested equity instruments is recognized on the date of the event triggering the measurement and payment of the tax to the taxing authority. Accordingly, no expense is recorded until stock options are exercised or nonvested shares are fully vested.

The US GAAP social security costs adjustment reflects the reversal of social security costs recorded under IFRS for outstanding options and unvested performance and restricted shares.

22 Pension costs Accounting for pension costs is discussed in this section. Accounting for other post-retirement benefits is discussed in section 23 and other employee benefits are covered in section 24.

Accounting for defined contribution pension schemes is straightforward under both IFRS and US GAAP as the pension cost is generally the contributions due from the employer in each period.

The principal IFRS standard for accounting for employee benefits other than share-based payments is IAS 19 Employee Benefits. The principal US GAAP standards are FAS 87 Employers’ Accounting for Pensions, FAS 88 Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, FAS 106 Employers’ Accounting for Postretirement Benefits Other than Pensions and FAS 132(R) Employers’ Disclosure about Pensions and Other Postretirement Benefits.

FAS 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) was issued in September 2006. FAS 158 does not change the amount of net periodic benefit cost included in net income but it does address several of the reported differences between IFRS and US GAAP.

IFRS and US GAAP have broadly comparable approaches to accounting for the costs of providing pension schemes to employees. However, there are differences in the detailed guidance and differences have arisen because the standards have been applied for the first time in different reporting periods, or because of differences in transitional provisions.

Differences in accounting for defined benefit pension plans that may give rise to reconciling differences include, but are not limited to those relating to:

• the classification of pension arrangements;

• the calculation of the benefit obligation;

• past service costs;

Extract 87: Nokia

61

• insurance contracts;

• measurement of plan assets;

• application of an asset cap;

• recognition of actuarial gains and losses; and

• settlements and curtailments.

Certain of the differences in accounting for pension costs under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings.

22.1 Classification of a pension arrangement

Differences between the IFRS and US GAAP criteria for classification of a pension arrangement as either defined benefit or defined contribution may result in accounting differences, as reported by Akzo Nobel and Stora Enso in the following extracts.

(23) Application of Generally Accepted Accounting Principles in the United States of America [extract]

(b) …

During 2005, Akzo Nobel reached an agreement with the unions on a change of its pension plan in the Netherlands, so that, effective December 31, 2005, it changed from a defined benefit plan to a defined contribution plan for IFRS, as the actuarial or investment risks related to the Dutch plan no longer rest with the company. However, SFAS 87 specifically prescribes for a defined contribution plan that the plan provides an individual account for each participant. The Dutch plan does not provide such individual accounts per participant as it is a collective defined contribution plan. Therefore, in accordance with SFAS 87 the changed pension plan in the Netherlands still is to be qualified as a defined benefit plan for US GAAP purposes.

…

Note 32—Summary of differences between International Financial Reporting Standards and Generally Accepted Accounting Principles in the United States of America [extract] a) Employee benefit plans [extract]

…

Disability benefits under the Finnish statutory employment pension scheme (“TEL”) were previously accounted for as a defined benefit plan under IFRS. In late 2004 the Finnish Ministry of Social Affairs and Health approved changes to the TEL which affected the method for calculating and funding these disability benefits (see note 21). IFRS provides that the use of insurance premiums to fund benefits should be accounted for using defined contribution accounting as long as a company retains no ongoing legal or constructive obligations, under any circumstances. Because of this change to the TEL the disability benefits are accounted fort as a defined contribution plan under IFRS. In 2004, the Company recorded a reduction in personnel expenses amounting to €179.9 million for its defined benefit obligation related to those benefits. U.S. GAAP contains no provision to allow defined contribution accounting where insurance premiums are used to fund benefits. Under U.S. GAAP, the cost of a benefit can and should be determined without regard to how an employer decides to finance the plan. The changes to the TEL had no impact on the defined benefit accounting treatment for the disability benefits under U.S. GAAP.

…

Extract 88: Akzo Nobel

Extract 89: Stora Enso



22.2 Past service cost

In the extract below Syngenta reports a difference in the periods over which past service costs are recognised.

33. Significant differences between IFRS and United States Generally Accepted Accounting Principles [extract] d: Pension provisions (including post-retirement benefits) [extract]

…

As described in Note 26, past service cost of US$60 million related to the Swiss pension plan rule change was expensed for IFRS in 2004. For US GAAP, in accordance with SFAS No. 87, this cost is being amortized over the expected future service period of that part of the workforce which was affected – approximately 8 years. Amortization expense of US$7 million was recorded for US GAAP in 2005.

…

22.3 Measurement of plan assets

Electrolux reports a difference in the measurement of pension plan assets in the following extract.

Note 29 US GAAP information [extract] Pensions and other post-employment benefits [extract]

Accounting for pensions and other post-employment benefits is made in accordance with IAS 19, Employee Benefits. Under US GAAP, guidance is defined in SFAS 87, Employers’ Accounting for Pensions, and SFAS 106, Employers’ Accounting for Post-retirement Benefits Other than Pensions. The material differences between IAS 19 and US GAAP which affect the Group are:

…

Under IAS 19, the estimated return on plan assets is based on actual market values, while US GAAP allows market-related values as the basis for estimation of the return on assets.

…

22.4 Asset cap

In the extract below, Lafarge reports a difference arising from the application of an asset cap under IFRS.


2. Pension obligations [extract] Accounting for pensions [extract]

Under U.S. GAAP, pension costs are accounted for in accordance with SFAS 87, “Employers’ Accounting for Pensions” (“SFAS 87”), SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits” (“SFAS 88”) and SFAS 106, “Employers’ Accounting for Post retirement Benefits Other than Pensions” (“SFAS 106”). IAS 19 is the corresponding standard applicable to employee benefits under IAS / IFRS. A limited number of discrepancies between these two sets of standards have been identified. They concern:

…

• the limitations applicable, under IAS 19 (asset ceiling), to prepaid pension costs to be recognized on the employer’s balance sheet for the overfunding of a plan’s liabilities by its dedicated assets, which have no direct equivalent under U.S. GAAP;

…

Extract 90: Syngenta


Extract 92: Lafarge

63

22.5 Actuarial gains and losses

Reuters and British Airways illustrate differences arising on the recognition of actuarial gains and losses in the following extracts.


Material differences between IFRS (as adopted by the EU) and US GAAP [extract] g. Pensions [extract] Under IFRS, pension assets, defined benefit pension liabilities and pension expense are determined using the Projected Unit Credit Method in a similar manner to US GAAP. However, under IFRS all actuarial gains and losses which arise in calculating the present value of the defined benefit obligation and the fair value of plan assets, are recognised immediately in the statement of recognised income and expense. Under US GAAP, actuarial gains and losses in excess of the corridor are recognised over the average remaining service life of the employees. …

Note 36 – Differences between IFRS and United States Generally Accepted Accounting Principles [extract] (a) Pensions costs [extract]

…

Under IFRS the Group applies the 10% corridor test at the beginning of the year, to determine whether actuarial gains and losses due to differences between expected and actual performance require amortisation. Where the gain or loss exceeds 10% of the greater of the projected benefit obligation or the market related value of the scheme’s assets, the excess is amortised over the active participants’ average remaining service periods. Under US GAAP, the Group has opted to apply the zero corridor approach, and amortises the actuarial gain or loss over the average remaining service periods.

…

22.6 Curtailments

Differences can arise in the timing of the recognition of gains or losses on a curtailment, as reported by Rhodia in the extract below.

39 Reconciliation to IFRS as adopted by the International Accounting Standards Board (“IASB”) and to U.S. GAAP [extract] (i) Pension and retirement plans [extract] Curtailments

Under U.S. GAAP, curtailment losses are recognized in income when it is probable that a curtailment will occur and that the effect of the curtailment is reasonably estimable. Curtailment gains are deferred until realized and are recognized in income when the related employees terminate or when the plan suspension or amendment is adopted. Under IFRS, curtailment gains and losses are recognized in income when curtailments occur.

Under U.S. GAAP, the calculation of gains and losses on curtailments includes unrecognized prior-service cost for which services are no longer expected to be rendered, and changes in the projected benefit obligation (net of any unrecognized gains or losses). Under IFRS, the calculation of gains and losses on curtailments includes any related changes in the present value of the defined benefit obligation, any related changes in the fair value of the plan assets and any related actuarial gains and losses and past-service cost that had not previously been recognized.

Extract 93: Reuters


Extract 95: Rhodia



23 Post-retirement benefits other than pensions The principal IFRS standard for accounting for all types of employee benefit plans other than share-based payments is IAS 19 Employee Benefits. The principal US GAAP standard for post-retirement benefits other than pensions is FAS 106 Employers ’ Accounting for Postretirement Benefits Other Than Pensions. The guidance in FAS 106 is similar to that in FAS 87 Employers’ Accounting for Pensions and FAS 88 Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, such that many of the differences between the IFRS and US GAAP treatments of pension benefits described in section 23 apply also to other post-retirement plans.

24 Other employee benefits The principal standards for accounting for other employee benefits are IAS 19 Employee Benefits under IFRS and FAS 112 Employers’ Accounting for Postemployment Benefits (an amendment of FASB Statements No. 4 and 43) under US GAAP.

The accounting treatment for termination benefits related to a restructuring event is discussed in section 17.

Certain countries have specific plans for employee early retirement or severance benefits and the accounting for these plans can differ according to the nature of the benefit obligation.

Certain of the differences in accounting for other employee benefits under IFRS and US GAAP are illustrated by the following extracts from Form 20-F filings

France Telecom accounts for an early retirement plan as a termination benefit under IFRS, but as a post-employment benefit plan under US GAAP.

NOTE 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract] Description of US GAAP adjustments [extract]

Pension obligations and other employee benefits (Q) [extract]

…

Under IFRS, the early retirement plan in France is treated as a termination benefit and changes in actuarial assumptions are fully charged to the income statement. Under US GAAP, the early retirement plan in France does not qualify for termination benefit accounting treatment and is accounted for as a post-employment benefit with actuarial gains and losses recognized over the remaining service period (ending in 2006). As a consequence, the related expense included in the restructuring costs in the IFRS statement of income, is classified within other operational expenses under US GAAP.

…


65

Air France – KLM implemented an early retirement programme and accounted for the benefits as termination costs under IFRS but expensed the costs as incurred under US GAAP.

41.1 Reconciliation of net income and of Stockholders’ equity [extract] Differences between accounting principles followed by the Company and U.S. GAAP [extract] (c) Pensions and post-retirement benefits [extract]

• Provision for early retirement

In accordance with French law. Air France-KLM has implemented a voluntary early retirement program for employees between 55 and 60 years of age (normal retirement age). During this early retirement period, employees receive 80% of their full time salary for working part time. The employees are required to work 50% of the total working time remaining until normal retirement age. In most cases, the employees work 80% of the total time during the first half of the period and 20% during the second half. Under IFRS, the Company treated the additional benefits granted under the early retirement program as termination benefits and recorded a liability at the date of the offer to the employees.

Under U.S. GAAP, such costs are expensed as incurred as they relate solely to future service periods and do not qualify as post-employment benefits according to SFAS 112, Employers’ Accounting for Post-employment Benefits.

Bayer accrued for the costs of an early retirement programme under IFRS but spread the costs over the remaining service lives of participating employees under US GAAP.

[44] U.S. GAAP information [extract] e. Early retirement program [extract]

The Company offers an early retirement program to its employees that provides an employee with the opportunity to work fulltime for a period of up to two and a half years and receive fifty percent of his or her base salary for up to five years (i.e., including a period of up to two and a half years of non-work), plus additional bonus payments during each of those five years. Under IFRS, the company immediately accrued and expensed a portion of the related early retirement benefit obligation for certain qualified employees who participate or are expected to participate in this program in future periods. Under U.S. GAAP, such early retirement benefits are accrued over the employees’ remaining service lives for participating employees that signed an early retirement agreement.

…

Benetton treats a termination indemnity benefit as a defined benefit plan under IFRS but recorded the indemnity at the present value of the vested benefits under US GAAP.

29 Summary of significant differences between IFRS and U.S. GAAP [extract]

(e) Employee benefits. The Group’s employees in its Italian operations receive when they leave the Company a termination indemnity benefit. In accordance with Italian Severance Pay Statutes, the Group is registered to record an indemnity liability for severance of employment. Under IFRS this benefit is treated as a defined benefit plan and is accounted based on actuarial calculations. Actuarial gains and losses arising on changes to the underlying assumptions that are incorporated into the calculation of defined the benefit plans are accounted for in the income statement using the corridor method.

Under U.S. GAAP in accordance with EITF 88-1 the Group elected to record the employee termination indemnity at present value of the vested benefits to which the employee is entitled if the employee separates immediately.

Extract 97: Air France – KLM

Extract 98: Bayer

Extract 99: Benetton



25 Earnings per share The principal standards for earnings per share are IAS 33 Earnings per Share under IFRS and FAS 128 Earnings per Share under US GAAP. Differences between IFRS and US GAAP mostly arise because of differences in computational guidance for diluted earning per share in the two standards and include, but are not limited to those relating to:

• the application of the treasury stock method;

• the treatment of contracts that may be settled in shares or cash; and

• contingently issuable shares.

26 Cash flow statements The principal standards for cash flow statements are IAS 7 Cash Flow Statements and FAS 95 Statement of Cash Flows. The guidance under the two standards is broadly comparable but differences can arise due to differences between IFRS and US GAAP in respect of the definition of cash, and the classification of specific items, including, but not limited to, interest, dividends and income tax.

27 Related party transactions The principal standards for related party transactions are IAS 24 Related Party Disclosures and FAS 57 Related Party Disclosures. Although related parties are defined differently in IAS 24 and FAS 57, in practice the differences between IFRS and US GAAP requirements on reporting related party transactions generally are limited.

28 Post balance sheet events The principal standard for post balance sheet events under IFRS is IAS 10 Events after the Balance Sheet Date. The equivalent guidance under US GAAP is provided by Statement on Auditing Standards No. 1.

Accounting for post balance sheet events is broadly comparable under both IFRS and US GAAP but differences are possible in practice. For example, a refinancing of a current liability that occurs after the balance sheet date but before the financial statements are issued may be treated differently under IAS 10 and FAS 6 Classification of Short-Term Obligations Expected to Be Refinanced, as reported by China Southern Airlines reports in the following extract.

51. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract] (h) Classification of short-term obligations expected to be refinanced

As described in Note 27 to the consolidated financial statements prepared under IFRSs, the short-term notes payable included certain notes payable of RMB2,611 which were renewed subsequent to December 31, 2005. The maturity dates of these notes payable are extended for twelve months to after December 31, 2006.

Under U.S. GAAP, such short-term obligations which were refinanced on a long-term basis after the balance sheet date but before issuance of financial statements are classified as non-current liabilities. Consequently, under U.S. GAAP, short-term notes payable and consolidated current liabilities would be RMB18,834 and RMB35,739, respectively, at December 31, 2005.


67

First-time adoption of IFRS There are many areas in which the requirements of IFRS and US GAAP are similar. Nevertheless, a considerable number of reconciling differences may still arise as a result of the first-time adoption rules in IFRS 1 First-time Adoption of International Financial Reporting Standards. An entity preparing an IFRS to US GAAP reconciliation is required to apply US standards as if it had always applied those standards. Conversely, IFRS 1 provides first-time adopters with a number of exemptions from full retrospective application. In some cases these rules permit a first-time adopter to base IFRS information on measurements under its previous GAAP. Hence, some of the reconciling items may reflect differences between a first-time adopter’s previous GAAP and US GAAP, rather than differences between IFRS and US GAAP.

The different types of reconciling items that result from the application of IFRS 1 are discussed below.

Initial measurement in opening IFRS balance sheet The following exemptions allow an entity to avoid a fully retrospective application of IFRS:

• Business combinations – A first-time adopter may elect not to apply IFRS 3 Business Combinations retrospectively to business combinations that occurred before its date of transition to IFRS. Consequently, assets and liabilities acquired and goodwill may be stated at amounts that differ from the amounts that would be recognised under US GAAP. These differences may affect future gains and losses, depreciation charges and impairment charges;

• Fair value or revaluation as deemed cost – Instead of determining the historical cost basis for investment property, intangible assets and property, plant and equipment, a first-time adopter is permitted to use fair value at the date of transition or a revaluation under previous GAAP. This will affect both future balance sheets and income statements under IFRS, and result in reconciling items with US GAAP for as long as the entity owns the assets;

• Employee benefits – First-time adopters are allowed to recognise all cumulative actuarial gains and losses at the date of transition to IFRS, even if they use the corridor approach for later actuarial gains and losses;

• Cumulative translation differences – A first-time adopter is allowed to reset the cumulative translation difference to zero. This means that upon disposal of a foreign operation, the gain or loss recognised under IFRS and US GAAP will differ due to the cumulative translation difference up to the date of transition, which is deemed to be zero under IFRS but must be recognised under US GAAP;

• Designation of previously recognised financial instruments – A first-time adopter is allowed to designate a financial instrument at the date of transition to IFRS (or the beginning of the first IFRS reporting period, if comparatives are not restated) as a ‘financial asset or financial liability at fair value through profit or loss’ or as available-for-sale; and

• Hedge accounting – Under the requirements of IFRS 1, transactions accounted for as hedges under national GAAP either will continue to receive hedge accounting treatment if hedge documentation is prepared under IFRS, or are accounted for as discontinued hedges under IFRS if no hedge documentation is prepared.

Prospective application of standards IFRS 1 provides special rules that allow a first-time adopter not to apply IFRS to share-based payment and derecognition of financial assets and financial liabilities transactions that were entered into before certain dates.


FIRST-TIME ADOPTION OF IFRS

Other first-time adoption exemptions and exceptions It should be noted that IFRS 1 also provides exemptions and exceptions relating to the following areas, which may not create additional reconciling differences but could affect the size and nature of existing reconciling differences:

• compound financial instruments;

• assets and liabilities of subsidiaries, associates and joint ventures;

• insurance contracts;

• changes in existing decommissioning, restoration and similar liabilities;

• estimates;

• accounting for arrangements containing leases;

• assets classified as held for sale and discontinued operations; and

• comparative information for financial instruments and insurance contracts.

Survey results Of the 130 companies, 102 are first-time adopters of IFRS. All but two of the first-time adopters are incorporated in EU countries. The two non-EU companies are incorporated in Norway and Venezuela. Only one of the 102 first-time adopters did not apply any of the elective transition exemptions available under IFRS 1. Differences related to IFRS 1 elective exemptions account for 6 of the 10 most reported differences and 20% of the total number of differences reported.

The following chart shows the percentage of first-time adopters applying each of the most common of the IFRS 1 elective transition exemptions.

0%

20%

40%

60%

80%

100%

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69

SEC accommodation for first-time adoption of IFRS In April 2005, the SEC amended Form 20-F to change the filing requirements for foreign private issuers that are first-time adopters of IFRS. The amendment allows eligible foreign private issuers for their first year of reporting under IFRS to file two years rather than three years of statements of income, changes in shareholders’ equity and cash flows prepared in accordance with IFRS, with appropriate related disclosure. The amendment applies to a foreign private issuer:

• that is a ‘first-time adopter’ of IFRS, as defined in IFRS 1; and

• that adopts IFRS as its basis of accounting prior to or for the first financial year starting on or after 1 January 2007.

The accommodation is only available to a foreign private issuer that is able to state unreservedly and explicitly that its financial statements comply with IFRS, and are not subject to any qualification relating to the application of IFRS as issued by the IASB. However, the accommodation is available to a foreign private issuer that prepares its financial statements in accordance with IFRS as adopted by the European Union if it also provides an audited reconciliation to IFRS as published by the IASB.

Foreign private issuers relying on the accommodation continue to be required to provide an audited reconciliation to US GAAP for the two financial years presented under IFRS.

The accommodation requires disclosure of (1) the foreign private issuer’s reliance on any of the transitional measurement exemptions available to a first-time adopter under IFRS 1, and (2) a reconciliation of specified financial statement elements from previous GAAP to IFRS.

The SEC accommodation was available to all first-time adopters and was applied by 90 of the 102 first-time adopters.

Of the twelve first-time adopters that did not apply the accommodation, seven are incorporated in the United Kingdom and the others are from Belgium, Finland, Germany, Luxembourg and Sweden.


INDUSTRY SECTOR ANALYSIS

Industry sector analysis We have separately identified and analysed companies in seven sectors. The industries selected were Air Transport, Chemicals, Extractive Industries, Financial Services, Pharmaceuticals, Telecommunications and Utilities and Energy.

The ranges of differences reported by percentages of companies in each industry sector are shown below.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Entire survey

Utilities and Energy

Telecommunications

Pharmaceuticals

Financial Services

Extractive Industries

Chemicals

Air Transport

3-10 Total differences 11-20 Total differences 21-29 Total differences

71

Air Transport Introduction The companies in the Air Transport sector are engaged in the operation of international and domestic scheduled and charter air services for the carriage of passengers, freight and mail. Of the 130 companies, five met the criteria for an Air Transport company. Four of the five companies have core business lines related to passenger transportation, while the other one is primarily focused on mail and freight services. The companies in the Air Transport sector have a combined fleet of over 1,300 aircraft. Three of the five companies are incorporated in the EU; the other two are incorporated in China.


AIR TRANSPORT

Net income reconciliation

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Air France-KLM 100% 21.2% -10.0% 1.8% 2.1% 1.3% -4.6% -0.2% -1.6% 110.0%

British Airways 100% 0.2% 1.3% -48.6% 2.2% 51.7% -1.3% -62.3% -10.4% 32.8%

China Eastern Airlines -100% -122.4% 16.0% 12.9% -101.0% -1.5% -296.0%

China Southern Airlines -100% 7.2% 2.3% -0.1% -90.6%

TNT 100% 1.2% -2.4% -2.9% 95.9%

Net equity reconciliation

Net

equ

ity u

nder

IFR

S

Bus

ines

s com

bina

tions

Prop

erty

, pla

nt a

nd

equi

pmen

t

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ncia

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ativ

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ac

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ting

Leas

ing

Taxa

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Prov

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ontin

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ies

Pens

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ers

Net

equ

ity u

nder

US

GA

AP

Air France-KLM 100% -12.5% 6.5% -1.4% -0.3% -3.6% -1.4% 0.6% 2.6% 90.5%

British Airways 100% -4.9% -13.3% 1.0% -10.5% 52.8% -1.2% 123.9%

China Eastern Airlines 100% 6.1% -6.6% 0.1% 0.5% 100.1%

China Southern Airlines 100% -3.0% 1.1% -14.8% 83.3%

TNT 100% 1.0% 1.4% -17.4% -0.4% 84.6%

73

Analysis The net income and net equity reconciliations presented by the five companies in the Air Transport sector show that the most significant differences, both in terms of the total number of individual differences reported and the percentage impact on net income and net equity, relate to pensions and post-retirement benefits, business combinations and provisions and contingencies.

The most significant area of industry-specific IFRS to US GAAP difference is accounting for aircraft overhaul and maintenance provisions. The analysis also revealed that all five companies disclosed differences relating to sale and operating leaseback transactions, although the impact of these differences on net profit or loss and shareholders’ equity are relatively small and only quantified by three companies in their reconciliations.

Companies in the Air Transport sector have a wide range of reported differences. One company reported only eight differences, while another reported twenty individual differences.

The reconciling differences had the following impact on net profit or loss and net equity:

• Two out of the five companies showed an overall increase in profit or decrease in loss of 10% and 9.4% while three showed an overall decrease in profit or increase in loss of between 4.1% and 196%.

• Two out of the five companies showed an overall increase in equity of 0.1% and 23.9% while three showed an overall decrease in equity of between 9.5% and 16.7%.

A total of 67 individual reconciliation differences, representing 30 unique differences, were reported by the five Air Transport sector companies. These 30 unique differences were allocated to 18 areas of accounting, or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the reconciliations. Also, the survey included three companies that are first-time adopters of IFRS. These companies reported a total of 17 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those differences to the appropriate underlying categories as the reconciliations do not separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.


Property, plant and equipment 4


Leasing 8



Others 25

67



AIR TRANSPORT

Sector differences


Major overhaul and maintenance costs

Under IFRS, IAS 16 Property, Plant and Equipment does not permit recognition of provisions in connection with major inspections, maintenance or overhaul of property, plant and equipment. However, when specific recognition criteria are met, these expenses may be capitalised.

The principal source of guidance under US GAAP for planned major maintenance activities is the AICPA Industry Audit Guide, Audits of Airlines, which permits four alternative methods of accounting; direct expense; built-in overhaul; deferral; and, accrual (accrue-in-advance). A FASB Staff Position, FSP AUG AIR-1, was issued in September 2006 and amends certain provisions in the AICPA Industry Audit Guide to prohibit the use of the accrue-in-advance method of accounting for planned major maintenance activities. The FASB believes that the accrue-in-advance method results in the recognition of liabilities that do not meet the definition of a liability in FASB Concepts Statement No. 6 Elements of Financial Statements.

With no specific guidance on accounting for and recognition of the cost of planned major maintenance, inspection or overhaul under US GAAP, many companies have historically followed the policy applied for local financial statements and avoided a reconciliation difference.

For many companies, the adoption of IFRS has resulted in a change in accounting for major inspections, maintenance or overhaul costs from a policy under previous GAAP of expensing as incurred to an IFRS policy of capitalising and amortising these costs. To continue to avoid a reconciliation difference, a similar change in accounting policy under US GAAP is required.

Two companies, British Airways and China Eastern Airlines, disclosed a US GAAP cumulative effect adjustment for a change of accounting principle required to re-align the US accounting policy following a change of accounting on the adoption of IFRS.

Note 36 – Differences between IFRS and United States Generally Accepted Accounting Principles [extract] (e) Change in accounting principle Under IFRS the Group has applied the component based approach of IAS 16 ‘Property, Plant and Equipment’ for tangible assets. This resulted in a change in accounting policy for the costs of major engine overhaul as compared to the accounting previously applied under UK GAAP. Previously, under UK GAAP, the Group had expensed these costs as incurred, but under IAS 16 these costs are capitalised at the time of expenditure and amortised over the period between major overhauls. As of April 1, 2005, the Group changed its US GAAP accounting policy for major engine overhaul from ‘expense as incurred’ to ‘capitalise and amortise’. This change represents a change in accounting principle as defined by APB No. 20 ‘Accounting Changes’, and a cumulative effect adjustment is recorded in the 2005/06 Income Statement. The Group changed its accounting policy under US GAAP because it believes the new policy results in a better matching of revenues and expenses.


75

43 SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract] (d) Retroactive application of the new overhaul accounting policy adopted in 2005 Prior to the adoption of the revised IAS 16 (Note 2), the Group expensed overhaul costs on owned and finance leased aircraft as incurred. Upon the adoption of the revised IAS 16 effective January 1, 2005, the Group capitalized overhaul costs as a separate component of the fixed assets carrying value to be depreciated over the estimated period between overhauls on a straight line basis. Upon the completion of an overhaul, any remaining balance of the previous overhaul will be derecognised and charged to the consolidated statements of operations. The adoption of the revised IAS 16 has been applied retrospectively to all years presented. Under U.S. GAAP, the capitalization of overhaul costs incurred as a separate component of fixed assets is an acceptable alternative. Therefore, the Group also changed its accounting policy on overhaul costs for owned and finance lease aircrafts in the U.S. GAAP condensed consolidated financial statements as such policy was considered to be preferable. Under U.S. GAAP, the effect of a change in accounting policy is recognized in the period of the change by including the cumulative effect of the change to the new accounting policy.

The survey identified one company, Air France – KLM, with a current difference arising from continuing to expense maintenance costs as incurred under US GAAP.

41.1 Reconciliation of net income and of Stockholders’ equity [extract] Differences between accounting principles followed by the Company and U.S. GAAP [extract] (b) Reconciling items related to aircraft [extract] • Accounting for maintenance costs Under IFRS, the Company applies the component method for major airframe and engine maintenance. The estimated maintenance costs related to aircraft owned and held under finance leases are capitalized and depreciated over the period to the next major overhaul. Under U.S. GAAP, the Company accounts for maintenance costs of owned aircraft and aircraft held under capital leases using the expense as incurred method.

There may also be a reconciling difference in accounting for major overhaul and maintenance costs related to assets held under operating lease arrangements where the overhaul and maintenance of the aircraft is a contractual obligation under the terms of the lease. This difference was identified by China Southern Airlines, however the effect of this difference was not considered to have a material impact on reported net loss or shareholder’s equity.

51. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract] (g) Provision for major overhauls [extract]

As disclosed in Notes 2(u) and 33 to the consolidated financial statements prepared under IFRS, in respect of aircraft held under operating leases, a provision is made over the lease term for the estimated cost of overhauls required to be performed on the related aircraft prior to their return to the lessors.

Under U.S. GAAP, a liability is recorded at the outset of the operating leases for the fair value of contractual obligations to perform the overhauls and a deferred asset is recorded for the corresponding amount, which is amortized over the term of the operating lease. …

Extract 102: China Eastern Airlines




AIR TRANSPORT

Leasing

Sale and leaseback

There are differences between IFRS and US GAAP in accounting for sale and leaseback transactions, particularly when the resultant lease is an operating lease. Sale and operating leasebacks are common in the airline industry, as indicated by all five Air Transport sector companies reporting differences arising from such arrangements. IAS 17 Leases requires the gain on a sale and operating leaseback to be recognised immediately where the sale price is established at fair value. Under FAS 98 Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate; Sales-Type Leases of Real Estate; Definition of the Lease Term; Initial Direct Costs of Direct Financing Leases, any gain arising on a sale and operating leaseback is generally deferred and only recognised over the lease rental period. An example of disclosure of this difference is provided by the following extract for British Airways.

Note 36 – Differences between IFRS and United States Generally Accepted Accounting Principles [extract] (h) Gains on sale and leaseback transactions Under IFRS, gains arising on sale and leaseback transactions are recognised as part of net income to the extent that the sale proceeds do not exceed the fair value of the assets concerned. Gains arising on the portion of the sale proceeds which exceed the fair value are deferred and amortised over the minimum lease term. Under US GAAP, the total gains arising on qualifying sale and leaseback transactions are deferred in full and amortised to income over the minimum lease term.

Leases involving governmental units

Under IFRS, there is no specific guidance on accounting for leases of properties owned by a government unit or authority and therefore the general rules for leases in IAS 17 apply. Under IAS 17, a lessee should account for a lease as a finance lease when the lease transfers substantially all the risks and rewards incidental to ownership to the lessee, even if legal title is not transferred. All other leases are operating leases.

Under US GAAP, there is specific guidance in FIN 23 Leases of Certain Properties Owned by a Governmental Unit or Authority for accounting for leases of certain properties owned by a government unit or authority. Under FIN 23, because of the special provisions normally present in leases involving property owned by a governmental unit or authority, for example, terminal space and other airport facilities, the economic life of such facilities is indeterminate and the concept of fair value is not applicable to such leases. Further, since leases involving property owned by a governmental unit or authority do not provide for a transfer of ownership or a bargain purchase option, they should be classified as operating leases. Our survey indicated that one company, Air France – KLM, reported a difference in this respect, as described in the following extract.

41.1 Reconciliation of net income and of Stockholders’ equity [extract] Differences between accounting principles followed by the Company and U.S. GAAP [extract] (b) Reconciling items related to aircraft [extract] • Leases involving governmental units Under IFRS, certain lease agreements with Aéroports De Paris (“ADP”), a governmental unit, have been accounted for as finance leases in accordance with IAS 17 Leases. Under US GAAP, in accordance with FIN 23 Leases of certain properties owned by a governmental unit or authority, lease agreements with ADP have been accounted for as operating leases.



77

Chemicals Introduction The companies in the Chemicals sector provide a range of services such as manufacturing, distribution, research and processing of varied products, including high value chemicals, plastics, health care products, intermediate petrochemicals, fine chemicals, crude oil and natural gas. Of the 130 companies in the survey, seven are in the Chemicals sector. Five of these companies are incorporated in the EU; one company is incorporated in Switzerland and one in China.


CHEMICALS


Net

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IFR

S

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Inta

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s

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s

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P

Akzo Nobel 100% -5.0% -2.5% 0.8% 10.3% -1.7% -28.0% -0.1% 73.8%

BASF 100% -0.7% 1.5% -0.9% 4.1% -2.4% 0.2% 101.8%

Bayer 100% 0.3% 1.4% 11.3% -1.3% -28.2% -0.3% 83.2%

Imperial Chemical Industries 100% -7.9% 5.9% 0.8% 4.9% -45.1% -5.1% 53.5%

Rhodia -100% -7.8% -1.1% 2.9% 1.8% -0.2% 5.0% -4.4% -1.0% -104.8%

Sinopec Shanghai Petrochemical 100% 0.1% 1.2% 101.3%

Syngenta 100% -14.0% -1.1% 3.9% -1.4% -2.4% 4.5% 89.5%


Net

equ

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IFR

S

Bus

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s com

bina

tions

Inta

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sset

s

Impa

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t

Fina

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nd h

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ac

coun

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Leas

ing

Taxa

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Prov

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ies

Pens

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and

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bene

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Oth

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quity

diff

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ces

Net

equ

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US

GA

AP

Akzo Nobel 100% 90.0% -0.9% 1.8% -4.2% 9.6% -0.1% 196.2%

BASF 100% 2.1% -0.1% 0.1% -2.7% 0.7% 5.4% -0.2% 105.3%

Bayer 100% 8.3% -1.2% -2.4% 0.9% 6.2% -1.1% 110.7%

Imperial Chemical Industries -100% 400.7% 16.0% -17.5% -3.1% 29.3% 2.5% 327.9%

Rhodia -100% -3.2% -4.3% 0.7% -3.0% 1.3% -7.1% 17.6% 0.6% -97.4%

Sinopec Shanghai Petrochemical 100% 0.2% 0.2% 100.4%

Syngenta 100% 4.4% 0.3% -6.5% 1.1% 0.3% 0.6% 100.2%

79

Analysis The differences that had the most significant impact on the reconciliations of Chemicals sector companies, both in terms of the total number of differences reported and the percentage impact on net profit/loss and net equity, relate to first-time adoption exemptions for business combinations, accounting for pensions and post-retirement benefits and provisions for restructuring, other terminations and early retirement.

The only area of reported IFRS to US GAAP difference that is particularly prevalent in the Chemicals sector is accounting for research and development projects, either acquired in a business combination or developed internally.

The Chemicals sector companies reported a wide range of total differences. One company reported only four differences while another reported 19 individual differences.

The reconciling differences have had both a positive and negative effect on the statements of profit and loss and equity.

• Five of the seven companies showed an overall decrease in profits or increase in losses of between 4.8% and 46.5% while the remaining two companies showed an overall increase in profit of 1.3% and 1.8%.

• Six of the seven companies showed an overall increase in net equity of between 0.2% and 96.2% while the other company, Imperial Chemical Industries, showed an overall increase in net equity of 427.9%, mostly due to purchase accounting adjustments resulting in the recognition of additional goodwill and other intangible assets under US GAAP.

The seven companies reported a total of 98 individual differences, representing 43 unique differences. These 43 unique differences were allocated to 17 areas of accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included four companies that are first-time adopters of IFRS. These companies reported a total of 16 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.


Intangible assets 2

Impairment 6


Leasing 2



Others 36

98



CHEMICALS

Sector differences

Business combinations and intangible assets

Development costs, both acquired in a business combination and internally developed

Companies in the Chemicals sector invest significant amounts in the development of new products.

Under IFRS 3 Business Combinations, the amounts allocated to acquired in-process research and development projects which meet the recognition criteria are capitalised as part of the purchase price allocation and amortised over the appropriate useful economic lives.

Under US GAAP, a portion of the purchase price paid in a business combination is allocated to tangible and intangible assets to be used in research and development projects that have no alternative future use and charged to expense at the acquisition date.

Two out of the seven companies, BASF and Bayer, disclosed differences relating to acquired in-process research and development costs. Extracts for these companies are included below.

5. Reconciliation of net income and stockholders’ equity to U.S. GAAP [extract] (f) Acquisitions [extract] A difference between U.S. GAAP and IFRS with respect to the first-time consolidation involves the treatment of in-process research and development projects of acquired businesses. Whereas these costs are expensed in the first year of consolidation under U.S. GAAP, IFRS requires that these costs are capitalized as intangible assets and are amortized over their useful lives. …

[44] U.S. GAAP information [extract]

c. In-process research and development [extract] IFRS does not consider that in-process research and development (“IPR&D”) is an intangible asset that can be separated from goodwill, unless both the definition and the criteria for recognition of an intangible asset are met. Under U.S. GAAP IPR&D is considered to be a separate asset that needs to be written-off immediately following an acquisition when the feasibility of the acquired research and development has not been fully tested and the technology has no alternative future use. During 2002, IPR&D has been identified for U.S. GAAP purposes in connection with the Aventis CropScience and Visible Genetics acquisitions. Fair value determinations were used to establish €138 million of IPR&D related to both acquisitions, which was expensed immediately for U.S. GAAP purposes. The independent appraisers used a discounted cash flow income approach and relied upon information provided by the Group management. The discounted cash flow income approach uses the expected future net cash flows, discounted to their present value, to determine an asset’s current fair value. …

Under IFRS, development costs may be recognised as assets if they meet the IAS 38 Intangible Assets definition and criteria for capitalisation as an intangible asset.

Under US GAAP, research and development costs generally should be expensed as incurred in accordance with FAS 2 Accounting for Research and Development Costs.

Extract 107: BASF

Extract 108: BAYER

81

The survey identified two companies, Rhodia and Akzo Nobel with differences related to capitalisation of internal development costs. Extracts for these companies are included below.

39. Reconciliation to IFRS as adopted by the International Accounting Standards Board (“IASB”) and to U.S. GAAP [extract]

a) Accounting policies [extract] (iii) Capitalized development costs Under U.S. GAAP, development expenses are expensed when incurred. Under IFRS, development expenses that meet specific criteria are capitalized in other intangible assets and are amortized over their estimated useful lives. Capitalized expenditures include personnel costs, material costs and services used that are directly assigned to the projects concerned.

(23) Application of Generally Accepted Accounting Principles in the United States of America [extract] (f) In accordance with IFRS development costs are to be capitalized and amortized, if certain conditions have been met. US GAAP does not allow capitalization and amortization of development costs. For US GAAP purposes, these costs have to be expensed as incurred. …

Extract 109: Rhodia

Extract 110: Akzo Nobel


EXTRACTIVE INDUSTRIES

Extractive Industries Introduction The Extractive Industries sector represents a broad range of natural resource extraction activities. The companies in this sector are involved in mineral extraction, from mining of precious metals to quarrying commercial construction materials, as well as exploration, production, refining and marketing of oil and natural gas. A total of 15 companies out of the 130 companies in the survey meet the general criteria of an Extractive Industries company. Of these, eleven are incorporated in the EU, three are incorporated in China and one is incorporated in Papua New Guinea.

83


Net

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Prop

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Impa

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atio

n of

bor

row

ing

cost

s

Inve

ntor

y

Taxa

tion

Shar

e-ba

sed

paym

ents

Pens

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GA

AP

Oil and gas BP 100% 0.1% -2.3% -1.6% -0.9% -0.1% -3.2% -2.8% 89.2%

China Petroleum & Chemical 100% 0.1% 14.3% 0.2% 0.1% -4.4% -1.3% 109.0%

Co. Générale de Géophysique -100% 34.6% -19.2% 191.0% 106.4%

Eni 100% -0.1% -10.9% -3.2% 0.4% 86.2%

PetroChina 100% 4.9% -1.6% -4.5% 98.8%

Repsol 100% -0.9% 1.4% -2.0% 0.9% 0.1% -8.7% -0.2% -1.7% 88.9%

Royal Dutch Shell 100% 1.4% -0.1% -0.2% -1.5% 1.9% 101.5%

Total 100% -7.3% -2.8% -1.5% 3.7% -1.5% 3.9% 94.5%

Mining and construction materials CRH 100% -2.8% 0.1% 0.6% -5.2% -1.9% 0.4% 91.2%

Hanson 100% 2.4% -5.0% 0.6% -0.4% 34.7% -2.9% -8.2% -1.5% 119.7%

Lafarge 100% 6.8% -2.0% 1.3% -7.8% 1.8% 100.1%

Lihir Gold 100% 37.4% -8.3% 94.0% 223.1%

Randgold Resources 100% 2.8% -8.2% 94.6%

Rio Tinto 100% -1.1% 1.8% -1.3% -4.1% 95.3%

Yanzhou Coal Mining 100% 6.5% -2.2% -0.4% 103.9%




Net

equ

ity u

nder

IFR

S

Bus

ines

s com

bina

tions

Prop

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, pla

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nd

equi

pmen

t

Impa

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t

Cap

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atio

n of

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row

ing

cost

s

Inve

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y

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paym

ents

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and

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equ

ity u

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GA

AP

Oil and gas BP 100% 0.2% 0.5% 0.6% -0.3% -0.2% 6.0% 0.1% 106.9%

China Petroleum & Chemical 100% -0.2% -0.8% -0.2% -0.1% 0.4% 0.3% 99.4%

Co. Générale de Géophysique 100% 1.9% -1.2% -0.4% -1.7% 98.6%

Eni 100% 2.2% 0.6% -5.6% -9.3% 7.3% 95.2%

PetroChina 100% 0.3% -4.9% 1.6% -5.2% 91.8%

Repsol 100% -4.4% -0.6% -2.2% 0.2% 11.6% 0.3% 104.9%

Royal Dutch Shell 100% 0.2% -2.4% 6.7% -1.0% 103.5%

Total 100% 71.2% 8.1% 0.4% -4.6% 0.6% 4.1% 179.8%

Mining and construction materials CRH 100% 6.3% -0.4% 2.2% 7.5% -1.0% 114.6%

Hanson 100% -2.1% 0.2% -0.2% 0.9% 18.2% -2.9% 114.1%

Lafarge 100% 2.5% -2.6% -0.1% 7.8% 0.3% 107.9%

Lihir Gold 100% -32.7% 0.7% 13.7% -12.5% 69.2%

Randgold Resources 100% -2.3% 97.7%

Rio Tinto 100% 10.6% -1.6% 2.5% 3.7% 115.2%

Yanzhou Coal Mining 100% -0.8% -6.0% 2.2% -0.6% 94.8%

85

Analysis The analysis of reconciliations presented by the Extractive Industries sector identified that the most significant reported differences, both in terms of the total number of differences and the percentage impact on net income and equity, relate to business combinations, pensions and post-retirement benefits, property, plant and equipment revaluations and capitalisation of borrowing costs.

The analysis also identified unique differences more prevalent in the sector. Inventory valuations and provisions for asset retirement obligations were areas of difference across the entire sector. The capitalisation of exploration and development costs (unsuccessful wells) is specific to the oil and gas industry and companies involved in mining and construction materials reported differences relating to the valuation of ore reserves and accounting for mining rights and stripping costs.

The companies had a wide range of reported differences. One company reported only 4 differences while another reported 26 individual differences.

The reconciling differences had the following impact on net profit/loss and equity:

• Seven out of the 15 companies showed an overall increase in profit (or decrease in loss) of between 0.1% and 206.4% while the remaining eight companies showed an overall decrease in profit of between 1.2% and 13.8%.

• Eight out of the 15 companies showed an overall increase in net equity of between 3.6% and 79.8% while the remaining seven companies showed an overall decrease in net equity of between 0.6% and 30.8%.

The companies reported a total of 188 differences representing 71 unique differences. These 71 unique differences were allocated to 23 areas of accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included 10 companies that are first-time adopters of IFRS. These companies reported a total of 40 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.



Impairment 13


Inventory 4



Others 92

188




Sector differences

Inventory IAS 2 Inventories requires companies to value inventory at the lower of cost and net realisable value. However, the measurement requirements of IAS 2 do not apply to inventories held by commodity broker-traders who measure their inventories at fair value less costs to sell.

Under US GAAP, inventories generally should be measured at the lower of cost and market value.

The survey identified two companies which disclose differences relating to the valuation of trading inventories. An example of this difference is reported by Total in the following extract.

4. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES [extract]

F. Trading Inventories Under IFRS, inventories held by the Group for its energy trading activities are measured at fair value less costs to sell, based on the scope exception provided by paragraph 3 b) of IAS 2 “Inventories” for commodity broker-traders. Under U.S. GAAP, EITF no 02-3 Issues involved in Accounting for Derivative Contracts Held for Trading purposes and Contracts Involved in Energy Trading and Risk Management Activities prohibits measurement at fair value of physical inventories included in energy trading activities.


Asset retirement obligations

Under IFRS, the general principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets should be followed, which require that a provision is recognised only where there is a legal or constructive obligation to incur costs.

There are specific rules under US GAAP for accounting for decommissioning costs in FAS 143 Accounting for Asset Retirement Obligations. FAS 143 amended FAS 19 Financial Accounting and Reporting by Oil and Gas Producing Companies to prohibit accounting for estimated dismantlement, restoration, and abandonment costs by a cost accumulation approach.

Although the guidance under IFRS and US GAAP is similar, differences may arise in practice.

The principal differences between IFRS and US GAAP in accounting for provisions as they relate to decommissioning costs or asset retirement obligations are due to the treatment of changes in discount rates. Under IAS 37, no guidance is provided on accounting for changes in the provision as a result of changes in cost estimates or changes in discount rates. However, this has been addressed in IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities. Under IFRIC 1, adjustments arising from changes in either the estimated cash flows or the current discount rate should be added to or deducted from the cost of the related asset with the adjusted depreciable amount of the asset then depreciated prospectively over the asset’s remaining useful life.

Under US GAAP, the fair value of the liability generally is not remeasured for changes in the risk-free interest rate which was initially used as the discount factor for the measurement of the provision.

Extract 111: Total

87

Four companies disclosed differences relating to the discounting of decommissioning or asset retirement obligations. Extracts from BP and Repsol are included below.

Note 55 – US generally accepted accounting principles [extract] (b) Provisions [extract] Under IFRS, provisions for decommissioning and environmental liabilities are measured on a discounted basis if the effect of the time value of money is material. In accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, the provisions for decommissioning and environmental liabilities are estimated using costs based on current prices and discounted using rates that take into consideration the time value of money and risks inherent in the liability. The periodic unwinding of the discount is included in other finance expense. Similarly, the effect of a change in the discount rate is included in other finance expense in connection with all provisions other than decommissioning liabilities. … Under US GAAP, decommissioning liabilities are recognized in accordance with SFAS 143 ‘Accounting for Asset Retirement Obligations’. SFAS 143 is similar to IAS 37 and requires that when an asset retirement liability is recognized, a corresponding amount is capitalized and depreciated as an additional cost of the related asset. The liability is measured based on the risk-adjusted future cash outflows discounted using a credit-adjusted risk-free rate. The unwinding of the discount rate is included in operating profit for the period. Unlike IAS 37, subsequent changes to the discount rate do not impact the carrying value of the asset or liability. Subsequent changes to the estimates of the timing or amount of future cash flows, resulting in an increase to the asset and liability, are re-measured using updated assumptions related to the credit-adjusted risk free rate. …

(42) DIFFERENCES BETWEEN IFRS AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA (US GAAP) [extract] 15. Asset retirement obligations [extract]

…. Under SFAS 143, the fair values of asset retirement obligations are recorded as liabilities on a discounted basis when they are incurred, which is typically at the time the assets are installed. The result is a provision being built up in cash flow layers with each layer discounted using the discount rate at the date that the layer was created. Remeasurement of the entire obligation using current discount rates is not permitted. Amounts recorded for the related assets will be increased by the amount of these obligations. Over time the liabilities will be accreted for the change in their present value and the initial capitalized costs will be depreciated over the useful lives of the related assets, principally relate to offshore oil and gas platforms. Under IFRS it is also required to capitalize, depreciate and set-up a provision similar to SFAS No. 143. However, under IFRS (IFRIC 1, Changes in existing decommissioning, restoration and similar liabilities) if there is a change in the discount rate the entire provision must be recalculated using the current discount rate. The effect of the change in the discount rates from current and prior periods has been recorded as a reconciliation item from IFRS to U.S. GAAP.

Differences which relate specifically to oil and gas companies

Capitalisation of exploration and development costs (unsuccessful wells)

There is no accounting standard under IFRS that specifically addresses the treatment of exploration and development costs for oil and gas companies.

Under US GAAP, costs relating to drilling an exploratory or exploratory-type stratigraphic well may be capitalised pending determination of whether the well has found proved reserves. If the well has found proved reserves, the capitalised costs become part of the enterprise’s wells, equipment and facilities. If it is determined that the well has not found proved reserves, the capitalised costs of drilling the well are expensed, net of any salvage value. All costs to drill and equip development-type stratigraphic test wells and service wells are development costs and may be capitalised regardless of whether the well is successful or unsuccessful.

Extract 112: BP

Extract 113: Repsol



Only Eni disclosed a difference related to exploration and development costs, as described in the extract below.

33 Adjustment of the Consolidated Financial Statements to U.S. GAAP [extract] Summary of significant differences between IFRS and U.S. GAAP [extract] B) Exploration & production activities [extract] Development Development costs are those costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas. Costs to operate and maintain wells and field equipment are expensed as incurred. Under IFRS, costs of unsuccessful development wells are expensed immediately. Costs of successful development wells are capitalized and amortized on the basis of units of production. Under U.S. GAAP, costs of productive wells and development dry holes, both tangible and intangible, are capitalized and amortized on UOP method.

Differences which relate specifically to mining and construction materials companies

Exploration costs

Currently there is no accounting standard under either IFRS or US GAAP that specifically addresses the treatment of exploration costs.

Therefore, under IFRS, companies generally follow current mining industry practice which is to carry forward the exploration and evaluation expenditure on a project after it has reached a stage where there is a high degree of confidence in its viability. In addition, impairment of exploration and evaluation expenditure capitalised in prior years can be reversed when the project proceeds to development, to the extent that relevant costs are determined to be recoverable.

Under US GAAP, expenditure generally is not allowed to be carried forward unless the viability of the project is supported by a final feasibility study. Also, US GAAP generally does not allow impairment to be reversed. However, given that expenditure is capitalised under US GAAP only if it is supported by a final feasibility study, it is less likely that exploration costs would be capitalised, and therefore subject to impairment.

With no specific accounting standards, industry practice has generally been applied consistently under both IFRS and US GAAP, resulting in few reported differences.

IFRS 6 Exploration for and Evaluation of Mineral Resources, which is effective from 1 January 2006, does not require or prohibit any specific accounting policies for the recognition and measurement of exploration and evaluation assets.

Our survey identified two companies that reported reconciling differences for capitalised exploration costs and related impairment.

Extract 114: Eni

89

The GAAP differences are disclosed by Randgold Resources in the following extract.

27. RECONCILIATION TO U.S. GAAP [extract]

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract] EXPLORATION COSTS During the years ended December 31, 2005 and 2004, the Group has capitalized certain exploration and evaluation expenditure under its IFRS accounting policy because it is considered probable that a future economic benefit will be generated. Under this accounting policy, expenditure of US$3.2million and US$3.9million incurred during the years ended December 31, 2005 and 2004 respectively relating to the underground development study at Loulo, have been capitalized. U.S. GAAP is more restrictive regarding the capitalization of such costs, since the project involves a different mining method (underground mine as opposed to an open pit) which means that proven and probable reserves need to be established before expenditure can be capitalized. Therefore, since a final feasibility study had not yet been established, this expenditure was expensed as incurred under U.S. GAAP. A final feasibility study for the Loulo underground project was completed in July 2005, and since that date, the costs relating to the project have been capitalized under both IFRS and U.S. GAAP.

Mineral rights

Under IFRS, there is no specific guidance for accounting for mineral rights by mining and construction materials companies. The general industry practice is that where mineral rights are in-substance the underlying ore reserves, then the price paid to acquire those rights will vary depending on the value of the ore reserves and the mineral rights will be classified as tangible assets.

Under US GAAP, there is specific guidance for accounting for mineral rights in EITF 04-2 Whether Mineral Rights Are Tangible or Intangible Assets. Under EITF 04-2, companies should report the aggregate carrying amount of mineral rights as a separate component of property, plant and equipment either on the face of the financial statements or in the notes to the financial statements.

The following extract from Lafarge describes this difference.

Note 36 - Summary of Differences Between Accounting Principles Followed by the Group and U.S. GAAP

6. Items affecting the presentation of consolidated financial statements [extract] d) Intangible assets

Under IFRS, mineral rights are classified as “Intangible assets”. In accordance with EITF 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets”, mineral rights should also be reclassified to quarries, within tangible assets, for purposes of U.S. GAAP.

There is no specific guidance for valuation of mineral reserves under IFRS. Therefore, companies either continue to apply previous local GAAP guidance, where available, or follow the US GAAP guidance.

Under US GAAP, although the SEC Industry Guide does not specify the basis of the commodity price to be used for reserves estimation, it is evident from presentations made by the SEC staff and from comments addressed to mining companies that, whenever possible, mineral reserves reporting should be based on historical commodity prices.

Extract 115: Randgold Resources

Extract 116: Lafarge



Differences arise where companies continue to apply previous local GAAP guidance under IFRS, as reported by Rio Tinto in the following extract.

52 Reconciliation to US Accounting Principles [extract] Effect of price assumptions specified for determination of ore reserves for US GAAP depreciation/amortisation For UK and Australian reporting, the Group’s ore reserves estimates are determined in accordance with the JORC code and are based on forecasts of future commodity prices. During 2003, the SEC formally indicated that, for US reporting, historical price data should be used to test the determination of reserves. The application of historical prices to test the reserves estimates has led to reduced ore reserve quantities for US reporting purposes for certain of the Group’s operations, which results in lower earnings for US reporting, largely as a result of higher depreciation charges. The reduced ore reserves have also had the effect of increasing the present value of provisions for closure obligations for certain of the Group’s operations.

Valuation of ores

Under IFRS, ore stockpiles are carried at the lower of cost and net realisable value. Reductions in the carrying values from cost to net realisable value are recognised as an expense in the period incurred as a write-down of inventory. Subsequent increases in net realisable value are recorded through the reversal of previously recognised write-downs, up to original cost.

Under US GAAP, ore stock piles generally should be carried at the lower of cost and market. Market means current replacement cost, except that market should not exceed net realisable value. Losses are recognised in the period incurred. Subsequent increases in the net realisable values or reversal of previously recognised losses generally are not permitted.

The reversal of impairment losses under IFRS can result in significant IFRS to US GAAP differences for mining companies and Lihir Gold reported a difference in this respect as follows.

NOTE 30: RECONCILIATION TO US GAAP [extract] (vi) Impairment: Economic grade stockpile: [extract] … In prior years and as at 31 December 2003, the Company determined that the net realizable value of the economic grade stockpile was zero for IFRS and US GAAP purposes because of the historically low gold prices during the periods of production and due to the long lead time before the stockpiles were expected to be processed. In 2004, following the improvement in the gold price environment and improvements to the plant and operating conditions, the directors resolved to reverse the previously recognized impairments on the basis that the current estimated net realizable value was higher than zero cost previously recognized under IFRS. The reinstatement to cost resulted in a non recurring gain of US$90.2 million in 2004. Under, U.S. GAAP, the cost of the existing stockpile at 31 December 2004 continues to be recorded at zero.

Discussion of future IFRS and US GAAP developments

Accounting for stripping costs

Stripping costs are costs of removing overburden and waste materials to access mineral deposits. There is currently no specific accounting standard under IFRS that addresses accounting for stripping costs. The general industry practice is to capitalise pre-production stripping costs. For post-production stripping costs, two methods of accounting are used. The first method is to expense costs as incurred when the stripping ratio (ratio of ore extracted to waste material) is relatively even during the life of the mine. The second method is to defer the stripping costs, when the stripping ratio varies substantially during the life of the mine.


Extract 118: Lihir Gold

91

Under US GAAP, prior to EITF 04-06 Accounting for Stripping Costs Incurred during Production in the Mining Industry there was no specific guidance either and diversity in practice exists. EITF 04-06 is effective for the first reporting period in fiscal years beginning after 15 December 2005, with early adoption permitted. Under EITF 04-06, the stripping costs incurred during the production phase of a mine are variable production costs that should be included in the cost of the inventory produced during the period that stripping costs are incurred. As a result, capitalisation of production stripping costs generally is appropriate only to the extent that product inventory exists at the end of the reporting period.

Our survey indicated that three mining companies, Lihir Gold, Randgold Resources and Rio Tinto, expect a significant cumulative effect adjustment under US GAAP on adoption of EITF 04-06. The remaining four mining companies either do not consider the impact of adoption of EITF 04-06 to be material or have not yet estimated the potential impact. An extract from Rio Tinto, which describes the expected impact of adopting EITF 04-06, is included below.

52 Reconciliation to US Accounting Principles [extract] New US accounting standards [extract] … The Group will adopt EITF 04-06 with effect from 1 January 2006. On implementation of EITF 04-06, deferred post production stripping balances brought forward, (net of taxes and minority interests) will be written off through beginning retained earnings as the cumulative effect of a change in accounting policy; and production phase stripping costs incurred each year will be treated as a variable production cost. Details of the Group’s deferred stripping balances and costs deferred during 2004 and 2005 are set out in Note 14 to the consolidated financial statements. Adoption of EITF 04-6 will have no impact on the Group’s cash balances. …



FINANCIAL SERVICES

Financial Services Introduction The companies in the Financial Services sector provide a diverse array of services from commercial and retail banking to insurance and investment management. A total of 18 companies are in the Financial Services sector for the survey, approximately 14% of the total survey sample of 130 companies. 10 out of the 18 companies are incorporated in the United Kingdom, nine are incorporated in other EU countries and one is incorporated in Switzerland.

93


Net

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GA

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ABN AMRO 100% -2.4% -10.6% -21.2% 14.1% -5.0% -1.7% -7.7% 65.5%

AEGON 100% -7.4% -9.6% 0.5% 8.3% -10.2% -5.2% 76.4%

Allianz 100% -4.9% -4.4% -22.3% 5.8% -0.7% 9.8% -1.4% 2.3% 84.2%

Allied Irish Banks 100% -17.3% -6.7% 3.6% 1.2% -4.4% -4.5% 71.9%

AMVESCAP 100% -1.5% 3.5% 5.7% -2.4% 105.3%

AXA 100% 6.2% -8.2% 5.2% 20.1% 8.9% -5.7% -1.2% 125.3%

Banco Bilbao Vizcaya Argentaria 100% -17.3% -7.3% -2.6% 37.1% -56.9% -0.1% 52.9%

Banco Santander Central Hispano 100% 1.6% -3.7% 5.5% -2.0% 0.1% 101.5%

Barclays 100% -3.5% -1.8% -6.0% 6.2% -0.7% 0.6% -5.9% -3.8% 85.1%

HSBC 100% -5.6% 15.5% -14.2% 3.8% 1.5% -1.2% -2.3% 97.5%

ING 100% -6.2% -1.1% -4.8% 11.0% -2.6% 0.8% -1.7% 1.2% 96.6%

Lloyds TSB 100% -5.6% -37.8% -6.5% 16.4% -0.1% -12.2% -0.1% 54.1%

Prudential 100% -3.7% -101.7% 194.4% -8.2% 12.3% -2.7% 0.4% -31.4% 159.4%

Royal Bank of Scotland 100% -1.2% -9.1% -2.2% 4.1% -6.7% -1.9% 83.0%

Royal & Sun Alliance 100% -11.2% -2.7% -1.3% 4.0% 0.2% 1.1% -53.7% 3.4% 39.8%

Sanpaolo IMI 100% -18.1% -0.9% -12.9% 14.1% -0.9% -0.3% 0.7% 81.7%

SVG Capital 100% 16.5% -8.8% 0.4% 108.1%

UBS 100% -6.6% -3.2% -3.8% 2.6% -0.1% -0.8% 88.1%


FINANCIAL SERVICES


Net

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ABN AMRO 100% 26.4% -1.1% 1.6% -3.7% 1.0% 0.3% 3.6% 128.1%

AEGON 100% 15.5% -5.8% 4.3% 0.5% -1.7% 6.6% -0.5% 118.9%

Allianz 100% 12.5% -0.8% 2.0% -0.4% 2.2% -6.1% 3.0% 112.4%

Allied Irish Banks 100% 4.4% -3.0% -1.2% 16.7% -3.0% 113.9%

AMVESCAP 100% 52.3% -0.3% 0.4% 0.1% 152.5%

AXA 100% 7.9% -2.1% 3.3% 0.6% -6.1% 0.4% 6.1% -3.4% 106.7%

Banco Bilbao Vizcaya Argentaria 100% 55.0% 10.6% 0.9% -8.5% -2.6% 155.4%

Banco Santander Central Hispano 100% 8.6% 2.0% 1.0% -0.8% -0.7% 110.1%

Barclays 100% -0.1% 1.5% -3.2% 0.6% 7.3% -0.2% 105.9%

HSBC 100% 3.6% -1.6% -0.1% -1.3% 1.7% -1.1% 101.2%

ING 100% 10.4% -8.2% 9.6% 1.6% -1.3% 0.3% 1.6% -0.7% 113.3%

Lloyds TSB 100% 14.3% -13.3% 1.5% -0.2% 6.7% -1.3% 107.7%

Prudential 100% 11.6% -133.0% 210.9% -0.1% -8.1% -0.1% 8.5% -51.2% 138.5%

Royal Bank of Scotland 100% 6.9% 7.4% 0.7% -0.8% 0.4% -1.0% 113.6%

Royal & Sun Alliance 100% -9.7% -1.7% 7.4% -22.8% 2.0% 0.1% 75.3%

Sanpaolo IMI 100% 36.0% 0.7% -7.2% -0.4% 1.7% -5.7% 125.1%

SVG Capital 100% -0.7% 99.3%

UBS 100% 39.3% 0.1% 0.2% -2.0% -1.8% 0.5% 0.2% 136.5%

95

Analysis The reconciliations presented by the Financial Services sector show that two of the most significant differences, both in terms of the total number of individual differences reported and the percentage impact on net income and net equity, relate to recognition and measurement of financial instruments and derivatives and hedge accounting. Many of the differences reported under these areas of accounting are specific to the Financial Services sector as they relate to banking or insurance activities.

Other differences specific to the Financial Services sector include the consolidation of special purpose entities, real estate and investment property valuation, subsequent recoveries of impaired-debt securities, venture capital and private equity investments and allowances for loan losses, foreign exchange differences on available for sale securities, the classification of available for sale investments, designation of financial assets and liabilities as carried at fair value through profit and loss, accounting for non-marketable securities, loan origination fees and costs and insurance contract deferred acquisition costs.

The Financial Services sector reported a wide range of total differences. One company reported only five individual differences, while another reported 26 individual differences.

The reconciling differences had the following impact on profit/loss and equity:

• 5 out of the 18 companies showed an overall increase in profit of between 1.5% and 59.4%, while 13 companies showed an overall decrease in profit of between 2.5% and 60.2%.

• 16 out of the 18 companies showed an overall increase in net equity of between 1.2% and 55.4%, while 2 companies showed an overall decrease in net equity of 0.7% and 24.7%.

The 18 companies reported a total of 313 individual differences representing 82 unique differences. These 82 unique differences were allocated to 18 areas of accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included 16 companies that are first-time adopters of IFRS. These companies reported a total of 68 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.


FINANCIAL SERVICES


Investment property 9






Others 109

313


97

Sector differences

Consolidated financial statements

Consolidation of special purpose entities

Under IFRS, a special purpose entity should be consolidated by the company that is deemed to control it. Indicators of control include arrangements whereby a special purpose entity conducts activities on behalf of a company or where a company holds the majority of the risks and rewards of the special purpose entity.

Under US GAAP, a special purpose, or variable interest, entity generally is consolidated by the interest holder that is exposed to the majority of the entity’s expected losses or residual returns.

The differences in the definitions of special purpose entities and variable interest entities, compounded by different and detailed assessment, accounting and application guidance, can result in different consolidation outcomes for particular entities.

The financial services sector uses special purpose or variable interest entities extensively, for example; as financing vehicles, leasing partnerships, securitisation conduit vehicles, venture capital enterprises, open ended companies and unit trusts. It is not surprising therefore that 8 of the 18 companies in this sector reported differences related to the consolidation of special purpose entities.

The IFRS and US GAAP guidance and accounting implications are described by HSBC in the following extract.

47 Differences between IFRS and US GAAP [extract]

Consolidation of Special Purpose Entities or Variable Interest Entities IFRSs

Under the IASB’s Standards Interpretations Committee (‘SIC’) Interpretation 12 (‘SIC-12’), an SPE should be consolidated when the substance of the relationship between an enterprise and the SPE indicates that the SPE is controlled by that entity. US GAAP • FASB Interpretation No. 46 (revised December 2003), ‘Consolidation of Variable Interest Entities’ (‘FIN 46R’), requires

consolidation of variable interest entities (‘VIE’s) in which HSBC is the primary beneficiary and disclosures in respect of all other VIEs in which it has a significant variable interest.

• A VIE is an entity in which equity investors hold an investment that does not possess the characteristics of a controlling financial interest or does not have sufficient equity at risk for the entity to finance its activities. HSBC is the primary beneficiary of a VIE if its variable interests absorb a majority of the entity’s expected losses. Variable interests are contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of an entity’s net assets exclusive of variable interests. If no party absorbs a majority of the entity’s expected losses, HSBC consolidates the VIE if it receives a majority of the expected residual returns of the entity.

Impact • When HSBC is deemed the primary beneficiary under US GAAP, but does not consolidate the vehicle under IFRSs, the assets

and liabilities of that vehicle are consolidated on the US GAAP balance sheet. This results in a grossing up of the balance sheet but does not have a material impact on net income for the period or on shareholders' equity.

• When HSBC is deemed not to be the primary beneficiary under US GAAP of a vehicle that is consolidated under IFRSs, the assets and liabilities of that vehicle are de-consolidated in the US GAAP balance sheet. This results in a reclassification in the 2004 balance sheet but does not have a material impact on shareholders' equity or on net income for 2004 or 2005.

Extract 120: HSBC


FINANCIAL SERVICES

Investment property

Real estate and investment property valuation

Under IFRS, property held for investment purposes generally is carried at fair value with changes in fair value reported in profit or loss. Additionally, IFRS provides the option to revalue property occupied for own use at fair value with changes in the fair value reported in profit or loss.

US GAAP does not permit revaluations of either type of property held, instead such properties generally are carried at cost less accumulated depreciation.

This difference is reported by Royal & Sun Alliance in the extract below.

38. SUMMARY OF DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION (“IFRS”) AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (“US GAAP”) [extract]

E. REAL ESTATE [extract]

Under IFRS, properties that are not occupied by the Group for its own use are treated as investment properties. These properties are reported at fair value with no depreciation charged against income. Properties that are occupied by the Group for its own use are treated as Group occupied properties. These properties are reported at fair value and depreciation is charged against income over their expected useful lives, primarily 30 years.

Under US GAAP all properties are recorded at their historical cost less depreciation thereon and segregated between those held for investment purposes and those occupied. Real estate assets are depreciated over their expected useful lives, primarily 30 years. The equity reconciliation reflects the impact of accounting for real estate on a depreciated cost basis. The net income adjustment reflects the depreciation charge and the change to realized gains as a result of this difference. It also reflects the reversal of the unrealized gains/losses recorded on an IFRS basis.

…

Extract 121: Royal & Sun Alliance

99

Impairment

Subsequent recoveries of impaired debt securities

Under certain circumstances, IFRS permits the reversal of previously recognised impairment losses for debt securities.

US GAAP generally does not permit reversal of any previously recognised impairment losses. The timing of recognition of an impairment loss may also be earlier under US GAAP than under IFRS. The following extract from HSBC describes the IFRS to US GAAP difference arising from the reversal of impairment losses for debt securities under IFRS.


Financial investments [extract] IFRSs [extract] … • If an available-for-sale security is determined to be impaired, the cumulative loss (measured as the difference between the

acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement) is removed from equity and recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.

… US GAAP [extract] … • A decline in fair value below cost of an available-for-sale or held-to-maturity security is treated as a realised loss and included

in earnings if it is considered ‘other than temporary’. The reduced fair value is then treated as the cost basis for the security. A decline in fair value is generally considered other than temporary when management does not intend or expect to hold the investment for sufficient time to enable the fair value to rise back to the original cost of the investment.

… Impact [extract] … • Subsequent recoveries in the value of an impaired debt security are not reported in net income for US GAAP purposes.

Financial instruments – recognition and measurement

Venture capital and private equity investments

Under IFRS, venture capital organisations and similar financial institutions are not required to apply the IAS 28 Investments in Associates equity method of accounting for investments over which they have significant influence. However, IAS 27 Consolidated and Separate Financial Statements does not exempt such companies from consolidating investments over which they have control.

In accordance with the specialised accounting practices that exist in US GAAP for investment companies, such investments generally are carried at fair value with changes in the fair value recognised in profit or loss.

Extract 122: HSBC


FINANCIAL SERVICES

In the extract below, ABN AMRO discloses the impact of this difference as it relates to accounting for private equity investments.

50 Shareholders’ Equity and Net Profit under US GAAP) [extract]

IFRS US GAAP

Private equity investments

Under IFRS all investments where the Group has a controlling financial interest are required to be consolidated in the Group’s financial statements.

For all investments where the Group has a financial interest that is not controlling, the Group has elected to designate these investments as fair value through income with changes in fair value from period to period being recorded in income.

Under US GAAP the Group accounts for its private equity investments in accordance with the AICPA Auditing and Accounting Guide, “Audits of Investment Companies”. Consequently, such investments are recorded at their fair value with changes in fair value from period to period being recorded in income.

Allowance for loan losses

Theoretically, there are no significant differences in the methodology for the calculation of non-specific impairment provisions related to loans under IFRS and US GAAP. Both methodologies focus on the calculation of a non-specific impairment provision based on historical loss experience but their application requires considerable judgement and is influenced by local regulators.

The reconciliation adjustments reported relate to the non-specific allowance for loan losses for the following reasons:

• First-time adoption of IFRS resulted in a change in methodology for calculation of the allowance for loan losses in accordance with IAS 39. Several companies took this opportunity to realign their US GAAP methodology to conform to IFRS and have reported a change in accounting estimate for US GAAP purposes.

Lloyds TSB describes the difference related to the first-time adoption of IAS 39 and re-alignment of the methodology for US GAAP as follows.

56 Differences between IFRS and US GAAP [extract] Notes to the IFRS/US GAAP reconciliation [extract] n Loan impairment [extract] … In 2004, Lloyds TSB Group determined the carrying value of its loans under IFRS and US GAAP using the same methodology. On 1 January 2005, the Lloyds TSB Group adopted IAS 39 and, as a result, now calculates the carrying value of its loans by discounting the expected cash flows. As described in note 54, an adjustment to equity of £221 million was made at 1 January 2005 and the carrying value of the loans reduced by £314 million (with associated deferred tax of £93 million). The Lloyds TSB Group has adopted a similar methodology under US GAAP. This change in the model for estimating the carrying value of its loans is considered a change of estimate and the adjustment detailed above has been included within the allowance for loan losses in the income statement in 2005. At 31 December 2005, there is no difference between the carrying value of loans under IFRS and US GAAP.

Extract 123: ABN AMRO

Extract 124: Lloyds TSB

101

• The detailed application of IFRS and US GAAP methodologies can produce reconciliation differences.

The following extract describes the impact of the difference in the detailed application of each methodology by HSBC.


Loan impairment IFRSs • When statistical models, using historic loss rates adjusted for economic conditions, provide evidence of impairment in

portfolios of loans, their values are written down to their net recoverable amount. The net recoverable amount is the present value of the estimated future recoveries discounted at the portfolio’s original effective interest rate. The calculations include a reasonable estimate of recoveries on loans individually identified for write-off pursuant to HSBC’s credit guidelines.

US GAAP • When the delinquency status of loans in a portfolio is such that there is no realistic prospect of recovery, the loans are written

off in full, or to recoverable value where collateral exists. Delinquency depends on the number of days payments is overdue. The delinquency status is applied consistently across similar loan products in accordance with HSBC’s credit guidelines. When local regulators mandate the delinquency status at which write-off must occur for different retail loan products and these regulations reasonably reflect estimated recoveries on individual loans, this basis of measuring loan impairment is reflected in US GAAP accounting. Cash recoveries relating to pools of such written-off loans, if any, are reported as loan recoveries upon collection.

Impact • Under both IFRSs and US GAAP, HSBC’s policy and regulatory instructions mandate that individual loans evidencing

adverse credit characteristics which indicate no reasonable likelihood of recovery, are written off. When, on a portfolio basis, cash flows can reasonably be estimated in aggregate from these written-off loans, an asset equal to the present value of the future cash flows is recognised under IFRSs.

• No asset for future recoveries arising from written-off assets was recognised in the balance sheet under IFRSs prior to 1 January 2005.

Foreign exchange differences on available for sale investments

Under IFRS, changes in the fair value of available-for-sale investments resulting from changes in foreign exchange rates are recognised in profit or loss.

Under US GAAP, such amounts are recognised in shareholders’ equity and recognition in the income statement occurs when the security is disposed. Barclays reports a difference in this respect.

63 Differences between IFRS and US GAAP accounting principles [extract]

Foreign exchange on available for sale securities

IFRS US GAAP

Changes in the fair value of available for sale debt securities resulting from movements in foreign currency exchange rates are reflected in the income statement as exchange differences.

Under EITF 96-15, as amended by SFAS 133, changes in the value of available for sale debt instruments due to changes in foreign currency exchange rate are carried in shareholders’ equity and transferred to income on sale of the instrument.

Classification differences for investments available for sale

On transition to IFRS, several entities noted that certain financial instruments were classified differently under IFRS and US GAAP. This is due to differences in the fundamental definitions of the loans and receivables and available-for-sale categories.

Extract 125: HSBC



FINANCIAL SERVICES

In the following extract, Royal Bank of Scotland describes this difference as it applies to debt securities classified as loans and receivables.

46 Significant differences between IFRS and US GAAP [extract]

IFRS US GAAP

(g) Financial instruments [extract]

Debt securities classified as loans and receivables

Non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables except those that are classified as held-to-maturity, held-for-trading, available-for-sale or designated as at fair value through profit or loss. Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at adjusted cost using the effective interest method less any impairment losses. The Group has classified some debt securities as loans and receivables.

…

Under US GAAP, these debt securities are classified as available-for-sale securities with unrealised gains and losses reported in a separate component of equity, except when the unrealised loss is considered other than temporary in which case the loss is included in net income.

Fair value option

Under IFRS, financial assets and financial liabilities may be designated at fair value through profit or loss at inception if they meet certain criteria.

US GAAP currently does not provide this option and, accordingly, such financial assets and financial liabilities are measured in accordance with the applicable US GAAP guidance for each financial asset or financial liability.

Many companies use the fair value option for: (1) designated financial assets used to hedge unit-linked insurance contracts; (2) designated financial liabilities that correspond either to unit-linked contracts or structured debt instruments containing significant embedded derivatives; or (3) designated financial assets or financial liabilities where hedge accounting would not otherwise be achievable.

The following extracts from Barclays and Lloyds TSB illustrate the differences related to the fair value option available under IFRS.

63 Differences between IFRS and US GAAP accounting principles [extract]

Financial instruments

IFRS US GAAP

Financial assets and financial liabilities may be designated at fair value through profit or loss (the ‘fair value option’) where they contain substantive embedded derivatives, where doing so significantly reduces measurement inconsistencies, or where they are managed and evaluated on a fair value basis with a documented risk management or investment strategy and reported to Key Management Personnel on that basis.

US GAAP does not permit an entity to apply the ‘fair value option’. These instruments have to be measured in accordance with the appropriate US GAAP.

Certain entities have been deemed to be investment companies or broker/dealers in accordance with the specific industry guidance applicable to those entities under US GAAP. The specific industry guidance requires certain financial instruments, held within these entities, to be measured at fair value through income.

Extract 127: Royal Bank of Scotland


103

56 Differences between IFRS and US GAAP [extract] Notes to the IFRS/US GAAP reconciliation [extract] h Investment securities [extract] 2005 Under IFRS in 2005, following the adoption of IAS 39, all debt and equity securities are classified as either (i) held at fair value through profit or loss, with unrealised gains or losses reflected in profit or loss; or (ii) available-for-sale at fair value, with unrealised gains and losses reflected in shareholders’ equity or (iii) held-to-maturity, at amortised cost or (iv) as loans and receivables, at amortised cost. Under IFRS, assets can only be held at fair value through profit or loss if they are held for trading or designated on initial recognition as at fair value through profit or loss; the decision to classify assets at fair value through profit or loss (including trading) is irrevocable. There are currently no provisions in US GAAP to elect for investment securities to be classified as held at fair value through profit or loss. For financial assets to be held at fair value with changes being recognised in the income statement, they must meet the definition of trading securities in SFAS 115. …

Non-marketable securities

Under IFRS, non-marketable equity securities generally are carried at fair value (classified as available for sale) unless the fair value cannot be reliably measured.

Under US GAAP, such investments generally are outside of the scope of FAS 115 Accounting for Certain Investments in Debt and Equity Securities as sales prices are not currently available on a recognised securities exchange and consequently, they do not have readily determinable fair values. Investments that are not accounted for under FAS 115, or under the equity method, generally should be carried at cost.

The following extract from Sanpaolo IMI describes this difference.

PART M–SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN EU GAAP, IFRS AS PUBLISHED BY IASB AND U.S. GAAP [extract]

Section 2–Significant differences in valuation and income recognition principles under EU GAAP and U.S. GAAP [extract] (c) Investment in Equity Securities (2005)

Non-marketable equity investments of 20% or less, with reliable fair value, are accounted at fair value with unrealized gains or losses recognized in a specific equity reserve. Certain unlisted equity securities, whose fair value cannot be reliably established or verified, are stated at cost, as adjusted for any impairment losses verified.

Non-marketable equity investments of 20% or less are accounted for under the cost method, reduced through write-downs to reflect “other than temporary” impairments in value. Reversals of impairments are not permitted.

Extract 129: Lloyds TSB

Extract 130: Sanpaolo IMI


FINANCIAL SERVICES

Loan origination fees and costs

Several entities reported an adjustment related to loan origination fees and costs. Under IFRS, certain fees and costs that are incremental and directly attributable to the origination of a loan are deferred and amortised over the life of the loan as part of the effective interest rate yield. US GAAP has similar requirements for the deferral of fees but only restricts the deferral to those costs that are directly attributable to the origination of a loan. Such costs may be internal costs and may not satisfy the incremental criteria under IFRS (for example, internal labour or overhead). Accordingly, the amount of cost deferral under US GAAP may be greater than the amount required to be deferred under IFRS. Any difference in cost deferral will impact financial assets and financial liabilities that are required to be recognised using the effective interest method which produces a constant yield over the life of the instrument, as ‘interest’ includes fees and incremental costs associated with the origination of a loan or receivable.

Barclays describes the difference related to the deferral of loan origination fees and costs as follows.

63 Differences between IFRS and US GAAP accounting principles [extract] Fee and cost recognition [extract] IFRS US GAAP IAS 39 does not consider certain internal costs to be incremental costs directly attributable to the origination of financial instruments and are excluded from effective interest calculations and are taken as an expense to income. Redemption fees are deferred and amortised on the balance sheet using the effective yield method. …

SFAS 91 requires loan origination fees and direct costs (including certain internal costs) to be deferred and amortised over the life of the loan as an adjustment of yield. Redemption fees are recorded in income as received. …

Insurance contracts discretionary participation and deferred acquisition costs

Common rules for accounting for insurance contracts will only be introduced with Phase 2 of IFRS 4 Insurance Contracts. Currently, IFRS 4 permits assets and liabilities of insurance and investment contracts with discretionary participation features and their related deferred acquisition costs to be accounted for under an entity’s previous GAAP. Many entities with significant insurance operations elected to continue to apply their previous GAAP therefore making it difficult to develop a meaningful comparison of the reconciliation adjustments between IFRS and US GAAP. However, IFRS 4 defines what is deemed to be an insurance activity and will result in many transactions which were previously treated as insurance contracts being accounted for as financial instruments under IAS 39.


105

The use of previous GAAP as permitted by IFRS 4 is illustrated in the extract below in which Prudential describes how previous GAAP (UK GAAP) has been applied in 2005.

J: Summary of Material Differences between IFRS and US Generally Accepted Accounting Principles [extract] Long-term Business [extract] Policy liabilities [extract]

…

The Group adopted IFRS 4 on January 1, 2005. As permitted by IFRS 4, assets and liabilities of insurance contracts and investments contracts with discretionary participation features are accounted for under previously applied GAAP. Accordingly, except as described below relating to UK regulated with-profits funds, the MSB of reporting as set out in the revised ABI SORP in December 2005 has been applied for the 2005 results. Investment contracts without discretionary participation features are accounted for on a basis that reflects the hybrid nature of the arrangements whereby the deposit component is accounted for as a financial instrument under IAS 39 and the service component is accounted for under IAS 18, 'Revenue'.

Under IFRS, from January 1, 2005, the Group has chosen to improve its accounting for UK regulated with-profits funds by the voluntary application of the UK accounting standard FRS 27, 'Life Assurance'. This standard requires the liabilities of the policyholders of the UK regulated with-profits life insurance business to be measured on the basis determined in accordance with the UK FSA Peak 2 realistic capital regime, subject to adjustments specified in the FRS. As all amounts of the with-profits funds not yet allocated to policyholders or shareholders are recorded to the unallocated surplus, shareholders' equity is not affected by this change.

Under US GAAP, for unitized with-profits life insurance and other investment-type policies, the liability is represented by the policyholders' account balances before any applicable surrender charges. Policyholder benefit liabilities for conventional with-profits life insurance and other protection-type insurance policies are developed using the net level premium method, with assumptions for interest, mortality, morbidity, withdrawals and expenses using best estimates at date of policy issue plus provisions for adverse deviation based on Group experience. Interest assumptions range from 0.3 per cent to 12 per cent. When the policyholder benefit liability plus the present value of expected future gross premiums are insufficient to provide for expected future policy benefits and expenses, using current best estimate assumptions, deferred acquisition costs are written down and/or a deficiency liability is established by a charge to earnings.

…

Extract 132: Prudential


PHARMACEUTICALS

Pharmaceuticals Introduction The companies included in the Pharmaceuticals sector are engaged in a wide range of activities including research and development, manufacturing and marketing of pharmaceutical, bio-technology and consumer health-related products.

There are thirteen companies in the Pharmaceuticals sector, or 10% of the total survey sample. Of these, eleven are incorporated in the EU and two are incorporated in Switzerland.

107


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Acambis -100% 0.4% -1.5% 1.1% -10.0% 30.4% 4.4% -75.2%

Altana 100% -2.3% 0.4% 0.4% -0.6% -0.1% -0.2% 97.6%

AstraZeneca 100% -21.7% -0.6% -0.3% -0.7% 7.4% -1.6% 82.5%

GlaxoSmithKline 100% -35.9% -0.6% 11.5% 0.1% -2.7% -1.2% 71.2%

Novartis 100% -20.3% 2.9% -0.7% -2.9% 5.5% 84.5%

Novo Nordisk 100% -5.0% 0.3% -6.8% -4.9% 83.6%

Sanofi-Aventis 100% -17.4% 10.4% 4.8% -0.9% 0.5% 97.4%

Schering 100% -1.0% -5.3% 2.9% 0.3% -1.8% -0.2% 94.9%

Serono -100% -80.1% -18.1% -10.3% -0.4% 6.3% -202.6%

Skyepharma -100% 0.4% 0.4% -9.8% 12.4% -96.6%

Smith & Nephew 100% -18.2% 2.7% 4.8% -0.5% -5.3% 9.1% 92.6%

Trinity Biotech 100% -93.0% 1.0% -4.6% 17.7% 25.6% 2.2% 48.9%

Vernalis -100% 8.8% -144.3% 4.4% -0.1% -231.2%


PHARMACEUTICALS


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Acambis 100% -8.8% -0.5% 1.0% -1.0% 3.7% -0.2% 94.2%

Altana 100% 0.9% 0.2% -1.3% -0.5% 1.5% 0.9% 101.7%

AstraZeneca 100% 138.2% -0.8% 1.8% 0.1% -15.6% 10.9% 234.6%

GlaxoSmithKline 100% 412.1% 2.4% -0.5% -62.0% 15.9% 0.9% 468.8%

Novartis 100% 12.6% -4.3% -0.3% 9.4% -1.9% 115.5%

Novo Nordisk 100% -1.7% 1.0% -1.4% -0.3% 97.6%

Sanofi-Aventis 100% 13.3% -11.1% -2.0% -0.7% 0.1% 99.6%

Schering 100% -5.4% 0.5% -3.2% 0.3% 8.9% 0.7% 101.8%

Serono 100% -4.3% -2.2% 0.4% -0.7% 93.2%

Skyepharma 100% 189.3% -4.7% -15.7% -112.2% 156.7%

Smith & Nephew 100% 7.4% -3.6% 6.1% -0.2% 109.7%

Trinity Biotech 100% 7.5% -9.1% 1.3% -0.3% 99.4%

Vernalis 100% -74.2% -1.7% 0.3% 62.8% 87.2%

109

Analysis The most significant areas of difference identified by Pharmaceuticals sector companies, both in terms of the total number of individual differences reported and the percentage impact on net income and equity relate to business combinations, pensions and post-retirement benefits, share-based payments and intangible assets.

The other areas of reported IFRS to US GAAP difference that relate to companies in the Pharmaceuticals sector are accounting for research and development projects, either acquired in a business combination or acquired directly and accounting for multiple element arrangements and long-term service arrangements, including differences in accounting for marketing contributions, pre-launch samples and licence fees.

The Pharmaceuticals sector companies reported a wide range of total differences. One company reported only seven differences while another reported 23 individual differences.

Our analysis revealed that the reconciling differences had the following impact on profit/loss and equity:

• Two out of the thirteen companies showed an overall decrease in loss of 3.4% and 24.8% while the remaining eleven companies showed an overall decrease in profit of between 2.4% and 131.2%.

• Seven out of the thirteen companies showed an overall increase in net equity of between 1.7% and 368.8% while the remaining six companies showed an overall decrease in net equity of between 0.4% and 12.8%.

The 195 individual differences represent 71 unique differences. These 71 unique differences were allocated to 19 areas of accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included eight companies that are first-time adopters of IFRS. These companies reported a total of 22 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.


Intangible assets 18






Others 74

195



PHARMACEUTICALS

Sector differences

Business combinations and intangible assets

Acquired in-process research and development projects

Under IFRS 3 Business Combinations, an acquirer recognises separately an intangible asset for in-process research and development of the acquiree at the acquisition date only if it meets the definition of an intangible asset in IAS 38 Intangible Assets and its fair value can be measured reliably.

Under US GAAP, costs assigned to intangible assets for in-process research and development acquired in business combinations are initially recognised and measured in accordance with FAS 141 Business combinations. However, FIN 4 Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method requires that identifiable tangible and intangible assets to be used in research and development projects and that have no alternative future use be charged to expense at the date of consummation of the combination.

Research and development is very significant in the Pharmaceuticals sector where a key priority is the quality of the product range and the new product pipeline. Nine of the thirteen companies reported a difference for in-process research and development acquired in a business combination. The difference as reported by GlaxoSmithKline is shown in the extract below.

38 Reconciliation to US accounting principles [extract] Summary of material differences between IFRS and US GAAP [extract] In-process research and development (IPR&D) [extract] Under IFRS, IPR&D projects acquired in a business combination are capitalised and remain on the balance sheet, subject to any impairment write downs. Amortisation is charged over the assets’ estimated useful lives from the point when the assets became available for use. Under US GAAP, such assets are recognised in the opening balance sheet but are then written off immediately to the income statement, as the technological feasibility of the IPR&D has not yet been established and it has no alternative future use. Under IFRS, deferred tax is provided for IPR&D assets acquired in a business combination. US GAAP does not provide for deferred tax on these assets, resulting in a reconciling adjustment to deferred tax and goodwill. …

Extract 133: GlaxoSmithKline

111

Intangible assets

Acquired in-process research and development projects

In-process research and development projects acquired other than as part of a business combination generally are capitalised under IFRS if the cost of acquiring the projects meets the definition of an intangible asset in IAS 38 Intangible Assets. Under US GAAP, the costs of acquired research and development projects, or assets used in research and development projects, that have no alternative future use generally are charged to expense as incurred. Nine companies reported differences arising from the capitalisation of research and development project costs acquired other than as part of a business combination.

The following extract from Novo Nordisk illustrates this difference.

38 Reconciliation to US GAAP [extract] c) Acquired in-process research and development projects Under IFRS, acquired in-process research and development projects are capitalised as intangible assets at the price paid, with annual impairment testing and subsequent amortisation when the product receives marketing authorisation.

According to US GAAP, such projects are expensed immediately following the acquisition as the feasibility of the acquired research and development project has not been fully tested and the technology has no alternative future use.

The future amortisation of the assets is therefore reversed under US GAAP. d) Acquired single-purpose research and development tangible assets US GAAP requires a company to expense acquired tangible assets used in a research and development project if these assets do not have an alternative use in future R&D projects or otherwise (single-purpose R&D assets). Under IFRS there is no such requirement to expense single-purpose R&D assets.

Novo Nordisk also reports a difference in accounting for a gain on a deemed partial disposal of an investment in a research and development company.

38 Reconciliation to US GAAP [extract] e) Unrealised capital gain on investments in research and development companies According to IFRS, the gain on a capital injection, where the shareholding of Novo Nordisk is diluted, is recognised in the Income statement.

Under US GAAP, the gain is recognised in equity where the issued securities are not common stock or the main activity of the investee is research and development.

Revenue recognition Only three companies reported revenue recognition differences. However, the differences identified relate to up-front fees and multiple-element arrangements and result from transactions that are specifically associated with the sector.

Under IFRS, accounting for revenue follows the general principles provided by IAS 18 Revenue.

Under US GAAP, there is revenue recognition guidance for specific types of transactions, including guidance in EITF 01-9 Accounting for Consideration Given by a Vendor to a Customer, EITF 00-21 Accounting for Revenue Arrangements with Multiple Deliverables and SAB 104 Revenue Recognition.




PHARMACEUTICALS

Licence Fees

Under SAB 104, up-front fees, even if non-refundable, are earned as the products and or services are delivered or performed over the term of the arrangement or the expected period of performance and generally should be deferred and recognised systematically over the periods that the fees are earned.

Under IFRS, such fees are not specifically addressed by IAS 18 and therefore general rules of revenue recognition apply. Therefore, in practice, differences in accounting for such revenues may arise. Acambis has reported a difference in this respect.

29 RECONCILIATION TO US ACCOUNTING PRINCIPLES [extract] SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS FOLLOWED BY THE GROUP AND US GAAP [extract] c) LICENSE FEES [extract]

Under IFRS certain license fees were recognized when paid, where such payments were not refundable. Under US GAAP the Group follows SAB 104, ‘Revenue Recognition in Financial Statements’, and where such license fees are not refundable and are not credited against associated R&D activities, these fees are considered inseparable from the associated R&D effort. As such, those license fees are deferred and recognized over the period of the license term or over the period of the R&D agreement. Deferred revenues relating to research programs terminated during this period are released to revenue on termination of the program.

…

Contingent marketing contributions and pre-launch samples

Although there is no specific guidance under IFRS or US GAAP for accounting for marketing contributions and pre-launch samples, in practice, revenue recognition differences arise as a result of the application of guidance for multiple element arrangements as reported by Skyepharma.

37 Summary of Material Differences between IFRS and U.S. GAAP [extract] Description of U.S. GAAP Adjustments [extract] (8) Revenue recognition

Under IFRS the Company accounts for revenues in accordance with IAS 18 and allocates revenue to the separate elements of each contract after consideration of the fair values and commercial substance of the contracts. The basis of such allocation differs from the allocation made under U.S. GAAP which, following the more prescriptive guidance in EITF 01–9; Accounting for Consideration Given by a Vendor to a Customer, EITF 00–21; Accounting for Revenue Arrangements with Multiple Deliverables and SAB 104; Revenue recognition, for determining the deliverable elements, the fair values of these deliverables and the allocation of consideration received.

Under U.S. GAAP, the Company has accounted for contingent marketing contributions as a reduction of up-front consideration received in determining the revenue to be recognized. If the contingent marketing contributions do not reach the contractually agreed reimbursements, the difference would be recognized as revenue at the time further marketing contributions are no longer required. Under IFRS, marketing contributions are expensed as incurred, in line with the timing of the resulting expected product sales. Furthermore, under EITF 00–21, pre-launch samples are considered a separate unit of accounting to which revenue is allocated, with such allocated revenue recognized as samples are delivered. Under IFRS, the samples are accounted for as a marketing contribution and expensed upon delivery.

Extract 136: Acambis

Extract 137: Skyepharma

113

Telecommunications Introduction The Telecommunications sector represents a broad range of telecommunications-related services, from mobile to fixed line communications, as well as network and consumer equipment. There are 32 companies in the Telecommunications sector, approximately 17% of the total survey population of 130 companies, incorporated in 11 countries in the EU, as well as Switzerland, Norway, China and Venezuela.


TELECOMMUNICATIONS


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Alcatel 100% -10.8% 2.5% -7.0% -1.0% -1.7% 82.0%

BT 100% -1.0% -28.2% 13.3% -14.2% -1.2% 68.7%

CANTV 100% -3.6% -1.1% 6.8% -0.2% 101.9%

China Telecom 100% 6.5% -25.7% 80.8%

Deutsche Telekom 100% -5.4% -4.7% -7.0% -1.1% 1.9% -0.5% 12.1% 95.3%

eircom 100% -13.4% -1.2% 8.5% -11.0% -2.4% 22.0% 102.5%

Ericsson 100% -0.3% 1.7% -0.3% -0.3% -0.1% 100.7%

France Telecom 100% 10.7% -0.5% -0.5% 8.2% -19.8% -2.2% 4.0% 99.9%

Gemplus 100% -3.6% -1.2% 3.1% 98.3%

Global Crossing (UK) 100% -90.6% -4.6% -33.0% -28.2%

Inmarsat 100% -3.9% -26.3% 116.6% 7.5% -38.4% 3.9% -7.8% -6.2% 145.4%

Koninklijke KPN 100% -5.7% -1.0% -1.6% 1.4% 4.4% -5.4% 2.4% 94.5%

Nokia 100% -0.2% 0.3% -0.3% 0.3% -0.1% -0.9% 99.1%

Portugal Telecom 100% -1.1% -5.0% 1.1% 8.3% 1.0% -37.8% -19.6% 46.9%

Spirent Communications -100% 114.9% -4.4% -79.1% 93.6% -3.6% 23.7% 45.1%

Swisscom 100% 0.7% 1.0% -0.1% 1.7% -1.3% 13.2% 115.2%

TDC 100% -0.2% 2.0% -5.6% 0.6% 96.8%

Tele2 100% -0.3% 0.4% 100.1%

Telecom Italia 100% -52.7% -0.8% 15.6% -1.8% 60.3%

Telefonica 100% -4.6% 0.5% -0.9% -3.4% 0.6% -3.5% 4.6% 93.3%

Telenor 100% 3.9% -1.7% 0.8% -4.1% -1.8% 97.1%

TeliaSonera 100% -58.0% 2.8% -1.2% -0.7% -10.6% 32.3%

Vodafone -100% -65.5% -0.3% 40.8% 64.2% -60.8%

115


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Alcatel 100% 52.4% -3.1% -6.8% -2.6% 139.9%

BT 100% 6.9% 10.5% 0.2% 16.8% -79.0% -65.6% -10.2%

CANTV 100% 4.5% -1.7% 0.5% -0.1% 103.2%

China Telecom 100% -2.0% 8.4% 106.4%

Deutsche Telekom 100% 12.8% -5.0% 0.1% 0.1% 0.9% -2.8% -2.3% 103.8%

eircom 100% -6.4% 7.1% -8.3% -3.9% 88.5%

Ericsson 100% 2.6% -0.1% 0.6% -2.3% -0.7% 100.1%

France Telecom 100% -48.2% 5.0% 1.1% -0.9% 1.4% 0.3% -5.6% 52.9%

Gemplus 100% 4.6% 0.2% -1.2% -2.2% 101.4%

Global Crossing (UK) -100% -4.3% -0.4% 39.1% -65.6%

Inmarsat 100% -11.3% -8.9% 20.9% -8.9% 0.4% 2.3% -9.3% 85.2%

Koninklijke KPN 100% 1.4% 12.4% 1.4% 0.7% 5.7% -4.2% -7.5% 109.9%

Nokia 100% 1.6% -0.4% 0.1% 0.7% -0.5% 1.8% 103.3%

Portugal Telecom 100% -2.0% 2.5% -4.3% 6.6% -3.7% -7.5% 40.1% -32.3% 99.4%

Spirent Communications 100% -10.2% -37.6% 7.7% 0.6% 60.5%

Swisscom 100% 1.9% 1.0% 3.7% -1.7% -9.7% -8.7% 86.5%

TDC 100% -0.3% -0.5% 1.9% -0.1% 101.0%

Tele2 100% 27.1% 0.2% -0.5% -1.6% 125.2%

Telecom Italia 100% 104.1% 2.9% -30.5% -2.7% 173.8%

Telefonica 100% 46.0% -0.6% 3.2% -0.1% 2.7% 0.5% -0.7% 151.0%

Telenor 100% 1.6% -0.9% -0.5% 3.1% -1.1% 102.2%

TeliaSonera 100% -2.2% 3.8% -3.7% -3.3% -12.0% 82.6%

Vodafone 100% 38.2% 1.7% -35.6% -2.3% 102.0%


TELECOMMUNICATIONS

Analysis The most significant areas reported by companies in the Telecommunications sector, both in terms of the total number of differences reported and the percentage impact on net income and equity, are business combinations, pensions and post-retirement benefits and derivatives and hedge accounting.

The analysis also revealed certain differences more prevalent in the Telecommunications sector. These include differences relating to customer acquisition costs, sales incentives, trademark licence intangibles, capitalisation of start-up costs and capitalisation of borrowing costs.

The companies reported a wide range of total differences. One company reported only 3 differences while another reported 27 individual differences.

The reconciling differences had the following impact on profit/loss and equity:

• Only 8 of the 23 companies showed an overall increase in profit (or decrease in loss) ranging from 0.1% to 145.1% while the remaining 15 companies showed an overall decrease in profit (or increase in loss) of between 0.1% and 128.2%.

• 15 out of the 23 companies showed an overall increase in net equity of between 0.1% and 73.8% while 8 companies showed an overall decrease in net equity of between 0.6% and 89.8%.

The 23 companies reported a total of 339 individual differences representing 86 unique differences. These 86 unique differences were allocated to 22 areas of accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included 18 companies that are first-time adopters of IFRS. These companies reported a total of 70 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption differences.

The total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.


Intangible assets 8



Financial instruments – derivative and hedge accounting 25


Pension and post-retirement benefits 51

Others 167

339


117

Sector differences

Revenue recognition The survey identified three different types of reconciling items related to revenue recognition. These differences relate to up-front fees and deferral of related costs and multiple-element arrangements. The most common revenue recognition accounting differences relate to up-front fees and multiple-element arrangements; both are reported by five companies in this sector.

Up-front fees

In the Telecommunications sector, up-front fees are generally customer connection and access fees which are charged at the beginning of a service arrangement. Under IFRS, there is no specific guidance relating to up-front fees, so the general IAS 18 Revenue rules apply. Under US GAAP, SAB 104 Revenue Recognition requires that up-front fees, even if non-refundable, are earned as the products and/or services are delivered and/or performed over the term of the arrangement or the expected period of performance. Consequently, unless the up-front fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process, revenue from up-front fees generally should be deferred and recognised systematically over the periods that the fees are earned. Furthermore, under SAB 104, in order for up-front fees to be recognised separately from the on-going service or product, the criteria for separating components in a multiple-element arrangement must be met.

Examples of disclosures of differences for up-front fees are provided by Swisscom and Portugal Telecom.

44. Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles [extract] i) Revenue recognition [extract] In 2004, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 104 which amended SAB 101. Under this guidance, revenue earned from access and similar charges should be recognized over the estimated life of the customer relationship. Under IFRS, this revenue is recognized immediately upon connection or similar activity. In 2005, 2004 and 2003, the effect of the deferred and released revenue from prior periods amounted to CHF 35 million, CHF 56 million and CHF 31 million respectively, which has been recorded as an addition to net revenue. SAB 104 allows companies to defer costs directly associated with revenue that has been deferred. Swisscom has elected not to defer any such costs. …



TELECOMMUNICATIONS

46. Summary of Significant Differences between Accounting Principles followed by the Company and U.S. Generally Accepted Accounting Principles [extract] e) Revenue recognition [extract] (i) Connection fees The principal difference between SAB 101 and IFRS for revenue recognition is related with the recognition of connection fees. Under IFRS, in accordance with IAS 18, revenue recognition regarding entrance fee (certain “up front” fees) depends on the nature of the services provided. If the fee includes only the entrance as a standalone transaction, and all other services or products are paid for separately, or if there is a separate annual subscription, the fee is recognized as revenue if no significant uncertainty as to its collectability exists. Under U.S. GAAP, Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101 modified by SAB 104, or SEC Staff Accounting Bulletin Topic13-A.1, Revenue Recognition) guidance is followed, and such entrance fee which is considered to be revenue earned from access and similar charges should be recognized over the estimated life of the customer relationship. The Company has estimated the following average lives of customers of its various businesses for which initial fees are being charged: 5 years for cable/internet access and 15 years for fixed line telephony. These estimated average customer lives are based on management’s best estimates. Such estimates are subject to revision, based on changes in customer demographics, the introduction of increased competition, as well as other factors.

Deferred costs

One company, Koninklijke KPN, disclosed a difference related to deferral of incremental direct costs associated with connection fees as follows.

RECONCILING ITEMS AND EXPLANATION OF CERTAIN DIFFERENCES BETWEEN IFRS AND US GAAP [extract] E. REVENUE RECOGNITION (DEFERRED EXPENSES) Under US GAAP and IFRS, up-front connection fees are deferred over the estimated customer relation period. During this period, the associated incremental direct costs, in so far they do not exceed the deferred revenues, are capitalized and recognized over the estimated customer relation period under US GAAP as the matching principle is applied. Under IFRS, these incremental direct costs are not allowed to be capitalized as the definition of an asset is not met.

Multiple-element arrangements

Five companies disclosed differences due to multiple-element arrangements which primarily related to equipment and services. Under IFRS, companies may allocate the cash consideration received from the customer between equipment and service elements based on their relative fair value. Under US GAAP, the amount allocated to the equipment generally is limited to the amount that is not contingent upon delivery of additional items or meeting other specific performance conditions.

Extract 139: Portugal Telecom

Extract 140: Koninklijke KPN

119

Examples of disclosures of differences in accounting for multiple-element arrangements are provided by Spirent Communications and Tele2.

39. Differences between International Financial Reporting Standards and United States Generally Accepted Accounting Principles [extract] (a) Revenue recognition Under IFRS, multiple-element arrangements with hardware, software and post contract support (“PCS”) components are accounted for as two or more separate transactions only where the commercial substance is that the individual components operate independently of each other because they are capable of being provided separately from one another and it is possible to attribute reliable fair values to every component. To the extent that a separate component comprises a product sale of hardware or software, revenue is recognized at the time of delivery and acceptance and when there are no significant vendor obligations remaining. Terms of acceptance are dependent upon the specific contractual arrangement agreed with the customer. Revenue is recognized on other components as the Group fulfills its contractual obligations and to the extent that it has earned the right to consideration. Under US GAAP, the rules for revenue recognition under multiple-element arrangements are detailed and prescriptive. These rules include the requirement that revenues be allocated to the respective elements of such an arrangement on the basis of Vendor Specific Objective Evidence (“VSOE”) for each element. Statement of Position (“SOP”) 97-2 ‘Software Revenue Recognition’ sets out precise requirements for establishing VSOE for valuing elements of a multiple-element arrangement. When VSOE for individual elements of an arrangement cannot be established in accordance with SOP 97-2, revenue is generally deferred and recognized over the term of the final element. Under US GAAP, the Group does not have VSOE for certain elements of certain multiple-element arrangements with customers in the Service Assurance division of our Communications group. The terms of these arrangements with customers include, among other terms, PCS for hardware and software and the provision of product roadmaps, which contain expected release dates of planned updates and enhancements. The existence of a particular item on the roadmap does not, in itself, create a contractual obligation to deliver that item; however, under US GAAP an implied obligation is deemed to exist. As a consequence of the terms of these arrangements revenue is deferred under US GAAP and does not start to be recognized until delivery or discharge of the obligation in respect of the final element of the arrangement for which VSOE is not determinable. If this final element is PCS, then revenue is recognized over the remaining term of the PCS contract. The Service Assurance division has a number of multi-year contracts for PCS and this has the effect of extending the period over which revenue is recognized for US GAAP. Direct costs of the delivered products for which revenue recognition is deferred are also deferred. The above gives rise to an IFRS to US GAAP difference in respect of revenue recognition in the reconciliations of both net income and shareholders’ equity.

Note 39 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract] Explanation of current differences between IFRS and US GAAP [extract] f) Connection charges [extract]

According to IFRS, connection charges may be recognized as revenue when collected at the inception of a contract.

According to US GAAP, for all contracts entered into prior to 2004, connection charges collected at the inception of a service contract were deferred and recognized as revenue over the period in which there is a customer relationship which is approximately three years. Effective for new contracts entered into from January 1, 2004, US GAAP changed in regards to the Group’s accounting for revenue arrangements containing multiple elements which are required to be treated as separate units of accounting as a result of the adoption of Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Where a revenue arrangement contains multiple elements which are determined to require separate accounting, total revenue under the contract is allocated and measured using units of accounting within the arrangement based on relative fair values.

The application of EITF 00-21 by the Group to revenue arrangements containing multiple elements which are required to be treated as separate units of accounting generally results in the connection charges being recognized as revenue at the inception of the contract, together with any proceeds received pertaining to the delivery of a mobile handset. …

Extract 141: Spirent Communications

Extract 142: Tele2


TELECOMMUNICATIONS

Development costs Under IAS 38 Intangible Assets, development costs should be capitalised and amortised if they meet the specific definition and criteria for capitalisation as an intangible asset.

Under US GAAP, research and development costs generally should be expensed as incurred in accordance with FAS 2 Accounting for Research and Development Costs.

The survey identified eight companies with differences related to internal development costs. Included below are extracts from Ericsson and Nokia.

C32 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES [extract]

SIGNIFICANT DIFFERENCES BETWEEN IFRSs AND US GAAP [extract] Capitalization of development costs According to IFRSs development costs are capitalized after the products have reached a certain degree of technological feasibility. Capitalization ceases and amortization begins when the product is ready for its intended use. The Company has adopted an amortization period for capitalized development cost of three to five years. Under US GAAP, The Company applies US GAAP SFAS 86 “Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed” and SOP 98-1, “Accounting for the costs of Computer Software Developed or Obtained for Internal use”. According to SFAS 86, software development costs are capitalized after the product involved has reached a certain degree of technological feasibility similarly to IFRSs. However, under US GAAP non-software related development costs may not be capitalized as per IFRSs, and is therefore expensed under US GAAP.

39. Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles [extract] Development Costs Development costs are capitalized under IFRS after the product involved has reached a certain degree of technical feasibility. Capitalization ceases and depreciation begins when the product becomes available to customers. The depreciation period of these capitalized assets is between two and five years. Under US GAAP, software development costs are similarly capitalized after the product has reached a certain degree of technological feasibility. However, certain non-software related development costs capitalized under IFRS are not capitalizable under US GAAP and therefore are expensed. Under IFRS, whenever there is an indication that capitalized development costs may be impaired the recoverable amount of the asset is estimated. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. Recoverable amount is defined as the higher of an asset’s net selling price and value in use. Value in use is the present value of estimated discounted future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Under US GAAP, the unamortized capitalized costs of a software product are compared at each balance sheet date to the net realizable value of that product with any excess written off. Net realizable value is defined as the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the enterprise’s responsibility set forth at the time of sale. The amount of unamortized capitalized software development costs under US GAAP is EUR 213 million in 2005 (EUR 210 million in 2004). The US GAAP development cost adjustment reflects the reversal of capitalized non-software related development costs under US GAAP net of the reversal associated amortization expense and impairments under IFRS. The adjustment also reflects differences in impairment methodologies under IFRS and US GAAP for the determination of the recoverable amount and net realizable value of software related development costs.

Extract 143: Ericsson

Extract 144: Nokia

121

Capitalisation of interest The survey identified that 13 companies disclosed differences relating to the capitalisation of interest.

Under IAS 23 Capitalisation of Borrowing Costs, entities have the choice of applying the benchmark treatment, which is to expense all borrowing costs as incurred, or the allowed alternative treatment, which is to capitalise borrowing costs on qualifying assets. There is no such choice under US GAAP since FAS 34 Capitalisation of Interest Cost makes the capitalisation of interest compulsory for certain qualifying assets that require a period of time to get them ready for their intended use.

In the Telecommunications sector, capitalisation of interest differences generally relate to either capitalisation of interest on the construction of tangible and intangible assets or on the acquisition of licences.

The sector has invested significant amounts in licences to operate mobile telephone networks. Under US GAAP, borrowing costs generally are capitalised until the licence is ready for use.

Examples of the GAAP differences disclosures for capitalisation of interest are provided by the following extracts from Vodafone and Deutsche Telekom.

38. US GAAP information [extract] Summary of differences between IFRS and US GAAP [extract] f. Capitalised interest Under IFRS, the Group has adopted the benchmark accounting treatment for borrowing costs and, as a result, the Group does not capitalise interest costs on borrowings in respect of the acquisition or construction of tangible and intangible fixed assets. Under US GAAP, the interest costs of financing the acquisition or construction of network assets and other fixed assets is capitalised during the period of construction until the date that the asset is placed in service. Interest costs of financing the acquisition of licences are also capitalised until the date that the related network service is launched. Capitalised interest costs are amortised over the estimated useful lives of the related assets.

(48) Reconciliation of IFRS to U.S. GAAP [extract] (b) Mobile Communication Licenses [extract] …. Under IFRS, the Company has elected to expense finance charges on debt related to construction period capital expenditures, including the costs to acquire mobile licenses. Under U.S. GAAP, finance charges on qualifying capital expenditures are capitalized during the period the mobile network is being constructed, and are subsequently amortized over the expected period of use. This difference has resulted in deferrals of interest expense and higher carrying bases for the mobile network fixed assets under U.S. GAAP. During 2003 and 2004, certain of the Company’s mobile networks in different countries were placed in use, and amortization commenced for those previously capitalized costs. …

Extract 145: Vodafone

Extract 146: Deutsche Telekom


TELECOMMUNICATIONS

Business combinations

Intangible assets

Under US GAAP, FAS 141 Business Combinations and FAS 142 Goodwill and Other Intangible Assets generally require that measurement of an intangible asset is based on its intended use. Under IFRS, IAS 38 Intangible Assets does not require intended use to be taken into account. Measurement differences where the intended useful life of an intangible asset is less than its expected useful life will result in a lower fair value for the identified intangible, and consequently a higher balance of goodwill, under US GAAP. Such differences, which may impact deferred taxation and amortisation to the extent that the identified intangible assets have finite useful lives, are explained in the following extract from France Telecom.

NOTE 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract] Description of US GAAP adjustments [extract] Other business combinations (B) [extract] 2005 Acquisition of Amena … (2) Under US GAAP, the portion of the purchase price allocated to the identified brand name intangible asset was lower than the amount recognized under IFRS by €347 million, which generates a discrepancy between IFRS and US GAAP goodwill of €173 million, net of the related deferred tax effect. In accordance with US GAAP practice, the brand name was valued based on France Telecom’s intended useful life whereas under IFRS, the brand name was valued based on an indefinite useful life. …


123

Utilities and Energy Introduction The primary business lines for the companies in the Utilities and Energy sector are the transmission and distribution of electricity and natural gas, for both commercial and residential purposes. Some of the companies in this sector are also involved in providing telecommunications and environmental management services.

There are 11 companies in the Utilities and Energy sector, approximately 8% of the total survey population of 130 companies. Of the 11 companies, 10 are incorporated in the EU and the other is incorporated in China.


UTILITIES AND ENERGY


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BG 100% -0.1% -29.8% 12.7% -0.9% -0.4% -7.0% 74.5%

EDP–Energias de Portugal 100% -1.7% 16.7% -2.1% -1.3% -2.1% -3.4% -6.9% 4.1% 103.3%

Endesa 100% 0.2% 3.9% -0.1% 0.4% 7.4% -0.5% -10.7% -14.1% 86.5%

ENEL 100% 20.7% 4.4% 6.0% 1.5% -10.1% 0.1% -8.9% 113.7%

Huaneng Power 100% 14.2% 0.6% -2.8% -0.6% 111.4%

International Power 100% 0.4% -26.3% 30.2% 2.1% -1.4% -21.1% 83.9%

National Grid 100% -60.4% -7.0% -3.4% 12.8% -1.2% -4.8% -2.1% 33.9%

Scottish Power 100% 0.1% 1.8% -2.0% -1.7% -27.8% 70.4%

SUEZ 100% -4.8% -2.6% -1.0% 10.2% 0.4% -4.0% -0.1% -28.0% 70.1%

United Utilities 100% -3.3% -8.0% 15.7% -1.3% -7.0% -26.5% 14.7% 84.3%

Veolia Environment 100% 4.9% -1.0% -8.5% 1.0% -7.2% 89.2%

125


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BG 100% 1.7% -8.7% 4.4% -0.6% 1.1% -1.1% 96.8%

EDP–Energias de Portugal 100% 0.8% -12.1% 2.8% 3.5% 3.4% 19.8% -3.0% 115.2%

Endesa 100% 11.4% -10.6% 0.3% -0.9% 6.4% 1.2% 1.1% -5.2% 103.7%

ENEL 100% -3.6% 3.3% -2.5% -2.8% -9.4% 0.8% 5.0% 90.8%

Huaneng Power 100% -10.8% 0.1% 2.6% -0.9% 91.0%

International Power 100% -3.2% 23.0% -0.8% -6.7% 0.8% -5.1% 108.0%

National Grid 100% 78.0% 62.1% -1.1% 3.4% -60.0% 76.4% 25.4% -4.3% 279.9%

Scottish Power 100% 9.4% -0.9% -6.2% 0.3% 4.8% 0.7% 108.1%

SUEZ 100% 38.0% 0.3% 1.0% 0.3% -0.3% -4.7% 0.8% -5.9% 129.5%

United Utilities 100% 34.5% -1.2% -5.8% -2.4% 9.6% 13.9% 148.6%

Veolia Environment 100% -26.4% -3.2% -2.8% 7.8% -0.9% 74.5%



Analysis The most significant areas of differences reported by companies in the Utilities and Energy sector, both in terms of the total number of individual differences reported and the percentage impact on net income and equity are business combinations, derivatives and hedge accounting, pensions and post-retirement benefits and impairment. However these areas are common across all sectors and are not specific to the Energy and Utilities industry. The differences reported that would be considered more industry-related include regulated pricing, accounting for leases, revenue recognition for up-front fees, the classification of an asset for CO2 emission allowances and nuclear fuel inventory.

The companies in this sector reported a wide range of total differences. One company reported only six differences while another reported 29 differences.

Overall, the reconciling differences for the companies in this sector had the following impact on profit/loss and equity:

• Three of the eleven companies showed an overall increase in profit of between 3.3% and 13.7% while eight showed an overall decrease in profit of between 10.8% and 66.1%.

• Seven out of the eleven companies showed an overall increase in net equity of between 3.7% and 179.9% while four showed an overall decrease in net equity of between 3.2% and 25.5%.

The total of 237 differences reported by this sector represents 67 unique differences. These 67 unique differences were allocated to 21 areas of accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included 10 companies that are first-time adopters of IFRS. These companies reported a total of 54 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the table below.



Impairment 13


Leasing 6



Others 106

237


127

Sector differences

Regulated pricing Under US GAAP, FAS 71 Accounting for the Effects of Certain Types of Regulation provides specific guidance relating to pricing within a regulated industry. Under FAS 71, an entity accounts for the effects of regulation by recognising a ‘regulatory’ asset (or liability) that reflects the increase (or decrease) in future prices approved by the regulator.

Due to the nature of the industry, revenue may be received before or after the costs relating to this revenue are incurred and this may cause a mismatching of the periods in which the revenue and expense are recognised. Under FAS 71, if the regulation provides assurance that incurred costs will be recovered in the future, companies generally are required to capitalise those costs and if the current regulated rates are intended to recover costs that are expected to be incurred in the future, then companies generally are required to recognise those current receipts as liabilities. FAS 71 applies only to general-purpose external financial statements of an enterprise that has regulated operations that meet all of the criteria specified in the statement. However, if only some of an enterprise’s operations are regulated and meet the criteria specified in FAS 71, then the guidance will apply to only that portion of the enterprise’s operations.

Under IFRS, there is no specific guidance which addresses regulated pricing.

The survey identified three companies with differences related to regulated pricing. Extracts from EDP–Energias de Portugal and Scottish Power are included below.

48. Reconciliation to accounting principles generally accepted in the United States of America [extract] h) Regulatory assets and liabilities In accordance with the IFRS conceptual framework, regulatory assets and liabilities, including tariff adjustments, are not recognized and on that basis, at the transition date, these assets and liabilities were adjusted against reserves. Under IFRS, regulatory assets and liabilities which relate to deferred costs and deferred income, respectively, defined and regulated by the Regulator, being recoverable or payable through tariff adjustments to be charged to customers in future years were also adjusted against reserves at the transition date. These future tariff adjustments are recorded as income in the period when they are charged to customers. Under U.S. GAAP, tariff adjustments, for the regulated activity in Portugal are eliminated because management believes that, in substance, the tariff adjustments regulation does not meet in full the criteria set out in SFAS 71. Even though the scope criterion of SFAS 71 is met with respect to the regulated activities in Portugal, due to the uncertainty in relation to future income being in an amount at least equal to the capitalized cost or a situation of a permanent roll forward of cost with current year costs being deferred and prior cost being recovered in each period, the asset recognition criteria as defined in SFAS 71 is not met. As a result, tariff adjustments related to Portuguese activities, consistently with the accounting treatment under IFRS, are not also reflected in U.S. GAAP accounts. The regulatory assets and liabilities including the tariff adjustments mechanism set out by the regulator (ANEEL) regarding the activities in Brazil meets the requirements of SFAS 71 and therefore are accounted for on that basis. Eligible costs are specifically determined by the Regulator and are recoverable through the recovery rates. Resulting from measures taken by the Brazilian government and by ANNEL in 2001, the companies in Brazil are subject to the application of SFAS 71.

Extract 148: EDP–Energias de Portugal



44 Summary of differences between IFRS and US Generally Accepted Accounting Principles (‘GAAP’) [extract] (c) Description of US GAAP adjustments [extract] (ii) US regulatory net assets [extract] FAS 71 ‘Accounting for the Effects of Certain Types of Regulation’ establishes US GAAP for utilities in the US whose regulators have the power to approve and/or regulate rates that may be charged to customers. FAS 71 provides that regulatory assets may be capitalised if it is probable that future revenue in an amount at least equal to the capitalised costs will result from the inclusion of that cost in allowable costs for ratemaking purposes. Due to the different regulatory environment, no equivalent GAAP applies under IFRS. Under IFRS, no regulatory assets are recognised. …

Leasing IFRIC 4 Determining whether an Arrangement contains a Lease provides guidance for determining whether arrangements that do not take the legal form of a lease, should nonetheless be accounted for as a lease in accordance with IAS 17 Leases. IFRIC 4 is applicable for periods beginning on or after 1 January 2006, with early adoption encouraged and is applied retrospectively. The assessment of whether an arrangement contains a lease may be made at the start of the earliest comparative period presented (and for first-time adopters, at the date of transition) based on the facts and circumstances existing at that date.

Under US GAAP, the specific guidance for determining whether an arrangement contains a lease is given in EITF 01-8 Determining Whether an Arrangement Contains a Lease and is applicable for all arrangements agreed to, modified, or acquired in a business combination initiated after the beginning of an entity’s next reporting period beginning after 28 May 2003.

The guidance is comparable under IFRS and US GAAP but the adoption dates and transition provisions can result in different treatments for a particular arrangement.

Two companies reported differences relating to the adoption of IFRIC 4 as follows.

Note 50 A. Summary of significant differences between US GAAP and IFRS [extract] PRINCIPAL ACCOUNTING DIFFERENCES BETWEEN IFRS AND U.S. GAAP RELATING TO THE GROUP [extract] Arrangements containing a lease Under IFRS, the Group has elected the early application of IFRIC 4 “Determining whether an arrangement contains a lease” in advance on January 1, 2004. Certain industrial contracts, Build, Operate & Transfer (BOT) contracts, incineration contracts and co-generation contracts have been considered as containing a lease that is accounted for as a financial lease in accordance with IAS 17. Consistent with IFRIC 4 the determination and the accounting of the financial assets as of January 1, 2004 has been made retrospectively. Under US GAAP, Emerging Issues Task Force (EITF) 01-08 “Determining Whether an Arrangement Contains a Lease”, is effective prospectively for contracts entered into or significantly modified after January 1, 2004.

Extract 149: Scottish Power

Extract 150: Veolia Environment

129

48. Reconciliation to accounting principles generally accepted in the United States of America [extract] c) Power purchase agreements EDP Group executed several contracts with REN, which are treated as finance leases, under U.S. GAAP. The evaluation of whether an arrangement contains a lease within the scope of Statement 13 and EITF 01-8 is based on the substance of the arrangements. Those contracts, include agreements that, although not nominally identified as leases, meet the definition stated in the referred statements, that a lease transfers substantially all of the benefits and risks related to the property of the lessee. In substance, those contracts explicitly identified the group of assets (power plants) under which EDP produces power exclusively to be provided to the lessee and cannot use any other power plant to supply the referred power to the referred lessee. Additionally, those contracts convey the right to use those power plants and require that the total production is acquired by REN, who is the lessee. Those contracts are being considered as capital leases for U.S. GAAP purposes, due to the fact that those contracts transfer the risks and the rewards of the usage to the lessee during the period of the lease term and the ownership of the property to the lessee (REN) at the end of the lease term and the lease terms are the same as the useful lives of power plants. Under IFRS, fixed assets used by binding producers are recorded as tangible fixed assets in the financial statements of each company, and are stated at deemed cost, which includes the revalued amount. The referred tangible assets are amortized on a straight line basis, over their estimated useful life. The remain useful life of PPA’s agreements is from 8 to 19 years for hydro power plants and 2 to 12 years for thermal power plants. On January 27, 2005 in accordance with Decree-Law 240/2004, of December 27, the EDP Group signed the early termination contracts of PPA related to the binding electricity producers’ centres. The termination agreements effects are suspended until a set of conditions is met-which includes the start up of the spot market that assures the sales of generated electric energy and the attribution of non-binding production licenses. When the conditions set on above allow for the effective termination of PPA’s, under U.S. GAAP, the accounting of these agreements will be re-assessed. On December 2, 2004 IFRIC 4 – Determining whether an arrangement contains a lease as defined in IAS 17 was published, effective only after January 1, 2006. An arrangement that contains a lease will be the same under IFRS and U.S. GAAP, effective January 1, 2006. Under IFRIC 4, in accordance with the transition regime set by this rule, PPAs should be analysed based on the existing information and facts at the date such transition, as to whether in substance the contracts are a financial lease. On this basis, the above mentioned Decree-Law that established the early termination of PPAs and the terms of the termination agreements signed in January 2005 relating to the electric generation facilities in PES, are relevant facts that should be taken in that should be taken in consideration, in the assessment of the adoption of IFRIC 4 effective January 1, 2006.

Revenue recognition Under IFRS, there is no specific guidance for revenue recognition relating to up-front fees so the general rules on revenue recognition apply. However, the treatment of various specific situations is discussed in the appendix to IAS 18 Revenue.

Under US GAAP, up-front fees, even if non-refundable, are earned as the products and/or services are delivered and/or performed over the term of the arrangement or the expected period of performance. Unless the up-front fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process, revenue generally should be deferred and recognised systematically over the periods that the fees are earned. Furthermore, in order for up-front fees to be recognised separately from the revenue from on-going service or product delivery, the criteria for separability in EITF 00-21 Revenue Arrangements with Multiple Deliverables should be met.

Extract 151: EDP–Energias de Portugal



Three companies reported differences relating to the recognition of up-front fees. Extracts from Endesa and ENEL are included below.

29. Differences Between IFRS and United States Generally Accepted Accounting Principles [extract] 4. Revenue recognition [extract] 4.1. Up-front Fee

Under IFRS, in accordance with IAS 18 revenue recognition regarding entrance fees (certain “up front” fees) depends on the nature of the services provided. If the fee includes only the entrance, and all other services or products are paid for separately, or if there is a separate annual subscription, the fee is recognized as revenue if no significant uncertainty as to its collectability exists.

Under U.S. GAAP Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101 modified by SAB 104, or SEC Staff Accounting Bulletin Topic 13-A.1, Revenue Recognition) guidance is followed.

Under IFRS, such entrance fee collected by Electricity Distribution Activities from new customers is considered to be a standalone transaction and all other services are paid for separately, therefore such fee is recognized up-front as revenue when no significant uncertainty as to its collectability exists.

Under U.S. GAAP, such entrance fee which is considered to be revenue earned from access and similar charges should be recognized over the estimated life of the customer relationship.

The effect of the deferred and released revenue from prior periods has been recorded as a reconciliation item from IFRS to U.S. GAAP.

21. RECONCILIATION OF NET INCOME AND SHAREHOLDERS’ EQUITY FROM IFRS-EU AND U.S. GAAP [extract]

Differences Between IFRS-EU and United States Generally Accepted Accounting Principles [extract] 21.2. Customers’ Connection Fees Under IFRS–EU the connection fees collected from new non eligible customers for connection to the electricity network which does not require an upgrade of the distribution network assets, are considered as a standalone transaction as there is no further obligation for the Company and all other service are for separately. Therefore such fees are immediately recognized as revenues. Under U.S. GAAP, these fees are deferred over the estimated life of the customer relationship (20 years).

Others – classification of assets There are some specific differences related to classification of emission rights and nuclear fuel assets under IFRS and US GAAP.

Emission rights

IFRIC 3 Emission Rights requires a participant in an operational ‘cap and trade’ scheme to account for emission rights (allowances) as an intangible asset under IAS 38 Intangible Assets. On initial recognition such allowances should be recognised at fair value, even if they were issued for less than fair value. The allowances should subsequently be measured under either the cost model or the revaluation model in IAS 38. The difference between the amount paid and the fair value of the allowances is a government grant that is initially recognised as deferred income in the balance sheet and recognised subsequently in income on a systematic basis over the compliance period for which the allowances were issued.

Extract 152: Endesa

Extract 153: ENEL

131

US GAAP does not provide specific guidance on accounting for emission rights and practice may therefore vary.

The survey identified one company which disclosed a difference in this respect as follows.

29. Differences Between IFRS and United States Generally Accepted Accounting Principles [extract] 16. Classification differences between IFRS and U.S. GAAP [extract] 16.1. CO2 emission allowances [extract]

Under IFRS as indicated in Note 3.d the group is recording CO2 emission allowances received as an intangible asset and deferred income by their fair value at date they are granted by each respective Government. Such intangible assets are not subsequently revalued and are excluded when delivered to each respective Government.

As indicated in Note 3.k under IFRS, Endesa records a provision against earnings considering the same cost of the respective intangible asset for those amounts that the Group has been granted. In this respect the Company recorded in earnings a part of Endesa’s deferred income for the same amount of emission rights used.

In addition, any shortfall of emissions allowance after consideration of amounts granted is recorded as a provision at fair value against earning for the amount considered necessary to buy such allowances. Such provision is reviewed and recorded in every period at its fair value with any change recorded in earnings.

Under U.S. GAAP the Group has eliminated from Endesa’s balance sheet all intangible asset, deferred income, provision for emission granted and all respective income and expenses from Endesa’s income statement since the Company is not recording any accounting effect for emissions granted or used under the granted amount. In addition in U.S. GAAP the Group has maintained the provision at fair value through earnings for those rights that Endesa will need to buy. …

Nuclear fuel

In the following extract, Endesa reports a difference relating to nuclear fuel assets. Under IFRS, Endesa accounts for nuclear fuel assets under IAS 2 Inventories as inventory. Under US GAAP, Endesa treats these assets as depreciable assets.

29. Differences Between IFRS and United States Generally Accepted Accounting Principles [extract] 16. Classification differences between IFRS and U.S. GAAP [extract] 16.2 Nuclear Fuel

As disclosed in Note 3.h, under IFRS, the Company has classified Nuclear Fuel in Inventory that under U.S. GAAP constitutes a depreciable asset. Consequently, under U.S. GAAP, €253 million and €216 million should be reclassified from inventory to long -term asset as of December 31, 2005 and 2004, respectively. The related U.S. GAAP depreciation expense of €81 million and €88 million for the years ended December 31, 2005 and 2004, respectively, is reclassified but remains unchanged.

Extract 154: Endesa

Extract 155: Endesa

133

Appendix A Convergence update Progress towards eliminating the reconciliation requirement in SEC filings has been ongoing since the Norwalk Agreement, published in October 2002, when the IASB and the FASB formalised their commitment to the convergence of IFRS and US GAAP. In February 2006, the IASB and the FASB published a Memorandum of Understanding that reaffirms the two boards’ shared objective of developing high quality, common accounting standards for use in the world’s capital markets. Both the IASB and the FASB recognise that removing the current reconciliation requirements will require continued progress on the joint convergence programme through the development of new high quality, common standards.

Convergence work will continue, firstly through short-term standard-setting projects, to be completed or substantially completed by 2008, and secondly, by addressing other areas identified by the IASB and the FASB where accounting practices under IFRS and US GAAP are regarded as candidates for improvement.

Short-term convergence projects The following short-term convergence projects are ongoing:

• Borrowing costs, government grants, joint ventures and segment reporting

To be examined by the IASB

• Fair value option, investment properties, research and development and subsequent events

To be examined by the FASB

• Impairment and income tax To be examined by the IASB and the FASB

Joint projects Joint projects are those that standard setters have agreed to conduct simultaneously in a coordinated manner. Currently, the IASB and the FASB are conducting joint projects to address the following areas:

Convergence topic Current status of the IASB and the FASB agendas

Progress targeted to be achieved by 2008

Business combinations Exposure drafts issued on 30 June 2005 by both the IASB and the FASB. Deliberations of comments received in response to the exposure drafts are in process.

Convergence standards projected for 2007.

Revenue recognition On agendas – No publication yet To have issued one or more due process documents relating to a proposed comprehensive standard.


APPENDIX A – CONVERGENCE UPDATE

Consolidations On agendas – No publication yet To implement work aimed at the completed development of converged standards as a matter of high priority.

Fair value measurement guidance

FAS 157 issued by the FASB in September 2006. The IASB issued a discussion paper in November 2006 and aims to issue an exposure draft in early 2008.

To have issued converged guidance aimed at providing consistency.

Liabilities and equity distinctions

On agendas – No publication yet To have issued one or more due process documents relating to the proposed standard.

Performance reporting Exposure draft issued by the IASB on 16 March 2006.

FASB – On agenda, no publication yet.

To have issued one or more due process documents on the full range of topics in this project.

Post-retirement benefits (including pensions)

FASB – Deliberations underway for first phase of multi-phase project.

IASB – Not yet on agenda.

To have issued one or more due process documents relating to the proposed standard.

Future projects In addition to the short-term and joint projects, other items designated as convergence topics already being researched by the IASB and the FASB, but not as yet on an active agenda include; derecognition, financial instruments, intangible assets and leases. By 2008, the IASB and the FASB target to have issued due process documents for derecognition and financial instruments and to have agreed the scope and timing of potential projects for intangible assets and leases.

Survey results The survey identified almost 200 individual differences. These differences fall into a number of areas of accounting, many of which either have been the subject of recently issued IFRS or US GAAP accounting standards or are being addressed by one of the short-term, joint or future conversion projects. Based on the timing of IASB/FASB conversion projects, some key areas of differences are likely to be eliminated in the near future.

135

The following chart allocates the over 1,900 reported differences by area of convergence and is based on the timing of the IASB and the FASB conversion projects. Details and timings of short-term, joint or future conversion projects to address key accounting areas are discussed below.

Share-based payments

Measurement differences account for the majority of the IFRS to US GAAP differences reported for share-based payments, with 48 of the 130 companies surveyed applying the IFRS 2 Share-based Payment fair value based model under IFRS and the APB 25 Accounting for Stock Issued to Employees intrinsic value based model under US GAAP.

Since the publication of FAS 123(R) Share-Based Payment, which eliminates the alternative of using the APB 25 intrinsic value based method, IFRS and US GAAP have similar requirements for accounting for share-based payments. However, although application of IFRS 2 is required for annual periods beginning on or after 1 January 2005, differences related to share-based payments will only be eliminated from the first fiscal year beginning after 15 June 2005 when FAS 123(R) is applied.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2005 2006 2007 2008 2009onwards

Joint ventures

Derivatives and hedge accounting

Foreign currency

Total differences

Others

Impairment


Financial instruments

Pensions

Borrowing costs


Taxation

Share-based payments




There are significant differences in accounting for business combinations between IFRS and US GAAP as evidenced by the 258 differences reported in this category, representing 13% of the total differences reported.

The project on business combinations is a joint project and is now in it’s second phase with both the IASB and the FASB reconsidering the existing guidance for applying the purchase method of accounting for business combinations (now called the acquisition method) that IFRS 3 Business Combinations, and FAS 141 Business Combinations carried forward without reconsideration. The current project plan targets that final standards will be issued by the IASB and the FASB by the second half of 2007 and any company adopting both standards should find very few, if any, differences arising from subsequent business combinations.

Taxation

Although IAS 12 Income Taxes and FAS 109 Accounting for Income Taxes are based on similar principles, there are certain differences in application that result in non comparability of financial information reported. Excluding the tax effects of other reconciling items, our analysis identified 99 individual differences relating to taxation.

The taxation project is a joint short-term convergence project aimed at eliminating the exceptions to the basic principles underlying IAS 12 and FAS 109. The current project plan targets that final standards will be issued in the second half of 2007.

Borrowing costs

Of the 130 companies surveyed, 43 companies reported a difference relating to the capitalisation of borrowing costs as they apply the option available under IAS 23 Borrowing Costs to expense all borrowing costs incurred while capitalising borrowing costs under FAS 34 Capitalization of Interest Cost.

The objective of this short-term convergence project is to amend IAS 23 to require the capitalisation of borrowing costs to the extent they are directly attributable to the acquisition, production or construction of a qualifying asset. The project is targeted to be completed in the first half of 2007.

Joint ventures

The most reported difference in this area arises from the application of the benchmark treatment of proportionate consolidation under IFRS as only the equity method of accounting is allowed for joint ventures under US GAAP. A total of 30 individual differences relating to the accounting for joint ventures were reported by 20 of the companies in the survey.

This project is part of the short-term convergence project to be examined by the IASB. The objective is to amend IAS 31 Interests in Joint Ventures, to require the use of the equity method for accounting for interests in jointly controlled entities. The final amendments to the standard are targeted to be published in 2008.

137

Pensions

A total of 311 differences relating to pensions and post-retirement benefits were reported by 101 companies in the survey. The post-retirement benefits project is a joint project to be conducted in two phases. The first phase will consider issues that can be resolved within the next four years, namely: presentation and disclosure, the definitions of defined benefit and defined contribution arrangements, the accounting for cash balance plans, smoothing and deferral mechanisms and the treatment of settlements and curtailments.

FAS 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans was issued on 29 September 2006 and represents the completion of the first phase in the FASB’s post-retirement benefits accounting project. FAS 158 requires an entity to:

• recognise in its statement of financial position an asset for a defined benefit post-retirement plan’s overfunded status or a liability for a plan’s underfunded status;

• measure a defined benefit post-retirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year; and

• recognise changes in the funded status of a defined benefit post-retirement plan in comprehensive income in the year in which the changes occur.

FAS 158 does not change the amount of net periodic benefit cost included in net income or address the various measurement issues associated with post-retirement benefit plan accounting. For public companies, the requirement to recognise the funded status of a defined benefit post-retirement plan and the disclosure requirements are effective for fiscal years ending after 15 December 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s balance sheet is effective for fiscal years ending after 15 December 2008.

The amendments to US GAAP accounting under FAS 158 will remove many of the reported differences, including the current requirement under US GAAP to recognise a minimum liability at least equal to the unfunded accumulated benefit obligation.

The IASB plans to issue a final standard for the first phase of its project in 2010. Although the timing and scope of the first phases of the projects might differ, the objectives of the IASB and FASB are ultimately to develop converged standards. If the IASB and FASB achieve their stated objective, new differences relating to pensions and post-retirement benefits should be eliminated from 2010 onwards.

Government grants

This project is a short-term convergence project to be examined by the IASB. The objectives are to amend IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, principally for the recognition requirement for a deferred credit when an entity has no liability and to address non-reciprocal transfers, including government grants. Under the current project plan, a final standard is targeted to be issued in 2008.



Other short-term convergence projects The other short-term convergence projects which the IASB and the FASB are targeting to be completed or substantially completed by 2008 are as follows:

Research and development

This is a project to be examined by the FASB. This project is currently in the staff research phase.

Subsequent events

This project is also to be examined by the FASB and deliberations are targeted to begin in 2007.

Impairment

The impairment project is to be covered jointly. Both the IASB and the FASB have yet to discuss the dates for this project.

Leasing

The scope of this joint project includes a reconsideration of existing standards of accounting for both lessees and lessors. The current project plan envisages, as a first step, the publication of a joint discussion paper. Deliberations are targeted to begin in 2007.

139

Appendix B Form 20-F financial statement requirements Item 17 and Item 18 requirements Item 17 of Form 20-F requires the financial statements to disclose, inter alia, an information content substantially similar to financial statements that comply with US GAAP and Regulation S-X. The financial statements may be prepared according to US GAAP or according to a comprehensive body of local accounting principles, eg, IFRS, if the following are disclosed:

• an indication of the comprehensive body of accounting principles applied;

• a discussion of the material variations from US GAAP and Regulation S-X in the accounting principles, practices and methods used in preparing the financial statements. These material variations have to be quantified in the following format:

– for each period (including any interim periods) for which an income statement is presented, a reconciliation of net income in tabular format either on the face of the income statement or in a note. A reconciliation of net income of the earliest of the three years presented may be omitted if that information has not previously been included in a filing made under the 1933 Act or 1934 Act.

– for each balance sheet presented, the amount of each material variation between an amount of a line item appearing in a balance sheet and the amount determined using US GAAP and Regulation S-X. These amounts may be shown in parentheses, in columns, as a reconciliation of the equity section, as a restated balance sheet, or in any similar format that clearly presents the differences in the amounts. In practice, the usual presentation adopted is a reconciliation of shareholders’ equity. The reconciliation of shareholders’ equity should be in sufficient detail to allow an investor to determine the differences between a balance sheet prepared using, for example, IFRS and one prepared using US GAAP. In particular:

– reconciling items should be shown gross and not net of taxes;

– adjustments affecting several balance sheet captions should not be shown as one item, eg, purchase accounting adjustments;

– each adjustment should be made at the subsidiary level to determine the impact on items such as minority interest, taxes and the currency translation adjustment; and

– adjustments for items such as property, plant and equipment or goodwill should be presented gross, with separate disclosure of the amounts of accumulated depreciation and amortisation;

• for each period for which an income statement is presented and required to be reconciled to US GAAP, either a statement of cash flows prepared in accordance with IAS 7 Cash Flow Statements, US GAAP, or a quantified description of the material differences between cash flows reported in the primary financial statements and those that would be reported under US GAAP; and


APPENDIX B – FORM 20-F FINANCIAL STATEMENT REQUIREMENTS

• for each period for which an income statement is presented, a statement of comprehensive income prepared using either home country GAAP, eg, a statement of changes in equity under IFRS, or US GAAP. These statements may be presented in any format permitted by FAS 130 Reporting Comprehensive Income. Reconciliation to US GAAP is encouraged, but not required.

If a company prepares its financial statements under a comprehensive body of accounting principles other than US GAAP, Item 17 permits the inclusion of a cash flow statement in those statements prepared under US GAAP or IAS 7 rather than a statement prepared under the accounting principles used for the rest of the financial statements.

Item 18 requires all of the information required by Item 17 and all other information required by US GAAP and Regulation S-X, unless those requirements specifically do not apply to the registrant as a foreign issuer. Information may be omitted for any period for which net income has not been reconciled to US GAAP.

SAB 88 Interpretation of requirements of Item 17 of Form 20-F states that the distinction between Items 17 and 18 is premised on a classification of the requirements of US GAAP and Regulation S-X into (1) those that specify the methods of measuring the amounts shown on the face of the financial statements and (2) those prescribing disclosures that explain, modify or supplement the accounting measurements. Under Item 17, disclosures required by US GAAP, but not required under the other comprehensive body of accounting principles under which the financial statements are prepared, need not be furnished.

Of the 130 companies in the survey, 106 or just over 80% filed financial statements under the more onerous requirements of Item 18.

The above represents only a brief summary of certain of the SEC rules and regulations relating to foreign private issuer financial statements. A registrant should refer to the SEC guidelines, rules and regulations, including staff interpretations, for a more comprehensive discussion of the SEC registration and reporting requirements.

Presentation of minority interest The revision of IAS 1 Presentation of Financial Statements, effective for accounting periods beginning on or after 1 January 2005, introduced the requirement to disclose on the face of the income statement the entity’s profit or loss for the period and the allocation of that amount between ‘profit or loss attributable to minority interest’ and ‘profit or loss attributable to equity holders of the parent’. IAS 1 also requires that the balance sheet includes, as line items, ‘minority interest’ (presented within equity) and ‘issued capital and reserves attributable to equity holders of the parent’. A similar allocation and presentation is required for the statement of changes in equity and statement of recognised income and expense.

Under US GAAP, minority interest is shown as a deduction in arriving at both net income and shareholders’ equity.

Survey results 109 companies disclosed minority interests in their financial statements.

Income statement

The wording in Form 20-F requires a reconciliation between net income as shown in the financial statements and net income according to US GAAP. This would suggest that the reconciliation should start with net income (or profit for the period) under IFRS and end with the net income under US GAAP. This reconciliation would include as a reconciling amount the minority interest in net income for the period.

141

61 companies reconciled income under IFRS net of minority interest. 48 companies reconciled income under IFRS including minority interest, of which 25 eliminated the IFRS minority interest as a presentation adjustment and 23 eliminated the IFRS minority interest as a reconciliation item.

Balance sheet

The wording in Form 20-F states that the reconciliation of balance sheet line item amounts should include only those items where there is a material variation between the amount appearing in the IFRS balance sheet and the amount determined using US GAAP. This would suggest that minority interest should only be included as a reconciling amount where the amount of minority interest under IFRS differs from that under US GAAP.

50 companies reconciled equity under IFRS net of minority interest. 59 companies reconciled equity under IFRS including minority interest, of which 33 eliminated the IFRS minority interest as a presentation adjustment and 26 eliminated the IFRS minority interest as a reconciliation item.

It is evident that the FPI community is split on the presentation of minority interest in IFRS to US GAAP reconciliations. Now that the 2006 Form 20-Fs have been filed, it will be interesting to see whether practice moves towards a consistent presentation or the current diversity continues.


APPENDIX C – ABBREVIATIONS USED

Appendix C Abbreviations used EITF Emerging Issues Task Force (of the FASB)

FAS Statement of Financial Accounting Standards (issued by the FASB)

FASB Financial Accounting Standards Board (United States)

GAAP Generally Accepted Accounting Practice

IAS International Accounting Standard

IASB International Accounting Standards Board

IFRIC International Financial Reporting Interpretations Committee

IFRS International Financial Reporting Standards

SEC United States Securities and Exchange Commission

US GAAP United States Generally Accepted Accounting Principles

143

Appendix D The companies surveyed • ABN AMRO

• Acambis

• AEGON

• Air France-KLM

• Aixtron

• Akzo Nobel

• Alcatel

• Allianz

• Allied Irish Banks

• Altana

• AMVESCAP

• Arcadis

• AstraZeneca

• AXA

• Banco Bilbao Vizcaya Argentaria

• Banco Santander Central Hispano

• Barclays

• BASF

• Bayer

• Benetton

• BG

• BP

• British Airways

• BT

• Buhrmann

• Bunzl

• Cadbury Schweppes

• CANTV (National Telephone Company Venezuela)

• China Eastern Airlines

• China Petroleum & Chemical

• China Southern Airlines

• China Telecom

• Compagnie Générale de Géophysique

• Corus Group

• CRH

• Delhaize Brothers

• Deutsche Telekom

• Dialog Semiconductor

• Ducati

• EDP-Energias de Portugal

• eircom

• Electrolux

• Endesa

• ENEL

• Eni

• Ericsson

• FIAT

• France Telecom

• Gallaher

• Gemplus

• GlaxoSmithKline

• Global Crossing (UK)

• Guangshen Railway

• Hanson

• HSBC

• Huaneng Power

• Imperial Chemical Industries

• ING

• Inmarsat

• InterContinental Hotels Group


APPENDIX D – THE COMPANIES SURVEYED

• International Power

• Koninklijke KPN

• Lafarge

• Lihir Gold

• Lloyds TSB

• Metso

• National Grid

• Nokia

• Novartis

• Novo Nordisk

• Pearson

• PetroChina

• Portugal Telecom

• Prudential

• Publicis

• Quilmes Industrial

• Randgold Resources

• Reed Elsevier

• Repsol

• Reuters

• Rhodia

• Rio Tinto

• Royal & Sun Alliance

• Royal Ahold

• Royal Bank of Scotland

• Royal Dutch Shell

• Sanofi-Aventis

• Sanpaolo IMI

• Schering

• Scottish Power

• Serono

• SGL Carbon

• Signet Group

• Sinopec Shanghai Petrochemical

• SKF

• Skyepharma

• Smith & Nephew

• Spirent Communications

• Steamship Company Torm

• Stora Enso

• SUEZ

• SVG Capital

• Swedish Match

• Swisscom

• Syngenta

• TDC

• Technip

• Tele2

• Telecom Italia

• Telefonica

• Telenor

• TeliaSonera

• Tenaris

• Ternium

• Thomson

• TMM

• TNT

• Total

• Trinity Biotech

• UBS

• Unilever

• United Utilities

• UPM-Kymmene

• Veolia Environment

• Vernalis

• Vivendi

• Vodafone

• Volvo

• WPP

• Yanzhou Coal Mining

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