ifrs-us gaap towards convergence

8/12/2019 IFRS-US GAAP Towards Convergence

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U S C A P I T A L M A R K E T S

Towards ConvergenceA Survey of IFRS to US GAAPDifferences

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

The Capital Markets Group at Ernst & Young is dedicated to serving our clients in their

cross-border finance raising transactions and activities and in their ongoing financial

reporting obligations both in the United States and Globally.

About Ernst & Young

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ContentsOverview 3

Overall analysis 8

Reported differences18

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Presentation of financial statements

Consolidated financial statements

Business combinations

Associates and joint ventures

Foreign currency translation

Intangible assets

Property, plant and equipment

Investment property

ImpairmentCapitalisation 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 recognitionGovernment 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

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

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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OverviewOne 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 memoirof 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 financialstatements 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 verysignificant 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.


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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 ofthe 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 havecontinued 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, bothwith and without renewal obligations, in accordance with the interpretation made by the French standard setter (CNC). UnderUS GAAP, France Telecom accounts for certain sales incentives given to customers with renewal obligations in accordance withEITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (EITF 01-9), and thereby recognizes such salesincentives 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 considerationreceived in determining the revenue to be recognized. If the contingent marketing contributions do not reach the contractuallyagreed reimbursements, the difference would be recognized as revenue at the time further marketing contributions are no longerrequired. Under IFRS, marketing contributions are expensed as incurred, in line with the timing of the resulting expectedproduct 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 termservice contracts may be deferred and accounted for over the contract period. Under US GAAP such payments may not qualifyfor deferral, and must be recognised fully in income in the initial period that the cost is incurred. We have paid certain long termcontract incentives totalling 6 million that did not qualify for deferral under US GAAP. As a result, under US GAAP, suchpayments were recognised immediately in the income statement, while under IFRS they have been deferred and will be recognisedover the term of the contract. This difference resulted in an adjustment to the US GAAP net income and shareholders equity inthe 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 23Borrowing Costs, entities have a choice of applying the benchmark treatment, which is to expense allborrowing 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 19Employee Benefits, if actuarial gains and losses are recognised in the period in which they occur, acompany 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


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OVERVIEW

Under IAS 31Interests in Joint Ventures, companies are allowed to account for investments in jointly controlledentities 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 modelas an accounting policy and apply the chosen policy to an entire class of property, plant and equipment. US GAAPgenerally 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 AcceptedAccounting 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 ofgrant 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

Paymentand FAS 123(R) Share-Based Paymentand 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 AccountingPrinciples [extract]

Share-based compensation[extract]

The Group maintains several share-based employee compensation plans, which are described more fully in Note 24. As ofJanuary 1, 2005 the Group adopted IFRS 2. Prior to the adoption of IFRS 2, the Group did not recognize the financial effect ofshare-based payments until such payments were settled. In accordance with the transitional provisions of IFRS 2, the Standard hasbeen 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 compensationawards granted to employees and existing awards modified on or after January 1, 2005, are measured based on the fair value of theaward 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 todifferences in the historical income statement for share-based compensation. Further, associated differences surrounding theeffective date of application of the standards to unvested shares give rise to both current and historical income statementdifferences in share-based compensation. Share issue premium reflects the cumulative difference between the amount of sharebased compensation recorded under US GAAP and IFRS and the amount of deferred compensation previously recorded inaccordance with APB 25.

Extract 5: Nokia


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OVERALL ANALY SI S

Overall analysisThe 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


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OVERALL ANALY SI S

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 3Business Combinationsfully 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 acquirers

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 minoritys share of the carrying amount of the

subsidiarys 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 acquirers interest in the fair value of the

identifiable assets, liabilities and contingent liabilities over the cost of the combination. Under

IFRS, where the acquirers 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 1exemptions 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 mostdevelopment 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 assets recoverable amount since the last impairment loss

was recognised. US GAAP generally prohibits the reversal of an impairment loss, except forlong-lived assets held for sale.


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OVERALL ANALY SI S

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. Impairmentassessments 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 orprivately 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 companys previous GAAP. As most companies in the FinancialServices 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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OVERALL ANALY SI S

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 17Leasesrequires 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 28Accounting for Sales with Leasebacks (an amendment of FASB Statement

No. 13)generally requires any gain arising on a sale and operating leaseback to be deferredand 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 40Investment 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 anoperating 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 otheremployee 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 Assetsrequires 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 71Accounting 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 Paymentto 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.


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OVERALL ANALY SI S

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 arerecognised 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 ofIFRS. 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 19Employee 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.


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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, SIC12 Consolidation Special Purpose

Entitiesrequires 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.


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PRINCIPAL DIFFERENCES

Reported differencesDifferences 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 operationsThe measurement and presentation requirements of IFRS 5Non-current Assets Held for Sale and Discontinued

Operationsare similar to the US rules on reporting discontinued operations under FAS 144Accounting 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 notunder 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 ordiscontinued operations under US GAAP. Under IFRS, investments in joint ventures and associates accounted for under the equitymethod can qualify as assets held for sale and discontinued operations. In 2005 Ahold completed the sale of its 50% interest inPaiz Ahold to Wal-Mart Stores Inc. Paiz Ahold is accounted for as a discontinued operation under IFRS in 2005 (withretrospective 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 retrospectiveunder both IFRS and US GAAP. Until 2004, Ahold reclassified non-current assets (and disposal groups) held for saleretrospectively under US GAAP, as permitted under SFAS No. 144 Accounting for the impairment or disposal of long-livedassets. Since IFRS does not permit such retrospective reclassification of non-current assets (and disposal groups) held for sale, theCompany decided to change its accounting policy in this respect as from 2005. As a result, non-current assets (and disposalgroups) held for sale are reclassified prospectively as from 2005 under US GAAP.

Extract 6: Royal Ahold


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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 thetransaction 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 FinancialStatementsand the principal guidance under US GAAP is ARB 51 Consolidated Financial Statementsand 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 Entitiesand under US GAAP by

FAS 140Accounting 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


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2.1 Definition of a subsidiaryThe 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, togovern the financial and operating policies of an entity so as to obtain benefits from its activities, and proportionately consolidatesjointly controlled entities in which the Group has joint control with other venturers. However, US GAAP requires that any entityof 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 between40.72% to 50% of the outstanding voting stock, and the Group's jointly controlled entities are not consolidated nor proportionatelyconsolidated under US GAAP and instead accounted for under the equity method. This exclusion does not affect the profitattributable to equity shareholders of the Company or the total equity attributable to the equity shareholders of the Companyreconciliations between IFRS and US GAAP.

2.2 Minority interests2.2.1 Carrying amount of minority interestsThe 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 theassets and liabilities considered retained by minority shareholders is recorded at fair value. Under U.S. GAAP, only the portion ofthe 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 interestsparticipation in the income of the subsidiary.

Extract 8: China Petroleum & Chemical

Extract 9: Lafarge


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21

2.2.2 Presentation of minority interestsThe 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, minorityinterest is presented as a separate item on the face of the balance sheet outside of equity.

2.3 Purchase of a non-controlling interestLafarge reports a difference on the acquisition of an additional portion of a consolidated subsidiary.

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

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

2.4 Special Purpose EntitiesAccounting 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 thesame time entered into certain franchise and service agreements with these parties. Kjedehuset is a trade association forindependent 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 in2004 and 2005.

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

Extract 10: Reuters

Extract 11: Lafarge

Extract 12: Telenor


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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 CapitalFinance) to issue 1,500 million of preference shares. The Financial Accounting Standards Board (FASB) releasedInterpretation No. 46, Consolidation of Variable Interest Entities (FIN 46R), which requires that all primary beneficiaries ofvariable interest entities consolidate that entity. FIN 46R is effective immediately for VIEs created after January 31, 2003 and toVIEs in which an enterprise obtains an interest after that date. According to this Interpretation, Endesa Capital Finance is a VIEand Endesa Group is not the primary beneficiary. Accordingly, under U.S. GAAP, Endesa Group should not consolidate EndesaCapital Finance. Consequently, the loan payable to Endesa Capital Finance remains outstanding on the U.S. GAAP consolidatedfinancial 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 excludesany 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 obtainbenefit from its activities.

In December 2003, the US Financial Accounting Standards Board issued FIN 46R (Consolidation of Variable InterestEntities). This statement is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, andaddresses the consolidation of variable interest entities (VIEs). FIN 46R requires the consolidation of a VIE by the primarybeneficiary if the majority of the expected losses are absorbed and/or a majority of the entitys expected residual returns arereceived 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 acontrolling financial interest, such as the ability through voting rights to make decisions about an entitys activities, the obligationto 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 salescontracts identified that the Group does not absorb the majority of the expected losses and expected residual returns of theseentities and therefore cannot be the primary beneficiary as defined by FIN 46R.

Extract 13: Endesa

Extract 14: International Power


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23

3 Business combinationsThe primary standards for business combinations are IFRS 3Business Combinations and FAS 141Business

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.


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3.2 Determining the fair value of identifiable assets acquired and liabilities assumedThe 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 AcceptedAccounting 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 withthe 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 acquisitiondate whereas under US GAAP they are recognized at the percentage of book value of identifiable net assets acquired at the acquisitiondate. 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 valuationbasis established at the time of acquisition. The increase in value is recorded directly in equity as a revaluation reserve. UnderUS 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 fromgoodwill, 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 acquisitionwhen the feasibility of the acquired research and development has not been fully tested and the technology has no alternativefuture use.

During 2002, IPR&D has been identified for U.S. GAAP purposes in connection with the Aventis CropScience and VisibleGenetics acquisitions. Fair value determinations were used to establish 138 million of IPR&D related to both acquisitions, whichwas expensed immediately for U.S. GAAP purposes. The independent appraisers used a discounted cash flow income approachand relied upon information provided by the Group management. The discounted cash flow income approach uses the expectedfuture net cash flows, discounted to their present value, to determine an assets 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 sellingexpense amounted to 3 million, 21 million and 12 million, in 2005, 2004 and 2003, respectively. Amortization expenserecorded under IFRS decreased in 2005 as compared to prior periods as only IPR&D capitalized separately from goodwillcontinues 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 Improvementbusiness, that was capitalized under IFRS as a result of the Aventis CropScience acquisition. The adjustments amount to5 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


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C Provisions for reorganisations and future losses

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

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]

h. Restructuring[extract]

Under IFRS, liabilities for terminating or reducing the activities of an acquired company are only recognised as part of allocating thecost of a combination if they exist at the date of acquisition and meet certain recognition criteria. Provisions for future losses or othercosts 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 purchasecombination, which requires recognition of certain costs incurred in respect of exit activities and integration if specified conditions aremet, 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 subsequentlyrecognized, the resulting debit is taken to income for the period. Under U.S. GAAP, the Group adjusts goodwill to reflect revisionsin estimates and/or the ultimate disposition of these contingencies with the provisions of SFAS No. 109 Accounting for IncomeTaxes 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 minoritys proportionof the net fair value of acquired assets and liabilities assumed. However, under US GAAP, fair values are assigned only to theshare of the net assets acquired by France Telecom.

Extract 19: Reuters

Extract 20: Lafarge

Extract 21: France Telecom


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27

3.3 Negative goodwillTrinity Biotech reports a difference related to negative goodwill in the following extract.

35. DIFFERENCES BETWEEN IFRS AS ADOPTED BY THE EU AND ACCOUNTING PRINCIPLES GENERALLYACCEPTED 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 acquiredentity. Under IFRS as adopted by the EU, if the acquirer's interest in the net fair value of the identifiable assets, liabilities andcontingent liabilities exceeds the cost of the business combination, the acquirer shall (a) reassess the identification andmeasurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of thecombination 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 ofimpairment are present. On December 31, 2004 and December 31, 2005, the Group performed its annual impairment tests ofgoodwill and indefinite-lived intangible assets, and concluded that there was no impairment in the carrying value of goodwill atthose dates.

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

3.4 Entities under common controlThe 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 wererestated 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 andrights related to the formation of the Group were eliminated in the Consolidated Financial Statements.

Extract 22: Trinity Biotech

Extract 23: TDC


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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 operationsand certain related assets and liabilities of CNA and XJA with effect from December 31, 2004. Under IFRSs, the purchase methodof accounting was applied to such business combination such that at December 31, 2004 only the acquired assets and assumedliabilities are included in the consolidated financial statements of the Group. The results of the acquired operations and theirrelated 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 ofentities under common control is accounted for in a manner similar to a pooling-of-interests. Consequently, the assets andliabilities of CNA and XJA are reflected at their historical net asset carrying values and the U.S. GAAP consolidated financialstatements of the Group are restated to include the historical carrying values of assets and liabilities of CNA and XJA, and theirresults 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 28Investments in Associates

and IAS 31Interests in Joint Venturesand 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 28will 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


4.1 Joint venturesIAS 31Interests in Joint Venturesallows 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


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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 thebenchmark treatment specified under IAS 31. Under U.S. GAAP, investments in joint ventures generally are accounted for underthe equity method. The differences in accounting treatment between proportionate consolidation and the equity method ofaccounting have no impact on the Groups consolidated stockholders equity or net income. Rather, they relate solely to matters ofclassification and display. The SEC permits the omission of such differences in classification and display in the reconciliation toU.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 andFAS 52Foreign Currency Translationunder 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 Economiesmay 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


5.1 HyperinflationTeliaSonera reports a difference in accounting for associated companies in hyperinflationary economies in thefollowing 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-inflationaryeconomy, the reported non-monetary assets and liabilities, and equity are restated in terms of the measuring unit current at thebalance sheet date. The restated financial statements are translated into SEK at the closing rate. The restating effects arerecognized 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 equityaccounted investees where they are denominated in currencies of highly-inflationary economies. The remeasurement of thefinancial statements is done as if the reporting currency of the parent had been the functional currency.

Extract 25: Bayer

Extract 26: TeliaSonera


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

5.3 Disposal of a foreign operationUnilever 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 isrecognised within the income statement. Under US GAAP, currency translation gains and losses are only recycled to the incomestatement 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 38Intangible Assets. The principal US GAAP standard forthe initial measurement of intangible fixed assets acquired as part of a business combination is FAS 141Business

Combinations. FAS 142 Goodwill and Other Intangible Assetsaddresses 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 2Accounting for Research and Development, FAS 71Accounting for the

Effects of Certain Types of Regulationand FAS 86Accounting for the Costs of Computer Software to be Sold, Leased, or

Otherwise Marketed.

Extract 27: Royal Ahold

Extract 28:Unilever


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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 measurementDifferences 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.

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

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 AreTangible or Intangible Assets, mineral rights should also be reclassified to quarries, within tangible assets, for purposes ofU.S. GAAP.

6.2 Regulatory assetsScottish Power reports a difference in respect of regulatory assets for which guidance is provided under US GAAP byFAS 71Accounting 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 regulatorshave the power to approve and/or regulate rates that may be charged to customers. FAS 71 provides that regulatory assets may becapitalised if it is probable that future revenue in an amount at least equal to the capitalised costs will result from the inclusion ofthat 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


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6.3 Emission rightsEndesa reports a difference related to CO2emission 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 anddeferred income by their fair value at date they are granted by each respective Government. Such intangible assets are notsubsequently 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 respectiveintangible asset for those amounts that the Group has been granted. In this respect the Company recorded in earnings a part ofEndesas 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 fairvalue against earning for the amount considered necessary to buy such allowances. Such provision is reviewed and recorded inevery period at its fair value with any change recorded in earnings.

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

6.4 General research and developmentIAS 38 requires some development costs to be capitalised, whereas FAS 2Accounting for Research and Development

Costsgenerally 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 dev

ifrs-us gaap towards convergence

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