Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards
Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards
ASC 260 is the source of guidance on EPS under U.S. GAAP. IAS 33 is
the source of guidance on EPS under IFRS Accounting Standards. Although the methods
used to calculate basic and diluted EPS under IFRS Accounting Standards are similar
to those under U.S. GAAP, there are differences between the two sets of standards
with respect to how the methods are applied. The table below summarizes some of
these differences and is followed by an explanation of each difference.1
Subject
|
U.S. GAAP
|
IFRS Accounting Standards
|
---|---|---|
Scope
|
Presentation of EPS for investment companies
and wholly owned subsidiaries is not required.
|
There are no scope exceptions related to
presenting EPS for investment companies or wholly owned
subsidiaries.
|
Numerator (earnings)
|
Many accounting differences between U.S.
GAAP and IFRS Accounting Standards affect income available
to common shareholders. These differences will result in
differences in EPS.
|
See U.S. GAAP column.
|
Numerator (earnings): forward and option
contracts for which physical settlement by repurchase of
equity shares is or may be required
|
Other than forward contracts that must be
physically settled by repurchase of a fixed number of the
issuer’s equity shares, forward and option contracts for
which physical settlement by repurchase of equity shares is
or may be required are measured at fair value, with changes
in fair value recognized in earnings. Contracts measured at
fair value include (1) forward contracts to purchase
outstanding shares that give the counterparty (holder) the
option to elect either gross physical or net settlement and
(2) written options that give the counterparty the right to
put outstanding shares to the entity regardless of the form
of settlement (i.e., gross physical or net settlement).
|
Such contracts are liabilities measured on
the basis of the gross present value amount that the issuer
could be required to pay to repurchase its own equity
shares.
Because the accounting differs for these
contracts (except for forward contracts that must be
physically settled), basic and diluted EPS under IFRS
Accounting Standards will differ from basic and diluted EPS
under U.S. GAAP. This is because earnings (i.e., the
numerator) include changes in the fair value of these
contracts under U.S. GAAP, whereas the amount of earnings
under IFRS Accounting Standards is the change in the present
value of the amount that the issuer could be required to pay
to repurchase its own equity shares.
|
Treatment of mandatorily redeemable common
shares and forward contracts for which physical settlement
of a fixed number of shares for cash is required.
|
Basic EPS — Exclude the common shares
(and any related earnings effect) that are to be redeemed or
repurchased in the calculation of EPS. Apply the two-class
method of calculating EPS.
Diluted EPS — No further adjustment
to the numerator or the denominator is necessary.
|
Forward contracts for which physical
settlement of a fixed number of shares for cash is required:
Mandatorily redeemable common shares (basic
and diluted EPS):
These shares are typically excluded from the
denominator.
|
Treatment of mandatorily convertible
instruments
|
If the instrument is a participating
security, entities should apply the two-class method (the
results of doing so are similar to those achieved when an
entity considers the shares outstanding) to calculate basic
EPS and the more dilutive of the two-class method or
if-converted method to calculate diluted EPS.
If the instrument is not a participating
security, entities do not adjust the numerator or
denominator in calculating basic EPS. The if-converted
method is applied to calculate diluted EPS.
|
Ordinary shares that will be issued upon
conversion are considered outstanding in the calculation of
basic EPS from the date the contract is entered into,
irrespective of whether the contract is participating. The
result is similar to that achieved by applying the two-class
method, but the presentation differs. However, the EPS
result differs from that calculated under U.S. GAAP when the
instrument is not a participating security.
For diluted EPS, the shares are considered
outstanding and no adjustment is made to the numerator.
|
Application of the two-class method to
participating securities
|
The two-class method applies to
participating securities irrespective of whether they are
debt or equity instruments. ASC 260 includes detailed
guidance on such application.
|
The two-class method applies only to
participating securities that are equity instruments. It is
not required for participating debt instruments (e.g.,
participating convertible debt). There is no detailed
guidance on such application.
|
Denominator for diluted EPS: treasury stock
method — year-to-date calculation
|
For year-to-date diluted EPS, the number of
incremental shares included in the denominator is determined
by using a weighted average of the number of incremental
shares included in each quarterly calculation of diluted
EPS.
|
The number of incremental shares is
determined independently for each period presented. The
number of dilutive potential ordinary shares in the
year-to-date period is not a weighted average of the
dilutive potential ordinary shares included in each interim
calculation.
|
Denominator for diluted EPS: contingently
issuable shares
|
Shares whose issuance is contingent on the satisfaction of
certain conditions are included in the denominator for
diluted EPS if all necessary conditions have been met by the
end of the reporting period.
For year-to-date calculations, the number of
contingent shares included in the denominator of diluted EPS
is determined by weighting the interim periods.
|
Contingently issuable ordinary shares are included in the
denominator for diluted EPS if the conditions are met (i.e.,
have occurred).
Weighting interim periods in the
year-to-date calculation is not permitted. See “Denominator
for diluted EPS: treasury stock method — year-to-date
calculation” above.
|
Denominator for diluted EPS: contingently convertible
instruments
|
Shares issuable upon the conversion of a convertible
instrument that contains a market price trigger are included
in the calculation of diluted EPS regardless of whether the
market price trigger has been met as of the reporting date.
If a convertible instrument becomes convertible only if a
substantive non-market-based contingency is met, the shares
are included in the calculation of diluted EPS only if the
non-market-based contingency has been met as of the
reporting date.
|
Shares issuable upon the conversion of a contingently
convertible instrument are included in the calculation of
diluted EPS if the contingency has been met as of the
reporting date. The nature of the contingency that must be
met for conversion to occur is not relevant.
|
Denominator for diluted EPS: contracts that
may be settled in cash or shares
|
Inclusion of the shares in diluted EPS is
based on a presumption that the contract will be settled in
shares (if dilutive). The presumption of share settlement
may not be overcome except in the case of certain
share-based payment arrangements. Therefore, for contracts
that may be settled in cash or shares, if dilutive, share
settlement must be used in the calculation of diluted EPS,
regardless of whether the issuer or the holder has the right
to elect cash or shares.
When shares are included in the denominator
of diluted EPS and the contract is classified as an asset or
liability, an adjustment to the numerator may be required
for any changes in income or loss that would result if the
contract had been reported as an equity instrument.
|
For contracts that may be settled in cash or
ordinary shares, diluted EPS must be based on a presumption
that the contract will be settled in ordinary shares. The
presumption of share settlement may not be overcome.
Therefore, for contracts that may be settled in cash or
ordinary shares, if dilutive, share settlement must be used
in the calculation of diluted EPS, regardless of whether the
issuer or holder has the right to elect cash or shares.
When shares are included in the denominator
of diluted EPS and the contract either is classified as an
asset or liability, or has both an equity and a liability
component, the numerator must be adjusted for any changes in
profit or loss that would have resulted during the period if
the contract had been classified wholly as an equity
instrument.
|
Footnotes
1
The differences are based on a comparison of the
authoritative literature under U.S. GAAP and IFRS Accounting Standards and
do not necessarily include interpretations of such literature.
A.1 Scope
Under U.S. GAAP, ASC 260-10-15-3 provides a scope exception for investment
companies and wholly owned subsidiaries (see
Section 2.1 for more information).
Under IFRS Accounting Standards, IAS 33 does not
provide any scope exceptions for investment
entities or wholly owned subsidiaries. Thus, such
entities are required to present EPS if their
ordinary shares or potential ordinary shares are
traded in a public market or they have provided,
or are providing, a filing to a regulatory
organization to issue ordinary shares in the
public market. However, in accordance with
paragraph 4 of IAS 33, “[w]hen an entity presents
both consolidated financial statements and
separate financial statements,” the entity is
required to present EPS “only on the basis of the
consolidated information.”
A.2 Numerator (Earnings)
Accounting differences between U.S. GAAP and IFRS Accounting Standards affect
the amount of reported earnings (numerator) and,
consequently, result in EPS differences even if
the method used to calculate EPS is the same. For
example, the if-converted method is applied to
convertible securities for EPS purposes under both
U.S. GAAP and IFRS Accounting Standards, yet the
accounting (e.g., the initial and subsequent
measurement) for convertible securities often
differs. Under both sets of standards, a
calculation may have the same denominator (in the
absence of other denominator differences), but the
numerator may differ. This is because of the
numerous accounting differences between U.S. GAAP
and IFRS Accounting Standards that have an effect
on reported net earnings.
A.3 Numerator (Earnings): Forward and Option Contracts for Which Physical Settlement by Repurchase of Equity Shares Is or May Be Required
Under U.S. GAAP, ASC 480-10-30-7 and ASC 480-10-35-5 indicate that other than forward contracts that must be physically settled by purchase of a fixed number of outstanding shares, forward and option contracts for which physical settlement by repurchase of outstanding shares is or may be required are accounted for at fair value, with changes in fair value recognized in earnings. Such contracts include:
- Forward contracts to purchase outstanding shares that give the counterparty (holder) the option to elect either gross physical or net settlement.
- Written options that give the counterparty a right to put outstanding shares back to the issuer regardless of the form of settlement (i.e., gross physical or net settlement).
Under U.S. GAAP, no adjustments are made to the numerator or denominator for
basic EPS for these types of contracts. In
accordance with ASC 260-10-45-35 and 45-36, for
these types of contracts, diluted EPS is
calculated by using the reverse treasury stock
method to the extent that the effect is dilutive.
As discussed in Section 4.3, an
adjustment to the numerator is required under the
reverse treasury stock method because these
contracts are classified as assets or liabilities
for accounting purposes.
Under IFRS Accounting Standards, any contract that may result in a requirement
for the issuer to gross-settle a repurchase of its own equity instruments for cash
or other financial assets is classified as a financial liability. The financial
liability is measured at the gross present value amount that the issuer could be
forced to pay to repurchase its own equity. This treatment applies irrespective of
whether the amount to be repaid to repurchase the entity’s own equity is fixed or
variable or whether the counterparty has a choice between settling net and settling
gross. In addition, it applies to both forward purchase contracts and written put
options.
IFRS Accounting Standards are similar to U.S. GAAP in that no adjustments to the
numerator or denominator are made for basic EPS.
In accordance with paragraph 63 of IAS 33, diluted
EPS is calculated by using the reverse treasury
stock method to the extent the effect is dilutive.
Although the methods for calculating EPS are the
same under U.S. GAAP as they are under IFRS
Accounting Standards for both basic and diluted
EPS, EPS amounts may differ because of the
differences in the numerator.
A.4 Treatment of Mandatorily Redeemable Common Shares and Forward Contracts for Which Physical Settlement of a Fixed Number of Shares for Cash Is Required
A.4.1 Basic EPS
Under U.S. GAAP, an entity should exclude from the EPS denominator the shares
that are to be redeemed or repurchased and should apply the two-class method of
calculating EPS. See Section
3.2.4.3.1 for more information.
IFRS Accounting Standards do not provide basic EPS guidance on these
instruments. Under IFRS Accounting Standards:
-
For mandatorily redeemable common shares, the basic EPS treatment could be analyzed as follows:
-
Paragraph 10 of IAS 33 indicates that the denominator in the calculation of basic EPS is “the weighted average number of ordinary shares outstanding . . . during the period” (emphasis added). Paragraph 5 of IAS 33 states, in part, that an “ordinary share is an equity instrument that is subordinate to all other classes of equity instruments” (emphasis added). Thus, whether a mandatorily redeemable common share is included in the denominator in the calculation of basic EPS depends on whether the mandatorily redeemable common share (1) is considered an equity instrument and (2) is in the most subordinate class of equity instrument. Note that mandatorily redeemable common shares other than certain puttable shares are considered a liability under IFRS Accounting Standards.
-
-
For forward contracts that require physical settlement of a fixed number of equity shares for cash or other financial assets, IFRS Accounting Standards require presentation of a liability that is equal to the present value of the amount the issuer would be required to settle under the contract. Typically, under IFRS Accounting Standards, an entity would consider the equity shares that are to be repurchased outstanding in the calculation of basic EPS because the equity shares have not yet been repurchased as of the balance sheet date. The two-class method does not apply under IFRS Accounting Standards because this method is only applied under IAS 33 when the financial instrument is classified as an equity instrument.
A.4.2 Diluted EPS
Under U.S. GAAP, no further adjustment is made for diluted EPS. According to ASC
480-10-45-4, the entity simply carries forward the basic two-class method to
calculate diluted EPS. Under IFRS Accounting Standards, paragraph 63 of IAS 33
indicates that an entity would apply the reverse treasury stock method to the
forward repurchase agreement in the calculation of diluted EPS if the effect is
dilutive. Thus, U.S. GAAP differs from IFRS Accounting Standards with regard to
forward repurchase agreements because no further adjustment to the two-class
method result for basic EPS is made under U.S. GAAP, while under IFRS Accounting
Standards entities apply the reverse treasury stock method to the forward
repurchase agreement to the extent that the instrument is dilutive. The
application of the reverse treasury stock method can result in the addition of
incremental shares to the denominator.
Under IFRS Accounting Standards, there is no guidance on diluted EPS for
mandatorily redeemable common shares. However, the discussion of mandatorily
redeemable common shares in Section A.4.1 applies by extension to diluted EPS. That is, if
the mandatorily redeemable common shares are not ordinary shares or potential
ordinary shares as described in paragraph 5 of IAS 33, the shares are not
included in diluted EPS. Note that mandatorily redeemable common shares are
generally considered a liability under IFRS Accounting Standards.
A.5 Treatment of Mandatorily Convertible Instruments
The basic EPS implications of mandatorily convertible instruments are not
directly addressed in U.S. GAAP. However, if the
instrument is a participating security, an entity
should apply the two-class method of calculating
EPS. If the instrument is not a participating
security, there is no impact on basic EPS. For
diluted EPS purposes, if the instrument is a
participating security, the more dilutive of the
two-class method or if-converted method is
applied. If the instrument is not a participating
security, an entity would apply the if-converted
method to calculate diluted EPS if the effect is
dilutive See Sections 3.3.2.2
and 6.4 for more
information.
Under IFRS Accounting Standards, entities do not apply the two-class method to
mandatorily convertible instruments. Instead, paragraph 23 of IAS 33 indicates that
entities should consider the shares outstanding in the calculation of basic EPS and
diluted EPS from the date the contract is entered into.
If the instrument is participating, the EPS presentation required under U.S.
GAAP differs from that required under IFRS Accounting Standards, since under U.S.
GAAP an entity applies the two-class method to calculate both basic and diluted EPS,
while under IFRS Accounting Standards an entity considers the shares outstanding.
U.S. GAAP and IFRS Accounting Standards also differ when the instrument is not
participating. This is because under U.S. GAAP, entities make no adjustment to the
numerator or denominator in calculating basic EPS, while under IFRS Accounting
Standards the shares are considered to be outstanding, which increases the
denominator. The net result is that basic EPS will be lower under IFRS Accounting
Standards than under U.S. GAAP. For diluted EPS, results under U.S. GAAP will also
differ from those under IFRS Accounting Standards, since under U.S. GAAP an entity
will apply the if-converted method (thereby increasing outstanding shares and
removing from the numerator any income statement impact from the mandatorily
convertible instrument), while under IFRS Accounting Standards the shares are
considered outstanding and no adjustment is made to the numerator.
A.6 Application of the Two-Class Method to Participating Securities
A.6.1 Scope
Under ASC 260-10-45-59A through 45-70 in U.S. GAAP, the two-class method of
calculating basic EPS applies to both debt and
equity instruments if they are participating
securities. However, paragraphs A13 and A14 of IAS
33 under IFRS Accounting Standards only require
the application of the two-class method to
participating equity instruments. See Chapter
5 for more information.
A.6.2 Participating Convertible Securities
Under U.S. GAAP, participating convertible securities are included in the
calculation of basic EPS by using the two-class
method. This is the case for both participating
convertible preferred stock and participating
convertible bonds. Under ASC 260-10-45-60A,
entities are precluded from applying the
if-converted method in calculating basic EPS for
these instruments.
As discussed above, under IFRS Accounting Standards, entities do not apply the
two-class method to participating debt
instruments. Thus, the two-class method of
calculating basic EPS does not apply to
participating convertible debt under IFRS
Accounting Standards. An entity would not adjust
the numerator or denominator for these instruments
in calculating basic EPS. Whether the two-class
method applies to participating convertible
preferred stock depends on its balance sheet
classification. The two-class method does not
apply if the participating convertible preferred
stock is classified as a liability but does apply
if the stock is classified as equity.
A.6.3 Detailed Guidance
Under U.S. GAAP, ASC 260 contains detailed application guidance on applying the
two-class method of calculating EPS. There is no
similar detailed application guidance under IFRS
Accounting Standards. As a result, the two-class
method of calculating EPS may be applied
differently under U.S. GAAP than it is under IFRS
Accounting Standards.
A.7 Denominator for Diluted EPS: Treasury Stock Method — Year-to-Date Calculation
Under U.S. GAAP, the number of incremental shares included in quarterly diluted
EPS is calculated by using the average market prices during the three months in the
reporting period. ASC 260-10-55-3 indicates that “[f]or year-to-date diluted EPS,
the number of incremental shares [is determined by using] a year-to-date weighted
average of the number of incremental shares included in each quarterly diluted EPS
computation.” See Section
4.9.1 for more information.
Under IFRS Accounting Standards, paragraph 37 of IAS 33 states that the number
of incremental shares “shall be determined independently for each period presented.”
This is consistent with paragraph 29 of IAS 34, which states, in part, that “the
frequency of an entity’s reporting shall not affect the measurement of its annual
results.” Thus, in accordance with paragraph 37 of IAS 33, the number of dilutive
potential ordinary shares included in year-to-date calculations of diluted EPS is
the weighted average for the year-to-date period.
A.8 Denominator for Diluted EPS: Contingently Issuable Shares
The principles in U.S. GAAP are similar to those in IFRS Accounting
Standards with respect to the inclusion of contingently issuable shares in the denominator
for diluted EPS. However, the guidance on this topic may be applied differently under U.S.
GAAP than it is under IFRS Accounting Standards. Under U.S. GAAP, when common shares are
contingently issuable in the future on the basis of the attainment of a specified average
level of earnings, the calculation of the number of shares to be included in the denominator
for diluted EPS, if any, is based only on the actual amount of earnings achieved through the
reporting date (i.e., the entity assumes that the current amount of earnings will not change
and that, therefore, no additional earnings will be achieved in the future). Under IFRS
Accounting Standards, if the specified average level of earnings has been achieved as of the
reporting date, the entity assumes that the same level of earnings will be achieved through
the end of the contingency period. See Section 4.5.2.3 for more information about the application of ASC 260 to such
arrangements.
Under U.S. GAAP, ASC
260-10-45-49 states, “For year-to-date [EPS] computations, contingent shares shall be
included on a weighted-average basis. That is, contingent shares shall be weighted for the interim periods in which they were included in the
computation of diluted EPS.” Under IFRS Accounting Standards, paragraph 52 of IAS 33 does
not permit entities to calculate year-to-date contingent shares by weighting the interim
periods. This is consistent with paragraph 29 of IAS 34, which states, in part, that “the
frequency of an entity’s reporting shall not affect the measurement of its annual results.”
See Section 4.9.4 for more
information about the application of ASC 260 to year-to-date calculations.
A.9 Denominator for Diluted EPS: Contingently Convertible Instruments
Under U.S. GAAP,ASC 260-10-45-43 and 45-44 address when the
if-converted method should be applied to convertible instruments that are
contingently convertible on the basis of a market price trigger. In accordance with
this guidance, as well as the guidance related to contingently issuable shares, the
if-converted method is applied to contingently convertible instruments as follows:
- If the instrument becomes convertible only if (1) a specified price of the entity’s common stock (i.e., a market price trigger) is achieved or (2) either a market-price trigger or some other non-market-based condition is met, the if-converted method should be applied, if dilutive, regardless of whether the conditions are met.
- If the instrument becomes convertible only if (1) a substantive non-market-based condition is met or (2) a market price trigger and some other substantive non-market-based condition are met, the if-converted method should be applied only if the non-market-based condition has been met as of the end of the reporting period.
See Section 4.4.3 for more information about
contingently convertible instruments.
Under IFRS Accounting Standards, paragraph 54 of IAS 33 indicates
that the calculation of diluted EPS is based on the number of ordinary shares that
would be issued if the market price at the end of the reporting period was the
market price at the end of the contingency period. Therefore, shares issuable upon
conversion of a convertible instrument that contains a market price trigger would be
included in the calculation of diluted EPS only if the market price trigger has been
achieved as of the reporting date. The same guidance would apply to convertible
instruments for which conversion is permitted only upon satisfaction of a
non-market-based condition.
A.10 Denominator for Diluted EPS: Contracts That May Be Settled in Cash or Shares
Under U.S. GAAP, for contracts that may be settled in cash or stock
— except for certain share-based payment arrangements — share settlement is presumed
and may not be rebutted if the effect of such settlement is dilutive, regardless of
whether such settlement is at the election of the issuer or the holder. Therefore,
share settlement must be used in the calculation of diluted EPS if the effect is
dilutive. In addition, if dilutive, the numerator in the calculation of diluted EPS
must be adjusted when the contract is classified as an asset or liability for
accounting purposes. See Section
4.7 for more information.
With one exception, the treatment of diluted EPS under IFRS
Accounting Standards is the same as that under U.S. GAAP for contracts that may be
settled in cash or shares. Paragraphs 58 and 60 of IAS 33 require an entity to
assume share settlement, regardless of whether the election to settle in cash or
shares is at the option of the issuer or the holder. Such a presumption cannot be
overcome if the effect of share settlement is dilutive. Unlike U.S. GAAP, IFRS
Accounting Standards do not provide an exception for share-based payment
arrangements in such circumstances.
Both U.S. GAAP and IFRS Accounting Standards address the need to
make a numerator adjustment when shares are included in the denominator of diluted
EPS and the contract is classified as an asset or liability. However, the U.S. GAAP
requirements on this topic may differ from those in IFRS Accounting Standards.
Paragraph 59 of IAS 33 indicates that such an adjustment is necessary if the
contract has both an equity and a liability component. ASC 260-10-45-46 only permits
such an adjustment if the contract is classified as an asset or liability. In
addition, there may be other situations in which an entity would be required to
adjust the numerator in calculating diluted EPS under IFRS Accounting Standards for
a contract that is classified as an asset or liability but would be prohibited from
doing so under U.S. GAAP.