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January 2016

Similarities and Differences

A comparison of IFRS, US GAAPand Belgian GAAP

www.pwc.be

Note:

This publication is for those who wish to gain a broad understanding of the significant differences between‘International Financial Reporting Standard’ (IFRS), US GAAP and Belgian GAAP. It is not comprehensive. Itfocuses on a selection of those differences most commonly found in practice. When applying the individualaccounting frameworks, companies should consult all of the relevant accounting literature and, whereapplicable, national law.

While every effort has been made to ensure accuracy, information contained in this publication may not becomprehensive or may have been omitted that may be relevant to a particular reader. In particular, thispublication is not intended as a study of all aspects of IFRS, US GAAP or Belgian GAAP, or as a substitute forreading the standards and interpretations when dealing with specific issues. No responsibility for loss to anyperson acting or refraining from acting as a result of any material in this publication can be accepted byPricewaterhouseCoopers. Recipients should not act on the basis of this publication without seeking professionaladvice, which PwC would be pleased to provide.

Contents

Preface

Chapter 1: IFRS first-time adoption

1.1 IFRS first-time adoption

Chapter 2: Revenue recognition

Chapter 3: Expense recognition—share-based payments

3.1 Expense recognition—share-based payments

3.2 Scope

3.3 Measurement of awards granted to employees by nonpublic companies

3.4 Measurement of awards granted to nonemployees

3.5 Classification of certain instruments as liabilities or equity

3.6 Awards with conditions other than service, performance, or market conditions

3.7 Awards with a performance target met after the requisite service period is completed

3.8 Service-inception date, grant date, and requisite service

3.9 Attribution—awards with service conditions and graded-vesting features

3.10 Certain aspects of modification accounting

3.11 Cash-settled awards with a performance condition

3.12 Derived service period

3.13 Tax withholding arrangements—impact to classification

3.14 Accounting for income tax effects

3.15 Recognition of social charges (e.g., payroll taxes)

3.16 Valuation—SAB Topic 14 guidance on expected volatility and expected term

3.17 Employee stock purchase plans (ESPP)

3.18 Group share-based payment transactions

3.19 Recent/proposed guidance

Chapter 4: Expense recognition—employee benefits

4.1 Expense recognition—employee benefits

4.2 Expense recognition—gains/losses

4.3 Expense recognition—prior service costs and credits

4.4 Expense recognition—expected return on plan assets

4.5 Income statement classification

4.6 Measurement frequency

4.7 Substantive commitment to provide pension or other postretirement benefits

4.8 Defined benefit versus defined contribution plan classification

4.9 Curtailments

4.10 Settlements

4.11 Asset ceiling

4.12 Measurement of defined benefit obligation when both employers and employees contribute

4.13 Plan asset valuation

4.14 Discount rates

4.15 Accounting for termination indemnities

4.16 Deferred compensation arrangements—employment benefits

4.17 Accounting for taxes


Chapter 5: Assets—nonfinancial assets

5.1 Assets—nonfinancial assets

5.2 Impairment of long-lived assets held for use—general

5.3 Carrying basis

5.4 Internally developed intangibles

5.6 Indefinite-lived intangible assets—level of assessment for impairment testing

5.7 Impairments of software costs to be sold, leased, or otherwise marketed

5.8 Advertising costs

5.9 Depreciation

5.10 Overhaul costs

5.11 Asset retirement obligations

5.12 Borrowing costs

5.13 Lease scope

5.14 Lease classification—general

5.15 Sale-leaseback arrangements

5.16 Leases involving land and buildings

5.17 Lease—other

5.18 Distributions of nonmonetary assets to owners

5.19 Inventory costing

5.20 Inventory measurement

5.21 Biological assets—fair value versus historical cost

5.22 Investment property


Chapter 6: Assets—financial assets

6.1 Assets—financial assets

6.2 Available-for-sale financial assets—fair value versus cost of unlisted equity instruments

6.3 Available-for-sale debt financial assets—foreign exchange gains/losses on debt instruments

6.4 Effective interest rates—expected versus contractual cash flows

6.4.1 Effective interest rates—changes in expectations

6.5 Eligibility for fair value option

6.6 Fair value option for equity-method investments

6.7 Fair value of investments in investment company entities

6.8 Loans and receivables

6.9 Reclassifications

6.10 Impairment principles—available-for-sale debt securities

6.11 Impairment principles—held-to-maturity debt instruments

6.12 Impairment of available-for-sale equity instruments

6.13 Losses on available-for-sale equity securities subsequent to initial impairment recognition

6.14 Impairments—measurement and reversal of losses

6.15 Derecognition


Chapter 7: Liabilities—taxes

7.1 Liabilities—taxes

7.2 Hybrid taxes

7.3 Tax base of an asset or a liability

7.4 Initial recognition of an asset or a liability

7.5 Recognition of deferred tax assets

7.6 Deferred taxes on investments in subsidiaries, joint ventures, and equity investees

7.7 Recognition of deferred taxes where the local currency is not the functional currency

7.8 Uncertain tax positions

7.9 Special deductions, investment tax credits, and tax holidays

7.10 Intercompany transactions

7.11 Change in tax laws and rates

7.12 Tax rate on undistributed earnings of a subsidiary

7.13 Fairness tax

7.14 Presentation

7.15 Intraperiod allocation

7.16 Disclosures

7.17 Interim reporting

7.18 Separate financial statements

7.19 Tax shelter

7.20 Share-based payment arrangements


Chapter 8: Liabilities—other

Chapter 10: Derivatives and hedging

10.1 Derivatives and hedging

10.2 Net settlement provisions

10.3 Own use versus normal purchase normal sale (NPNS)

10.4 Reassessment of embedded derivatives

10.5 Calls and puts in debt instruments

10.6 Nonfinancial host contracts—currencies commonly used

10.7 Day one gains and losses

10.8 When to assess effectiveness

10.9 Effectiveness testing and measurement of hedge ineffectiveness

10.10 Credit risk and hypothetical derivatives

10.11 Servicing rights

10.12 Cash flow hedges with purchased options

10.13 Foreign currency risk and internal derivatives

10.14 Hedges of a portion of the time period to maturity

10.15 Designated risks for financial assets or liabilities

10.16 Fair value hedge of interest rate risk in a portfolio of dissimilar items

10.17 Firm commitment to acquire a business

10.18 Foreign currency risk and location of hedging instruments

10.19 Hedging more than one risk

10.20 Cash flow hedges and basis adjustments on acquisition of nonfinancial items


Chapter 11: Consolidation

11.1 Consolidation

11.2 Requirements to prepare consolidated financial statements

11.3 Investment company/entity definition

11.4 Consolidation model

11.5 Accounting policies and reporting periods

11.6 Potential voting rights

11.7 Definition and types of joint ventures

11.8 Accounting for joint arrangements

11.9 Accounting for contributions to a jointly controlled entity

11.10 Equity method of accounting—exemption from applying the equity method

11.11 Equity method of accounting—classification as held for sale

11.12 Equity method of accounting—acquisition date excess of investor’s share of fair value over cost

11.13 Equity method of accounting—conforming accounting policies

11.14 Equity method of accounting—impairment

11.15 Equity method of accounting—losses in excess of an investor’s interest

11.16 Equity method of accounting—loss of significant influence or joint control

11.17 Accounting for investments in qualified affordable housing projects

11.18 Disclosures


Chapter 12: Business combinations

12.1 Business combinations

12.2 Definition of control

12.3 Acquired contingencies

12.4 Assignment/allocation and impairment of goodwill

12.5 Contingent consideration—seller accounting

12.6 Noncontrolling interests

12.7 Combinations involving entities under common control

12.8 Identifying the acquirer

12.9 Push-down accounting

12.10 Employee benefit arrangements and income tax


Chapter 13: Other accounting and reporting topics

13.1 Other accounting and reporting topics

13.2 Balance sheet—offsetting assets and liabilities

13.3 Balance sheet—disclosures for offsetting assets and liabilities

13.4 Balance sheet: classification—post-balance sheet refinancing agreements

13.5 Balance sheet: classification—refinancing counterparty

13.6 Income statement and statement of comprehensive income

13.7 Statements of equity

13.8 Statement of cash flows

13.9 Disclosure of critical accounting policies and significant estimates

13.10 Capital management disclosures

13.11 Comparative financial information

13.12 Diluted earnings-per-share calculation—year-to-date period calculation

13.13 Diluted earnings-per-share calculation—contracts that may be settled in stock or cash(at the issuer’s election)

13.14 Diluted earnings-per-share calculation

13.15 Diluted EPS calculation—application of treasury stock method to share-based payments -windfall tax benefits

13.16 Trigger to release amounts recorded in the currency translation account

13.17 Translation in consolidated financial statements

13.18 Determination of functional currency

13.19 Hyperinflation

13.20 Interim financial reporting—allocation of costs in interim periods

13.21 Definition of discontinued operations

13.22 Discontinued operations—unit of account upon which to perform a discontinued operationsassessment

13.23 Related parties—disclosure of commitments

13.24 Related parties—disclosure of management compensation

13.25 Related parties—disclosure of transactions with the government and government-relatedentities

13.26 Operating segments—segment reporting

13.27 Service concession arrangements


PwC Similarities and Differences - A comparison of IFRS, US GAAP and Belgian GAAP Preface-11-1

Preface

This publication provides an overview of the major differences between IFRS, US GAAPand Belgian GAAP (“BE GAAP”).

In Belgium, despite the possibility of (voluntary) adoption of IFRS for the consolidatedfinancial statements of non-listed companies (irrevocable choice) and the mandatory useof IFRS for the consolidated financial statements of listed companies’, banks, insurancecompanies and certain types of investment companies, Belgian GAAP remains therequired accounting framework for separate and individual financial statements, becauseof the current impact on tax, company law and SMEs. This publication is therefore usefulin helping you identify key differences between the Belgian GAAP and otherinternationally recognized financial reporting frameworks (IFRS and US GAAP).

Embedding internationally recognized standards across a group with extensive globaloperations that use a variety of local reporting standards will significantly ease themonitoring of financial information, reduce the complexity of statutory reconciliations(thereby reducing the risk of error), make the consolidation process more efficient andstreamline reporting procedures across group entities.

PricewaterhouseCoopers (PwC) fully supports high-quality, global principles-basedfinancial reporting standards since these promote consistency and transparency andhelp companies and their advisors to respond appropriately to new developments inbusiness practice.

Each topical chapter consists of the following:

A conceptual discussion of the current similarities and differences between IFRS, USGAAP and Belgian GAAP.

A more detailed analysis of the current differences between these frameworks,including an assessment of the impact embodied within the differences.

Additional commentary and insight with respect to recent/proposed guidance.

Guidance date

This publication is a part of PwC’s ongoing commitment to help companies navigate theswitch from local GAAP to full IFRS or US GAAP. It considers authoritativepronouncements and other developments under IFRS and US GAAP through June 1, 2015and Belgian GAAP rules in force as at 31 August 2015. Future editions will be released tokeep pace with significant developments.

Preface-2 Similarities and Differences - A comparison of IFRS, US GAAP and Belgian GAAP

Sources

References to Belgian GAAP or Belgian accounting legislation in this publication means

the law of 17 July 1975 and its implementing decrees as well as the most important

recommendations of the ASC/CBN/CNC (Accounting Standards Commission/ Commissie

van Boekhoudkundige Normen/ Commission des Normes Comptables). Specific

accounting rules for banks, insurance companies, pension funds, investment funds, etc.

are not dealt with in this publication.

Authors

This January 2016 publication has been led by Patrice Schumesch and Elena Shibkova.

The ‘IFRS, US GAAP and Belgian GAAP: similarities and differences’ 2016 publication is

drawn from the breadth and depth of expertise of many individuals within PwC.

Our special acknowledgements go to the authors, reviewers and other contributors of the

“IFRS and US GAAP: similarities and differences” publication (edition 2015).

We would also like to address our special thanks to the reviewers and other PwC Belgium

team members who contributed words and ideas to this edition.

Patrice SchumeschGlobal AccountingConsulting ServicesPartner PwC Belgium

Elena ShibkovaGlobal AccountingConsulting ServicesDirector PwC Belgium

PwC 1-1

Chapter 1:IFRS first-time adoption

IFRS first-time adoption

1-2 Similarities and Differences - A comparison of IFRS, US GAAP and Belgian GAAP

1.1 IFRS first-time adoption

IFRS 1, First-Time Adoption of International Financial Reporting Standards, is the

standard that is applied during preparation of a company’s first IFRS-based financial

statements. IFRS 1 was created to help companies transition to IFRS and provides

practical accommodations intended to make first-time adoption cost-effective. It also

provides application guidance for addressing difficult conversion topics.

1.1.1 What does IFRS 1 require?

The key principle of IFRS 1 is full retrospective application of all IFRS standards that

are effective as of the closing balance sheet or reporting date of the first IFRS financial

statements. Full retrospective adoption can be very challenging and burdensome. To

ease this burden, IFRS 1 gives certain optional exemptions and certain mandatory

exceptions from retrospective application.

IFRS 1 requires companies to:

□ Identify the first IFRS financial statements.

□ Prepare an opening balance sheet at the date of transition to IFRS.

□ Select accounting policies that comply with IFRS effective at the end of the first

IFRS reporting period and apply those policies retrospectively to all periods

presented in the first IFRS financial statements.

□ Consider whether to apply any of the optional exemptions from retrospective

application.

□ Apply the seven mandatory exceptions from retrospective application. Two

exceptions regarding classification and measurement periods of financial assets

and embedded derivatives relate to amendments to IFRS 9, which is effective for

annual reporting periods beginning on or after January 1, 2018.

□ Make extensive disclosures to explain the transition to IFRS.

IFRS 1 is regularly updated to address first-time adoption issues. There are currently

twenty-one long-term optional exemptions (nineteen of which are effective) to ease

the burden of retrospective application. These exemptions are available to all first-

time adopters, regardless of their date of transition. Additionally, the standard

provides for short-term exemptions, which are temporarily available to users and

often address transition issues related to new standards. There are currently four such

short-term exemptions. As referenced above, the exemptions provide limited relief for

first-time adopters, mainly in areas where the information needed to apply IFRS

retrospectively might be particularly challenging to obtain. There are, however, no

exemptions from the disclosure requirements of IFRS, and companies may experience

challenges in collecting new information and data for retrospective footnote

disclosures.

IFRS first-time adoption

Similarities and Differences - A comparison of IFRS, US GAAP and Belgian GAAP 1-3

Many companies will need to make significant changes to existing accounting policies

to comply with IFRS, including in such key areas as revenue recognition, inventory

accounting, financial instruments and hedging, employee benefit plans, impairment

testing, provisions, and stock-based compensation.

1.1.2 When to apply IFRS 1

Companies will apply IFRS 1 when they prepare their first IFRS financial statements,

including when they transition from their previous GAAP to IFRS. These are the first

financial statements to contain an explicit and unreserved statement of compliance

with IFRS.

PwC 1-1

Chapter 2:Revenue recognition

Revenue recognition


2.1 Revenue recognition

In May 2014, the FASB and IASB issued their long-awaited converged standard on

revenue recognition, Revenue from Contracts with Customers. The revenue standard

was originally issued with effective dates for calendar year-end companies in 2017

(2018 for non-public entities following US GAAP); however, as noted in SD 3.11.1.7,

both boards have proposals to defer the effective date by a year. Refer to SD 3.11.1.7

for further discussion. The new model is expected to impact revenue recognition

under both US GAAP and IFRS, and will eliminate many of the existing differences in

accounting for revenue between the two frameworks. Many industries having

contracts in the scope of the new standard will be affected, and some will see pervasive

changes. Refer to the Recent/proposed guidance section of this chapter for a further

discussion of the new revenue standard.

Until the new revenue standard is effective for all entities, existing differences

between the two frameworks remain. US GAAP revenue recognition guidance is

extensive and includes a significant number of standards issued by the Financial

Accounting Standards Board (FASB), the Emerging Issues Task Force (EITF), the

American Institute of Certified Public Accountants (AICPA), and the US Securities

and Exchange Commission (SEC). The guidance tends to be highly detailed and is

often industry-specific. While the FASB’s codification has put authoritative US GAAP

in one place, it has not impacted the volume and/or nature of the guidance. IFRS has

two primary revenue standards and four revenue-focused interpretations. The broad

principles laid out in IFRS are generally applied without further guidance or

exceptions for specific industries.

A detailed discussion of industry-specific differences is beyond the scope of this

publication. However, the following examples illustrate industry-specific US GAAP

guidance and how that guidance can create differences between US GAAP and IFRS

and produce conflicting results for economically similar transactions.

□ US GAAP guidance on software revenue recognition requires the use of vendor-

specific objective evidence (VSOE) of fair value in determining an estimate of the

selling price. IFRS does not have an equivalent requirement.

□ Activation services provided by telecommunications providers are often

economically similar to connection services provided by cable television

companies. The US GAAP guidance governing the accounting for these

transactions, however, differs. As a result, the timing of revenue recognition for

these economically similar transactions also varies.

As noted above, IFRS contains minimal industry-specific guidance. Rather, the broad

principles-based approach of IFRS is to be applied across all entities and industries. A

few of the more significant, broad-based differences are highlighted below:

Contingent pricing and how it factors into the revenue recognition models vary

between US GAAP and IFRS. Under US GAAP, revenue recognition is based on fixed

or determinable pricing criterion, which results in contingent amounts generally not

being recorded as revenue until the contingency is resolved. IFRS looks to the

Revenue recognition


probability of economic benefits associated with the transaction flowing to the entity

and the ability to reliably measure the revenue in question, including any contingent

revenue. This could lead to differences in the timing of revenue recognition, with

revenue potentially being recognized earlier under IFRS.

Two of the most common revenue recognition issues relate to (1) the determination ofwhen transactions with multiple deliverables should be separated into componentsand (2) the method by which revenue gets allocated to the different components. USGAAP requires arrangement consideration to be allocated to elements of a transactionbased on relative selling prices. A hierarchy is in place which requires VSOE of fairvalue to be used in all circumstances in which it is available. When VSOE is notavailable, third-party evidence (TPE) may be used. Lastly, a best estimate of sellingprice may be used for transactions in which VSOE or TPE does not exist. The residualmethod of allocating arrangement consideration is no longer permitted under USGAAP (except under software industry guidance), but continues to be an option underIFRS. Under US GAAP and IFRS, estimated selling prices may be derived in a varietyof ways, including cost plus a reasonable margin. BE GAAP does not provide specificguidance on separation of transactions into components and allocation of revenue todifferent components.

The accounting for customer loyalty programs may drive fundamentally different

results. The IFRS requirement to treat customer loyalty programs as multiple-element

arrangements, in which consideration is allocated to the goods or services and the

award credits based on fair value through the eyes of the customer, would be

acceptable for US GAAP purposes. US GAAP reporting companies, however, may use

the incremental cost model, which is different from the multiple-element approach

required under IFRS. In this instance, IFRS generally results in the deferral of more

revenue. BE GAAP is silent on this subject.

US GAAP prohibits use of the cost-to-cost percentage-of-completion method for

service transactions (unless the transaction explicitly qualifies as a particular type of

construction or production contract). Most service transactions that do not qualify for

these types of construction or production contracts are accounted for under a

proportional-performance model. IFRS requires use of the percentage-of-completion

method in recognizing revenue in service arrangements unless progress toward

completion cannot be estimated reliably (in which case a zero-profit approach is used)

or a specific act is much more significant than any other (in which case revenue

recognition is postponed until the significant act is executed). Prohibition of the use of

the completed contract method under IFRS and diversity in application of the

percentage-of-completion method might also result in differences. BE GAAP guidance

in this area is summarized below and allows a choice between percentage of completion

or completed contract (zero-profit) approach for recognition and measurement of work in

progress in service arrangements and construction contracts.

Due to the significant differences in the overall volume of revenue-related guidance, a

detailed analysis of specific fact patterns is normally necessary to identify and evaluate

the potential differences between the accounting frameworks.

Revenue recognition


Technical references

US GAAP

ASC 605-20-25-1 through 25-6, ASC 605-20-25-14 through 25-18, ASC 605-25, ASC

605-35, ASC 605-50, ASC 985-605, CON 5, SAB Topic 13

IFRS

IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, SIC 31

BE GAAP

CBN/CNC 2013/7, CBC/CNC 2013/11, CBN/CNC 2013/12, CBN/CNC 2012/17,

CBN/CNC 2012/15

Note

The following discussion captures a number of the more significant GAAP differences.

It is important to note that the discussion is not inclusive of all GAAP differences in

this area.

2.2 Revenue recognition—general

The concept of IFRS being principles-based, and US GAAP being principles-based but

also rules-laden, is perhaps nowhere more evident than in the area of revenue

recognition.

This fundamental difference requires a detailed, transaction-based analysis to identify

potential GAAP differences.

Differences may be affected by the way companies operate, including, for example,

how they bundle various products and services in the marketplace.

Revenue recognition


US GA A P IFRS B E GA A P

Revenue recognitionguidance is extensive andincludes a significantvolume of literatureissued by various USstandard setters.

Generally, the guidancefocuses on revenue being(1) either realized orrealizable and (2) earned.Revenue recognition isconsidered to involve anexchange transaction;that is, revenue shouldnot be recognized until anexchange transaction hasoccurred.

These ratherstraightforward conceptsare augmented withdetailed rules.

A detailed discussion ofindustry-specificdifferences is beyond thescope of this publication.For illustrative purposesonly, we note that highlyspecialized guidanceexists for softwarerevenue recognition. Oneaspect of that guidancefocuses on the need todemonstrate VSOE of fairvalue in order to separatedifferent softwareelements in a contract.This requirement goesbeyond the general fairvalue requirement of USGAAP.

Two primary revenuestandards capture allrevenue transactionswithin one of four broadcategories:

□ Sale of goods□ Rendering of services□ Others’ use of an

entity’s assets(yielding interest,royalties, etc.)

□ Constructioncontracts

Revenue recognitioncriteria for each of thesecategories include theprobability that theeconomic benefitsassociated with thetransaction will flow tothe entity and that therevenue and costs can bemeasured reliably.Additional recognitioncriteria apply within eachbroad category.

The principles laid outwithin each of thecategories are generally tobe applied withoutsignificant further rulesand/or exceptions.

The concept of VSOE offair value does not existunder IFRS, therebyresulting in moreelements likely meetingthe separation criteriaunder IFRS.

Although the price that isregularly charged by anentity when an item issold separately is the bestevidence of the item’s fairvalue, IFRS acknowledgesthat reasonable estimatesof fair value (such as costplus a reasonable margin)may, in certaincircumstances, beacceptable alternatives.

Belgian legislationincludes a number ofprovisions relatingdirectly or indirectly toincome recognition,encompassing bothrevenue and gains.

BE GAAP defines certainheadings or subheadingsof the income statement(definition of captions).

Revenue recognitionunder BE GAAP isbroadly comparable toIFRS, but revenue issometimes stillrecognized based on thelegal form of thetransaction.

Based on the prudencyprinciple, revenues canonly be recognized if theyare realized. Expenseshave to be allocated to thesame accounting year asthe revenues to whichthey relate based on thematching principle.Revenues resulting fromthe transfer of goods arerecognized in theaccounting year in whichthe principal risks aretransferred to theacquirer which usuallycorresponds to thetransfer of ownership orto the transfer of risk ofloss or damage to thegoods. Revenues resultingfrom the delivery ofservices are recognized inthe accounting year inwhich the keyperformance of theservice is carried out.

When the delivery ofgoods is made regularlyover a determined period

Revenue recognition



of time for a fixed price,revenue should berecognized over thatperiod, irrespective of thetiming of billing.

If the collection ofrevenues is uncertain, thecompany should either (1)not recognize anyrevenues as long as thecollection remainsuncertain or (2) recognizerevenues and animpairment loss in theincome statement.

In the CBN/CNC advicessome practical examplesare given of revenue andrelated expenserecognition. For example,dividends are recognizedby the beneficiary at themoment the generalshareholders’ meetingdecides upon theirdistribution.

Sources:

CBN/CNC 2013/11

CBN/CNC 2013/12CBN/CNC 2012/17

2.3 Contingent consideration—general

Revenue may be recognized earlier under IFRS when there are contingencies

associated with the price/level of consideration.


General guidanceassociated withcontingencies aroundconsideration isaddressed within SECStaff Accounting Bulletin(SAB) Topic 13 and theconcept of the seller’sprice to the buyer beingfixed or determinable.

For the sale of goods, onelooks to the generalrecognition criteria asfollows:

□ The entity hastransferred to thebuyer the significantrisks and rewards ofownership;

BE GAAP is broadly

comparable to IFRS,

however more emphasis

is placed on the principle

of prudency and it may

result in the later

recognition of contingent

Revenue recognition



Even when deliveryclearly has occurred (orservices clearly have beenrendered), the SEC hasemphasized that revenuerelated to contingentconsideration should notbe recognized until thecontingency is resolved. Itwould not be appropriateto recognize revenuebased upon theprobability of a factorbeing achieved.

□ The entity retainsneither continuingmanagerialinvolvement to thedegree usuallyassociated withownership noreffective control overthe goods sold;

□ The amount ofrevenue can bemeasured reliably;

□ It is probable that theeconomic benefitsassociated with thetransaction will flowto the entity; and

□ The costs incurred orto be incurred withrespect to thetransaction can bemeasured reliably.

IFRS specifically calls forconsideration of theprobability of the benefitsflowing to the entity aswell as the ability toreliably measure theassociated revenue. If itwere probable that theeconomic benefits wouldflow to the entity and theamount of revenue couldbe reliably measured,contingent considerationwould be recognizedassuming that the otherrevenue recognitioncriteria are met. If eitherof these criteria were notmet, revenue would bepostponed until all of thecriteria are met.

consideration under BE

GAAP compared to IFRS.

Revenues/expenses

related to the delivery of

goods and services are

recognized only if the

amount is determined or

determinable.

In case if the amount of

revenues/expenses is not

fully determined or

determinable, the

minimum amount will be

recognized.

Source: CBN/CNC

2012/17

Revenue recognition


2.4 Multiple-element arrangements—general

While the guidance often results in the same treatment under US GAAP and IFRS,

careful consideration is required, as there is the potential for significant differences.


Revenue arrangementswith multiple deliverablesare separated intodifferent units ofaccounting if thedeliverables in thearrangement meet all ofthe specified criteriaoutlined in the guidance.Revenue recognition isthen evaluatedindependently for eachseparate unit ofaccounting.

US GAAP includes ahierarchy for determiningthe selling price of adeliverable. The hierarchyrequires the selling priceto be based on VSOE ifavailable, third-partyevidence (TPE) if VSOE isnot available, orestimated selling price ifneither VSOE nor TPE isavailable. An entity mustmake its best estimate ofselling price (BESP) in amanner consistent withthat used to determinethe price to sell thedeliverable on astandalone basis. Noestimation methods areprescribed; however,examples include the useof cost plus a reasonablemargin.

The revenue recognitioncriteria usually areapplied separately to eachtransaction. In certaincircumstances, however,it is necessary to separatea transaction intoidentifiable componentsto reflect the substance ofthe transaction.

At the same time, two ormore transactions mayneed to be groupedtogether when they arelinked in such a way thatthe commercial effectcannot be understoodwithout reference to theseries of transactions as awhole.

The price that is regularlycharged when an item issold separately is the bestevidence of the item’s fairvalue. At the same time,under certaincircumstances, a cost-plus-reasonable-marginapproach to estimatingfair value would beappropriate under IFRS.The use of the residualmethod and, under rarecircumstances, thereverse residual methodmay be acceptable toallocate arrangementconsideration.

Not addressed.

Revenue recognition



Given the requirement touse BESP if neither VSOEnor TPE is available,arrangementconsideration will beallocated at the inceptionof the arrangement to alldeliverables using therelative selling pricemethod.

The residual method isprecluded.

The reverse-residualmethod (when objectiveand reliable evidence ofthe fair value of anundelivered item or itemsdoes not exist) is alsoprecluded unless other USGAAP guidancespecifically requires thedelivered unit ofaccounting to be recordedat fair value and markedto market each reportingperiod thereafter.

Revenue recognition


2.4.1 Multiple-element arrangements—contingencies

In situations where the amount allocable to a delivered item includes an amount that

is contingent on the delivery of additional items, differences in the frameworks may

result in recognizing a portion of revenue sooner under IFRS compared to US GAAP.


The guidance includes astrict limitation on theamount of revenueotherwise allocable to thedelivered element in amultiple-elementarrangement.

Specifically, the amountallocable to a delivereditem is limited to theamount that is notcontingent on the deliveryof additional items. Thatis, the amount allocable tothe delivered item oritems is the lesser of theamount otherwiseallocable in accordancewith the guidance or thenoncontingent amount.

IFRS maintains itsgeneral principles andwould look to keyconcepts including, butnot limited to, thefollowing:

□ Revenue should notbe recognized beforeit is probable thateconomic benefitswould flow to theentity

□ The amount ofrevenue can bemeasured reliably

When a portion of theamount allocable to adelivered item iscontingent on the deliveryof additional items, IFRSmight not impose alimitation on the amountallocated to the first item.A thorough considerationof all factors would benecessary so as to draw anappropriate conclusion.Factors to consider wouldinclude the extent towhich fulfillment of theundelivered item is withinthe control of, and is anormal/customarydeliverable for, the sellingparty, as well as theability and intent of theselling party to enforcethe terms of thearrangement. In practice,the potential limitation isoften overcome.

Not addressed.

Revenue recognition


2.4.2 Multiple-element arrangements—customer loyalty programs

Entities that grant award credits as part of sales transactions, including awards that

can be redeemed for goods and services not supplied by the entity, may encounter

differences that impact both the timing and total value of revenue to be recognized

under US GAAP or IFRS.

Where differences exist, revenue recognition is likely to be delayed under IFRS.


Currently, divergenceexists under US GAAP inthe accounting forcustomer loyaltyprograms. Two verydifferent models generallyare employed.

Some companies utilize amultiple-elementaccounting model,wherein revenue isallocated to the awardcredits based on relativefair value. Othercompanies utilize anincremental cost model,wherein the cost offulfillment is treated as anexpense and accrued foras a “cost to fulfill,” asopposed to deferred basedon relative fair value.

The two models can resultin significantly differentaccounting.

IFRS requires that award,loyalty, or similarprograms, whereby acustomer earns creditsbased on the purchase ofgoods or services, beaccounted for as multiple-element arrangements. Assuch, IFRS requires thatthe fair value of the awardcredits (otherwiseattributed in accordancewith the multiple-elementguidance) be deferred andrecognized separatelyupon achieving allapplicable criteria forrevenue recognition.

The above-outlinedguidance applies whetherthe credits can beredeemed for goods orservices supplied by theentity or whether thecredits can be redeemedfor goods or servicessupplied by a differententity. In situations wherethe credits can beredeemed through adifferent entity, acompany also shouldconsider the timing ofrecognition andappropriate presentationof each portion of theconsideration received,given the entity’spotential role as an agentversus a principal in eachaspect of the transaction.

Not addressed.

Revenue recognition


2.4.3 Multiple-element arrangements—loss on delivered element only

The timing of revenue and cost recognition in situations with multiple element

arrangements and losses on the first element may vary under US GAAP and IFRS.


When there is a loss onthe first element of a two-element arrangement(within the scope of thegeneral/non-industry-specific, multiple-elementrevenue recognitionguidance), an accountingpolicy choice with respectto how the loss is treatedmay exist.

When there is anapparent loss on the firstelement of a two-elementarrangement, anaccounting policy choicemay exist as of the datethe parties entered intothe contract.

Not addressed

When there is a loss onthe first element but aprofit on the secondelement (and the overallarrangement isprofitable), a companyhas an accounting policychoice if performance ofthe undelivered elementis both probable and inthe company’s control.Specifically, there are twoacceptable ways oftreating the loss incurredin relation to thedelivered unit ofaccounting. The companymay (1) recognize costs inan amount equal to therevenue allocated to thedelivered unit ofaccounting and defer theremaining costs untildelivery of the secondelement, or (2) recognizeall costs associated withthe delivered element(i.e., recognize the loss)upon delivery of thatelement.

When there is a loss onthe first element but aprofit on the secondelement (and the overallarrangement isprofitable), a companymay choose between twoacceptable alternatives ifperformance of theundelivered element isboth probable and in thecompany’s control. Thecompany may (1)determine that revenue ismore appropriatelyallocated based on costplus a reasonable margin,thereby removing the losson the first element, or(2) recognize all costsassociated with thedelivered element (i.e.,recognize the loss) upondelivery of that element.

Once the initial allocationof revenue has beenmade, it is not revisited.That is, if the loss on thefirst element becomesapparent only after theinitial revenue allocation,the revenue allocation isnot revisited.

Revenue recognition



There is not, under IFRS,support for deferring theloss on the first elementakin to the US GAAPapproach.

2.5 Sales of services—general

A fundamental difference in the guidance surrounding how service revenue should be

recognized has the potential to significantly impact the timing of revenue recognition.


US GAAP prohibits theuse of the cost-to-costrevenue recognitionmethod for servicearrangements unless thecontract is within thescope of specific guidancefor construction or certainproduction-typecontracts.

IFRS requires that servicetransactions be accountedfor by reference to thestage of completion of thetransaction (thepercentage-of-completionmethod). The stage ofcompletion may bedetermined by a variety ofmethods, including thecost-to-cost method.Revenue may berecognized on a straight-line basis if the servicesare performed by anindeterminate number ofacts over a specifiedperiod and no othermethod better representsthe stage of completion.

Similar to IFRS except forthe authorization to usethe completed contractmethod.

Generally, companieswould apply theproportional-performance model or thecompleted-performancemodel. In circumstanceswhere output measuresdo not exist, inputmeasures (other thancost-to-cost), whichapproximate progressiontoward completion, maybe used. Revenue isrecognized based on adiscernible pattern and, ifnone exists, then the

When the outcome of aservice transaction cannotbe measured reliably,revenue may berecognized to the extentof recoverable expensesincurred. That is, a zero-profit model would beutilized, as opposed to acompleted-performancemodel. If the outcome ofthe transaction is souncertain that recovery ofcosts is not probable,revenue would need to bedeferred until a more

Revenue recognition



straight-line approachmay be appropriate.

Revenue is deferred if aservice transaction cannotbe measured reliably.

accurate estimate couldbe made.

Revenue may have to bedeferred in instanceswhere a specific act ismuch more significantthan any other acts.

2.5.1 Sales of services—right of refund

Differences within IFRS and US GAAP provide the potential for revenue to be

recognized earlier under IFRS when services-based transactions include a right of

refund.


A right of refund maypreclude recognition ofrevenue from a servicearrangement until theright of refund expires.

In certain circumstances,companies may be able torecognize revenue overthe service period—net ofan allowance—if certaincriteria within theguidance are satisfied.

Service arrangements thatcontain a right of refundmust be considered todetermine whether theoutcome of the contractcan be estimated reliablyand whether it is probablethat the company wouldreceive the economicbenefit related to theservices provided.

When reliable estimationis not possible, revenue isrecognized only to theextent of the costsincurred that are probableof recovery.

Not addressed.

2.6 Construction contracts

There are a variety of differences between the three frameworks with potentially far-

reaching consequences.

Differences ranging from the transactions scoped into the construction contract

accounting guidance to the application of the models may have significant impacts.

Revenue recognition



The guidance generallyapplies to accounting forperformance of contractsfor which specificationsare provided by thecustomer for theconstruction of facilities,the production of goods,or the provision of relatedservices.

The scope of thisguidance generally hasbeen limited to specificindustries and types ofcontracts.

The guidance applies tocontracts specificallynegotiated for theconstruction of a singleasset or a combination ofassets that areinterrelated orinterdependent in termsof their design,technology, and function,or their ultimate purposeor use. The guidance isnot limited to certainindustries and includesfixed-price and cost-plusconstruction contracts.

Assessing whether acontract is within thescope of the constructioncontract standard or thebroader revenue standardcontinues to be an area offocus. A buyer’s ability tospecify the majorstructural elements of thedesign (either beforeand/or duringconstruction) is a keyindicator (although not,in and of itself,determinative) ofconstruction contractaccounting.

Construction accountingguidance is generally notapplied to the recurringproduction of goods.

The guidance applies toaccounting forperformance of contractsspecifically negotiatedwith customers(construction of facilitiesor provision of services).

The scope of thisguidance is not limited tocertain industries andtypes of contracts.

BE GAAP permits twomethods: either thepercentage of completionmethod or the completedcontract method (positivemargin is recognizedupon completion),provided it is doneprudently and theaccounting policy chosenis disclosed in the notes tothe financial statements.

C om pleted -con tractm eth od

Although the percentage-of-completion method ispreferred, the completed-contract method isrequired in certainsituations, such as whenmanagement is unable tomake reliable estimates.

For circumstances inwhich reliable estimatescannot be made, but thereis an assurance that no


The completed-contractmethod is prohibited.


The completed-contractmethod has the followingfeatures:

□ Certitude ofrecognized results:the outcome of thecontract is certainand no assumptionsare involved;

□ Uneven evolution ofresults through theperiod of contract;

Revenue recognition



loss will be incurred on acontract (e.g., when thescope of the contract is ill-defined but the contractoris protected from anoverall loss), thepercentage-of-completionmethod based on a zero-profit margin, rather thanthe completed-contractmethod, is used untilmore-precise estimatescan be made.

□ Generation of hiddenreserves reflected inaccounts at the timeof completion only;

□ Accountingprinciples: prudenceand realisationprinciples.

P ercen tage-of-com pletion m eth od

Within the percentage-of-completion model thereare two acceptableapproaches: the revenueapproach and the gross-profit approach.


IFRS utilizes a revenueapproach to percentage ofcompletion. When thefinal outcome cannot beestimated reliably, a zero-profit method is used(wherein revenue isrecognized to the extentof costs incurred if thosecosts are expected to berecovered). The gross-profit approach is notallowed.


The percentage-of-completion method hasthe following features:

□ Future earnings needto be anticipated(assumptions);

□ Continued evolutionof results;

□ Annual accounts:revenue is recognizedin the accountingperiod to which itrelates;

□ Accountingprinciples: matchingprinciple.

C om bin in gan dsegm en tin gcon tracts

Combining andsegmenting contracts ispermitted, providedcertain criteria are met,but it is not required solong as the underlyingeconomics of thetransaction are reflectedfairly.


Combining andsegmenting contracts isrequired when certaincriteria are met.


The unit of account is setat the individual contractlevel.

Source: CBN/CNC2012/15

Revenue recognition


2.7 Sale of goods—continuous transfer

Outside of construction accounting under IFRS, some agreements for the sale of goods

will qualify for revenue recognition by reference to the stage of completion.


Other than constructionaccounting, US GAAPdoes not have a separatemodel equivalent to thecontinuous transfermodel for sale of goods.

When an agreement is forthe sale of goods and isoutside the scope ofconstruction accounting,an entity considerswhether all of the sale ofgoods revenuerecognition criteria aremet continuously as thecontract progresses.When all of the sale ofgoods criteria are metcontinuously, an entityrecognizes revenue byreference to the stage ofcompletion using thepercentage-of-completionmethod.

The requirements of theconstruction contractsguidance are generallyapplicable to therecognition of revenueand the associatedexpenses for suchcontinuous transfertransactions.

Meeting the revenuerecognition criteriacontinuously as thecontract progresses forthe sale of goods isexpected to be relativelyrare in practice.

Not specifically addressedhowever the requirementsof the constructioncontracts guidance aregenerally applicable to therecognition of revenueand the associatedexpenses for such contin-uous transfertransactions.

Meeting the revenuerecognition criteriacontinuously as thecontract progresses forthe sale of goods isexpected to be relativelyrare in practice.

Revenue recognition


2.8 Barter transactions

The three frameworks generally require different methods for determining the value

ascribed to barter transactions.


US GAAP generallyrequires companies to usethe fair value of goods orservices surrendered asthe starting point formeasuring a bartertransaction.

IFRS generally requirescompanies to use the fairvalue of goods or servicesreceived as the startingpoint for measuring abarter transaction.

BE GAAP does not makea distinction betweenexchanges of similar anddissimilar assets.

The acquisition value ofan asset acquired byexchange equals the fairvalue of the asset givenup. The fair value of theasset received is usedwhere the fair value of theasset given up cannot bedetermined.

N on -ad vertisin g-bartertran saction s

The fair value of goods orservices received can beused if the valuesurrendered is not clearlyevident.

N on -ad vertisin g-bartertran saction s

When the fair value ofitems received is notreliably determinable, thefair value of goods orservices surrendered canbe used to measure thetransaction.

A ccoun tin gforad vertisin g-bartertran saction s

If the fair value of assetssurrendered in anadvertising-bartertransaction is notdeterminable, thetransaction should berecorded based on thecarrying amount ofadvertising surrendered,which likely will be zero.

A ccoun tin gforad vertisin g-bartertran saction s

Revenue from a bartertransaction involvingadvertising cannot bemeasured reliably at thefair value of advertisingservices received.However, a seller canreliably measure revenueat the fair value of theadvertising services itprovides if certain criteriaare met.

Revenue recognition



A ccoun tin gforbarter-cred ittran saction s

It should be presumedthat the fair value of thenonmonetary assetexchanged is more clearlyevident than the fair valueof the barter creditsreceived.

However, it is alsopresumed that the fairvalue of the nonmonetaryasset does not exceed itscarrying amount unlessthere is persuasiveevidence supporting ahigher value. In rareinstances, the fair value ofthe barter credits may beutilized (e.g., if the entitycan convert the bartercredits into cash in thenear term, as evidencedby historical practice).

A ccoun tin gforbarter-cred ittran saction s

There is nofurther/specific guidancefor barter-credittransactions. The broadprinciples outlined aboveshould be applied.

Revenue recognition


2.9 Extended warranties

The IFRS requirement to separately allocate a portion of the consideration to each

component of an arrangement on a relative fair value basis has the potential to impact

the timing of revenue recognition for arrangements that include a separately priced

extended warranty or maintenance contract.


Revenue associated withseparately pricedextended warranty orproduct maintenancecontracts generally shouldbe deferred andrecognized as income on astraight-line basis overthe contract life. Anexception exists whereexperience indicates thatthe cost of performingservices is incurred on another-than-straight-linebasis.

The revenue related toseparately pricedextended warranties isdetermined by referenceto the separately statedprice for maintenancecontracts that are soldseparately from theproduct. There is norelative fair market valueallocation in this instance.

If an entity sells anextended warranty, therevenue from the sale ofthe extended warrantyshould be deferred andrecognized over theperiod covered by thewarranty.

In instances where theextended warranty is anintegral component of thesale(i.e., bundled into a singletransaction), an entityshould attributeconsideration based onrelative fair value to eachcomponent of the bundle.

Similar to IFRS.

Revenue recognition


2.10 Discounting of revenues

Discounting of revenue (to present value) is more broadly required under IFRS and

BE GAAP than under US GAAP.

This may result in lower revenue under IFRS and BE GAAP because the time value

portion of the ultimate receivable is recognized as finance/interest income.


The discounting ofrevenue is required inonly limited situations,including receivables withpayment terms greaterthan one year and certainindustry-specificsituations, such as retailland sales or licenseagreements for motionpictures or televisionprograms.

Discounting of revenue topresent value is requiredin instances where theinflow of cash or cashequivalents is deferred.

Similar to IFRS,discounting is required incases specified in theaccounting law.

When discounting isrequired, the interestcomponent should becomputed based on thestated rate of interest inthe instrument or amarket rate of interest ifthe stated rate isconsidered unreasonable.

In such instances, animputed interest rateshould be used fordetermining the amountof revenue to berecognized as well as theseparate interest incomecomponent to be recordedover time.


2.11.1 Joint FASB/IASB Revenue Recognition Project

In May 2014, the FASB and IASB issued their long-awaited converged standard on

revenue recognition—ASC 606 and IFRS 15, Revenue from Contracts with

Customers. The standard contains principles that an entity will apply to report useful

information about the nature, amount, timing, and uncertainty of revenue and cash

flows arising from its contracts to provide goods or services to customers. The core

principle requires an entity to recognize revenue to depict the transfer of goods or

services to customers in an amount that reflects the consideration it expects to be

entitled to in exchange for those goods or services. The standard could significantly

change how many entities recognize revenue, especially those that currently apply

industry-specific guidance. The standard will also result in a significant increase in the

volume of disclosures related to revenue.

Revenue recognition


The standard sets forth a five-step model for recognizing revenue from contracts with

customers:

□ Identify the contract with a customer.

□ Identify the performance obligations in the contract.

□ Determine the transaction price.

□ Allocate the transaction price to the performance obligations.

□ Recognize revenue when (or as) each performance obligation is satisfied.

2.11.1.1 Identify the contract with a customer

The model starts with identifying the contract with the customer and whether an

entity should combine, for accounting purposes, two or more contracts (including

contract modifications), to properly reflect the economics of the underlying

transaction. An entity will need to conclude that it is “probable,” at the inception of

the contract, that the entity will collect the consideration to which it will ultimately be

entitled in exchange for the goods or services that are transferred to the customer in

order for a contract to be in the scope of the revenue standard. The term “probable”

has a different meaning under US GAAP (where it is generally interpreted as 75

percent – 80 percent likelihood) and IFRS (where it means more likely than not—that

is, greater than 50 percent likelihood). This could result in a difference in the

accounting for a contract if there is a likelihood of non-payment at inception. For

example, assuming all other criteria were met, an IFRS preparer would be following

the revenue guidance for a contract that is 70% certain of collection, where as a US

GAAP preparer would not be permitted to apply the revenue standard.

Two or more contracts (including contracts with different customers) should be

combined if the contracts are entered into at or near the same time and the contracts

are negotiated with a single commercial objective, the amount of consideration in one

contract depends on the other contract, or the goods or services in the contracts are

interrelated. A contract modification is treated as a separate contract only if it results

in the addition of a separate performance obligation and the price reflects the stand-

alone selling price (that is, the price the good or service would be sold for if sold on a

stand-alone basis) of the additional performance obligation. The modification is

otherwise accounted for as an adjustment to the original contract either through a

cumulative catch-up adjustment to revenue or a prospective adjustment to revenue

when future performance obligations are satisfied, depending on whether the

remaining goods and services are distinct. While aspects of this model are similar to

existing literature, careful consideration will be needed to ensure the model is applied

to the appropriate unit of account.

Revenue recognition


2.11.1.2 Identify the performance obligations in the contract

An entity will be required to identify all performance obligations in a contract.

Performance obligations are promises to transfer goods or services to a customer and

are similar to what we know today as “elements” or “deliverables.” Performance

obligations might be explicitly stated in the contract but might also arise in other

ways. Legal or statutory requirements to deliver a good or perform a service might

create performance obligations even though such obligations are not explicit in the

contract. A performance obligation may also be created through customary business

practices, such as an entity’s practice of providing customer support, or by published

policies or specific company statements. This could result in an increased number of

performance obligations within an arrangement, possibly changing the timing of

revenue recognition.

An entity accounts for each promised good or service as a separate performance

obligation if the good or service is distinct (i.e., the customer can benefit from the

good or service either on its own or together with other resources readily available to

the customer); and is distinct within the context of the contract (i.e., the good or

service is separately identifiable from other promises in the contract).

Sales-type incentives such as free products or customer loyalty programs, for example,

are currently recognized as marketing expense under US GAAP in some

circumstances. These incentives might be performance obligations under the new

model; if so, revenue will be deferred until such obligations are satisfied, such as when

a customer redeems loyalty points. Other potential changes in this area include

accounting for return rights, licenses, and options.

2.11.1.3 Determine the transaction price

Once an entity identifies the performance obligations in a contract, the obligations will

be measured by reference to the transaction price. The transaction price reflects the

amount of consideration that an entity expects to be entitled to in exchange for goods

or services delivered. This amount is measured using either a probability-weighted or

most-likely-amount approach; whichever is most predictive. The amount of expected

consideration captures: (1) variable consideration if it is “probable” (US GAAP) or

“highly probable” (IFRS) that the amount will not result in a significant revenue

reversal if estimates change, (2) an assessment of time value of money (as a practical

expedient, an entity need not make this assessment when the period between payment

and the transfer of goods or services is less than one year), (3) noncash consideration,

generally at fair value, and (4) consideration paid to customers. While the standards

use different words in measuring variable consideration (“probable” under US GAAP

and “highly probable” under IFRS), the intent of the boards is that the terminology

should lead to the same accounting treatment under both frameworks.

Inclusion of variable consideration in the initial measurement of the transaction price

might result in a significant change in the timing of revenue recognition. Such

consideration is recognized as the entity satisfies its related performance obligations,

provided (1) the entity has relevant experience with similar performance obligations

(or other valid evidence) that allows it to estimate the cumulative amount of revenue

for a satisfied performance obligation, and (2) based on that experience, the entity

Revenue recognition


does not expect a significant reversal in future periods in the cumulative amount of

revenue recognized for that performance obligation. Revenue may therefore be

recognized earlier than under existing guidance if an entity meets the conditions to

include variable consideration in the transaction price. Judgment will be needed to

assess whether the entity has predictive experience about the outcome of a contract.

The following indicators might suggest the entity’s experience is not predictive of the

outcome of a contract: (1) the amount of consideration is highly susceptible to factors

outside the influence of the entity, (2) the uncertainty about the amount of

consideration is not expected to be resolved for a long period of time, (3) the entity’s

experience with similar types of contracts is limited, and (4) the contract has a large

number and broad range of possible consideration amounts.

2.11.1.4 Allocate the transaction price to the performance obligations

For contracts with multiple performance obligations, the performance obligations

should be separately accounted for to the extent that the pattern of transfer of goods

and services is different. Once an entity identifies and determines whether to

separately account for all the performance obligations in a contract, the transaction

price is allocated to these separate performance obligations based on relative

standalone selling prices.

The best evidence of standalone selling price is the observable price of a good or

service when the entity sells that good or service separately. The selling price is

estimated if a standalone selling price is not available. Some possible estimation

methods include (1) cost plus a reasonable margin or (2) evaluation of standalone

sales prices of the same or similar products, if available. If the standalone selling price

is highly variable or uncertain, entities may use a residual approach to aid in

estimating the standalone selling price (i.e., total transaction price less the standalone

selling prices of other goods or services in the contract). An entity may also allocate

discounts and variable amounts entirely to one (or more) performance obligations if

certain conditions are met.

2.11.1.5 Recognize revenue when each performance obligation is satisfied

Revenue should be recognized when a promised good or service is transferred to the

customer. This occurs when the customer obtains control of that good or service.

Control can transfer at a point in time or continuously over time. Determining when

control transfers will require a significant amount of judgment. An entity satisfies a

performance obligation over time if: (1) the customer is receiving and consuming the

benefits of the entity’s performance as the entity performs (i.e., another entity would

not need to substantially re-perform the work completed to date); (2) the entity’s

performance creates or enhances an asset that the customer controls as the asset is

created or enhanced; or (3) the entity’s performance does not create an asset with an

alternative use to the entity, the entity has a right to payment for performance

completed to date, and it expects to fulfill the contract. A good or service not satisfied

over time is satisfied at a point in time. Indicators to consider in determining when

the customer obtains control of a promised asset include: (1) the customer has an

unconditional obligation to pay, (2) the customer has legal title, (3) the customer has

physical possession, (4) the customer has the risks and rewards of ownership of the

good, and (5) the customer has accepted the asset. These indicators are not a

Revenue recognition


checklist, nor are they all-inclusive. All relevant factors should be considered to

determine whether the customer has obtained control of a good.

If control is transferred continuously over time, an entity may use output methods

(e.g., units delivered) or input methods (e.g., costs incurred or passage of time) to

measure the amount of revenue to be recognized. The method that best depicts the

transfer of goods or services to the customer should be applied consistently

throughout the contract and to similar contracts with customers. The notion of an

earnings process is no longer applicable.

2.11.1.6 Contract cost guidance

The new model also includes guidance related to contract costs. Costs relating to

satisfied performance obligations and costs related to inefficiencies should be

expensed as incurred. Incremental costs of obtaining a contract (e.g., a sales

commission) should be recognized as an asset if they are expected to be recovered. An

entity can expense the cost of obtaining a contract if the amortization period would be

less than one year. Entities should evaluate whether direct costs incurred in fulfilling a

contract are in the scope of other standards (e.g., inventory, intangibles, or fixed

assets). If so, the entity should account for such costs in accordance with those

standards. If not, the entity should capitalize those costs only if the costs relate

directly to a contract, relate to future performance, and are expected to be recovered

under a contract. An example of such costs may be certain mobilization, design, or

testing costs. These costs would then be amortized as control of the goods or services

to which the asset relates is transferred to the customer. The amortization period may

extend beyond the length of the contract when the economic benefit will be received

over a longer period. An example might include set-up costs related to contracts likely

to be renewed.

2.11.1.7 Summary observations and anticipated timing

The above commentary is not all-inclusive. The effect of the new revenue recognition

guidance will be extensive, and all industries may be affected. Some will see pervasive

changes as the new model will replace all existing US GAAP and IFRS revenue

recognition guidance, including industry-specific guidance with limited exceptions

(for example, certain guidance on rate-regulated activities in US GAAP).

The US GAAP standard was originally going to be effective (1) for public entities, for

annual reporting periods, and interim periods therein, beginning after December 15,

2016 and (2) for non-public entities, for annual reporting periods beginning after

December 15, 2017, and for interim periods within annual periods beginning after

December 15, 2018. Under IFRS, the final standard was originally going to be effective

for the first interim period within annual reporting periods beginning on or after

January 1, 2017. In spring 2015, both boards issued exposure drafts deferring the

proposed effective dates by a year. The IASB has retained the option for entities to

early adopt the standard, and the FASB’s proposal will permit entities to adopt the

standard as of the original effective date.

Revenue recognition


The IASB and FASB discussed several implementation issues related to the new

revenue standard at joint board meetings in 2015. The boards were aligned on the

need to address stakeholder feedback on licenses, performance obligations, and

certain practical expedients upon transition, but did not agree on the approach. The

IASB is expected to recommend more limited clarifications while the FASB changes

are expected to be more extensive. The FASB has also decided to propose changes in

other areas—for example, guidance on collectibility and noncash consideration, and

new practical expedients for shipping and handling services and presentation of sales

taxes collected from customers. The joint discussions are expected to continue in the

coming months.

Entities should continue to evaluate how the model might affect current business

activities, including contract negotiations, key metrics (including debt covenants and

compensation arrangements), budgeting, controls and processes, information

technology requirements, and accounting. The new standard will permit an entity to

either apply it (i) retrospectively to all existing contracts, using any combination of

several optional practical expedients, or (ii) through use of a modified retrospective

transition method (whereby the cumulative effect of initially applying the guidance is

recognized as an adjustment to the opening balance of retained earnings (or other

component of equity, as appropriate) in the period of initial application). This

modified retrospective approach must be supplemented by additional disclosures.

For further details on the new revenue standard, refer to PwC’s accounting and

financial reporting guide for Revenue from contracts with customers — 2014 global

edition. For current developments of the new revenue standard, refer to PwC’s In

transition publications, available on CFOdirect.com.

PwC 1-1

Chapter 3:Expense recognition─ share-based payments

Expense recognition─share-based payments


3.1 Expense recognition—share-based payments

Although the US GAAP and IFRS guidance in this area is similar at a macro

conceptual level, many significant differences exist at the detailed application level.

The broader scope of share-based payments guidance under IFRS leads to differences

associated with awards made to nonemployees, impacting both the measurement date

and total value of expense to be recognized.

Differences within the two frameworks may result in differing grant dates and/or

different classifications of an award as a component of equity or as a liability. Once an

award is classified as a liability, it needs to be remeasured to fair value at each period

through earnings, which introduces earnings volatility while also impacting balance

sheet metrics and ratios. Certain types of awards (e.g., puttable awards and awards

with vesting conditions outside of service, performance, or market conditions) are

likely to have different equity-versus-liability classification conclusions under the two

frameworks.

In addition, companies that issue awards with graded vesting (e.g., awards that vest

ratably over time, such as 25 percent per year over a four-year period) may encounter

accelerated expense recognition and potentially a different total value to be expensed

(for a given award) under IFRS. The impact in this area could lead some companies to

consider redesigning the structure of their share-based payment plans. By changing

the vesting pattern to cliff vesting (from graded vesting), companies can avoid a front-

loading of share-based compensation expense, which may be desirable to some

organizations.

The deferred income tax accounting requirements for share-based payments under

IFRS vary significantly from US GAAP. Companies can expect to experience greater

variability in their effective tax rate over the lifetime of share-based payment awards

under IFRS. This variability will be linked with the issuing company’s stock price. For

example, as a company’s stock price increases, a greater income statement tax benefit

will occur, to a point, under IFRS. Once a benefit has been recorded, subsequent

decreases to a company’s stock price may increase income tax expense within certain

limits.

BE GAAP is substantially different from IFRS and USGAAP and only provides limited

guidance for equity settled share-based payment transactions that result in the

delivery of existing shares to the employees.


US GA A P

ASC 480, ASC 505-50, ASC 718, SAB Topic 14

IFRS

IFRS 2



B E GA A P

CBN/CNC 2012/3

Note



this area.

3.2 Scope

Under IFRS, companies apply a single standard to all share-based payment

arrangements, regardless of whether the counterparty is a nonemployee. Under US

GAAP, there is a separate standard for non-employee awards.

Some awards categorized as nonemployee instruments under US GAAP will be treated

as employee awards under IFRS. The measurement date and expense will be different

for awards that are categorized as nonemployee instruments under US GAAP but

employee awards under IFRS. BE GAAP is substantially different from US GAAP and

IFRS and the guidance is limited to certain transactions.

US GAAP IFRS BE GAAP

ASC 718, C om pen sation —S tock C om pen sation ,applies to awards grantedto employees and throughEmployee StockOwnership Plans. ASC505-50 applies to grantsto nonemployees.

The guidance focuses onthe legal definition of anemployee with certainspecific exceptions.

IFRS 2, Sh are-basedpaym en ts, includesaccounting for allemployee andnonemployeearrangements.Furthermore, underIFRS, the definition of anemployee is broader thanthe US GAAP definition.

IFRS focuses on thenature of the servicesprovided and treatsawards to employees andothers providingemployee-type servicessimilarly. Awards forgoods from vendors ornonemployee-typeservices are treateddifferently.

BE GAAP is substantiallydifferent from IFRS andUS GAAP.

The CBN/CNC advice2012/3 applies to theequity settled share-basedpayment transactionsresulting in a delivery ofexisting shares to theemployees except in caseswhere hedging strategiesare applied. Other typesof share-based paymenttransactions are notspecifically addressed.

A cost should berecognized at grant dateand subsequently (via theprovisions account) basedon one of the twoaccounting methods:

Recognition of an expenseon a pro-rata basis inorder to build up aprovision correspondingto the difference between




the exercise price and theestimated fair value at theexercise date.

Recognition of an expenseat each period-end for thedifference between theexercise price and the fairvalue at that period-end.

S ource: C B N / C N C2 0 1 2 / 3

3.3 Measurement of awards granted toemployees by nonpublic companies

IFRS does not permit alternatives in choosing a measurement method.


Equity-classified

The guidance allowsnonpublic companies tomeasure stock-basedcompensation awards byusing the fair valuemethod (preferred) or thecalculated-value method.

IFRS does not includesuch alternatives fornonpublic companies andrequires the use of thefair-value method in allcircumstances.

BE GAAP does not makea distinction betweenquoted and non-quotedshares. For non-quotedshares, the estimated fairvalue is used.

S ource: C B N / C N C2 0 1 2 / 3

Liability-classified

The guidance allowsnonpublic companies tomake an accountingpolicy decision on how tomeasure stock-basedcompensation awardsthat are classified asliabilities. Suchcompanies may use thefair value method,calculated-value method,or intrinsic-value method.



3.4 Measurement of awards granted tononemployees

Both the measurement date and the measurement methodology may vary for awards

granted to nonemployees.


ASC 505-50 states thatthe fair value of an equityinstrument issued to anonemployee should bemeasured as of the date atwhich either (1) acommitment forperformance by thecounterparty has beenreached, or (2) thecounterparty’sperformance is complete.

Nonemployeetransactions should bemeasured based on thefair value of theconsideration received orthe fair value of the equityinstruments issued,whichever is more reliablymeasurable.

Transactions with partiesother than employees (orthose providingemployee-type services)should be measured at thedate(s) on which thegoods are received or thedate(s) on which theservices are rendered. Theguidance does not includea performancecommitment concept.

Nonemployeetransactions are generallymeasured at the fair valueof the goods or servicesreceived, since it ispresumed that it will bepossible to reliablymeasure the fair value ofthe considerationreceived. If an entity isnot able to reliablymeasure the fair value ofthe goods or servicesreceived (i.e., if thepresumption isovercome), the fair valueof the award should bemeasured indirectly byreference to the fair valueof the equity instrumentgranted as consideration.

When the presumption isnot overcome, an entity isalso required to accountfor any unidentifiablegoods or services receivedor to be received. Thiswould be the case if thefair value of the equityinstruments grantedexceeds the fair value ofthe identifiable goods or

Not addressed.




services received and tobe received.

3.5 Classification of certain instruments asliabilities or equity

Although ASC 718 and IFRS 2 contain a similar principle for classification of stock-

based compensation awards, certain awards will be classified differently under the

two standards. In some instances, awards will be classified as equity under US GAAP

and a liability under IFRS, while in other instances awards will be classified as a

liability under US GAAP and equity under IFRS.


ASC 718 containsguidance on determiningwhether to classify anaward as equity or aliability. ASC 718 alsoreferences the guidance inASC 480, D istin guish in gL iabilitiesfrom Equity,when assessingclassification of an award.

In certain situations,puttable shares may beclassified as equityawards, as long as therecipient bears the risksand rewards normallyassociated with equityshare ownership for areasonable period of time(defined as 6 months).

Liability classification isrequired when an awardis based on a fixedmonetary amount settledin a variable number ofshares.

IFRS 2 follows a similarprinciple ofequity/liabilityclassification as ASC 718.However, while IAS 32has similar guidance toASC 480, arrangementssubject to IFRS 2 are outof the scope of IAS 32.Therefore, equity/liabilityclassification for share-based awards isdetermined wholly onwhether the awards areultimately settled inequity or cash,respectively.

Puttable shares arealways classified asliabilities, even if the putcannot be exercised for anextended period of time.

Share-settled awards areclassified as equityawards even if there isvariability in the numberof shares due to a fixedmonetary value to beachieved.

Not addressed.



3.6 Awards with conditions other than service,performance, or market conditions

Certain awards classified as liabilities under US GAAP may be classified as equity

under IFRS.


If an award containsconditions other thanservice, performance, ormarket conditions(referred to as “other”conditions), it is classifiedas a liability award.

If an award of equityinstruments containsconditions other thanservice or performance(which can includemarket) vestingconditions, it can still beclassified as an equity-settled award. Suchconditions may benonvesting conditions.Nonvesting conditions aretaken into account whendetermining the grantdate fair value of theaward.

BE GAAP does not havethe same level of detailedguidance for various typesof share-based paymenttransactions with complexvesting and non-vestingconditions.

3.7 Awards with a performance target met afterthe requisite service period is completed

Under IFRS, this is a non-vesting condition that is reflected in the measurement of the

grant date fair value.


A performance target thatmay be met after therequisite service period iscomplete is aperformance vestingcondition, and costshould be recognized onlyif the performancecondition is probable ofbeing achieved.

A performance target thatmay be met after therequisite service period isa non-vesting conditionand is reflected in themeasurement of the grantdate fair value of anaward.




3.8 Service-inception date, grant date, andrequisite service

Because of the differences in the definitions, there may be differences in the grant date

and the period over which compensation cost is recognized.


The guidance providesspecific definitions ofservice-inception date,grant date, and requisiteservice, which, whenapplied, will determinethe beginning and end ofthe period over whichcompensation cost will berecognized. Additionally,the grant date definitionincludes a requirementthat the employee beginsto be affected by the risksand rewards of equityownership at that date.

IFRS does not include thesame detailed definitions.The difference in thegrant date definition isthat IFRS does not havethe requirement that theemployee begins to beaffected by the risks andrewards of equityownership.

BE GAAP does not havethe same level of detailedguidance.

3.9 Attribution—awards with service conditionsand graded-vesting features

The alternatives included under US GAAP provide for differences in both the

measurement and attribution of compensation costs when compared with the

requirements under IFRS for awards with graded vesting (i.e., tranches).


Companies are permittedto make an accountingpolicy election regardingthe attribution method forawards with service-onlyconditions and graded-vesting features. Thechoice in attributionmethod (straight-line oraccelerated tranche bytranche) is not linked tothe valuation method thatthe company uses. Forawards with gradedvesting and performanceor market conditions, theaccelerated graded-

Companies are notpermitted to choose howthe valuation orattribution method isapplied to awards withgraded-vesting features.Companies should treateach installment of theaward as a separate grant.This means that eachinstallment would beseparately measured andattributed to expense overthe related vesting period.





vesting attributionapproach is required.

3.10 Certain aspects of modification accounting

Differences between the two standards for improbable to probable modifications may

result in differences in the compensation costs that are recognized.


An improbable toprobable “Type III”modification can result inrecognition ofcompensation cost that ismore or less than the fairvalue of the award on theoriginal grant date. Whena modification makes itprobable that a vestingcondition will beachieved, and thecompany does not expectthe original vestingconditions to be achieved,a new measurement dateis established. The grant-date fair value of theaward would not be afloor for the amount ofcompensation costrecognized.

Under IFRS, if the vestingconditions of an awardare modified in a mannerthat is beneficial to theemployee, this would beaccounted for as a changein only the number ofawards that are expectedto vest (from zero to anew amount), and theaward’s full originalgrant-date fair valuewould be recognized forthe awards over theremainder of the serviceperiod. That result is thesame as if the modifiedvesting condition hadbeen in effect on the grantdate.


3.11 Cash-settled awards with a performancecondition

For a cash-settled award where the performance condition is not probable, liability

and expense recognition may occur earlier under IFRS.


For cash-settled awardswith a performancecondition, where theperformance condition isnot probable, there maybe no liability recognizedunder US GAAP.

For cash settled awards,even where theperformance condition isnot probable (i.e., greaterthan zero but less than 50percent probability), aliability may berecognized under IFRS





based on the fair value ofthe instrument(considering thelikelihood of earning theaward).

3.12 Derived service period

For an award containing a market condition that is fully vested and deep out of the

money at grant date, expense recognition may occur earlier under IFRS.


US GAAP contains theconcept of a derived serviceperiod. Where an award isfully vested and deep out ofthe money at the grant datebut allows employees only alimited amount of time toexercise their awards in theevent of termination, USGAAP presumes thatemployees must providesome period of service toearn value from the award.Because there is no explicitservice period stated in theaward, a derived serviceperiod must be determinedby reference to a valuationtechnique. The expense forthe award would berecognized over the derivedservice period and reversedif the employee does notcomplete the requisiteservice period.

IFRS does not define aderived service period forfully vested, deep-out-of-the-money awards.Therefore, the relatedexpense for such an awardwould be recognized in fullat the grant date becausethe award is fully vested atthat date.

BE GAAP does nothave the same level ofdetailed guidance forvarious types of share-based paymenttransactions withcomplex vesting andnon-vestingconditions.



3.13 Tax withholding arrangements—impact toclassification

There could be a difference in award classification as a result of tax withholding

arrangements.


An award containing a netsettled tax withholdingclause could be equity-classified so long as thearrangement limits taxwithholding to thecompany’s minimumstatutory rate. If taxwithholding is permittedat some higher rate, thenthe whole award would beclassified as a liability.

IFRS does not contain asimilar exception. Whenan employee can netsettle a tax withholdingliability in cash, the awardis bifurcated between acash-settled portion andan equity-settled portion.The portion of the awardrelating to the estimatedtax payment is treated asa cash-settled award andmarked to market eachperiod until settlement ofthe actual tax liability.The remaining portion istreated as an equitysettled award.

Not addressed.

3.14 Accounting for income tax effects

Companies reporting under IFRS generally will have greater volatility in their

deferred tax accounts over the life of the awards due to the related adjustments for

stock price movements in each reporting period.

Companies reporting under US GAAP could have greater volatility upon exercise

arising from the variation between the estimated deferred taxes recognized and the

actual tax deductions realized.

There are also differences in the presentation of the cash flows associated with an

award’s tax benefits.


The US GAAP model foraccounting for incometaxes requires companiesto record deferred taxesas compensation cost isrecognized, as long as atax deduction is allowedfor that particular type ofinstrument. The

The measurement of thedeferred tax asset in eachperiod is based on anestimate of the future taxdeduction, if any, for theaward measured at theend of each reportingperiod (based on thecurrent stock price if the

Not addressed.




measurement of thedeferred tax asset is basedon the amount ofcompensation costrecognized for bookpurposes. Changes in thestock price do not impactthe deferred tax asset orresult in any adjustmentsprior to settlement orexpiration. Although theydo not impact deferredtax assets, future changesin the stock price willnonetheless affect theactual future taxdeduction (if any).

Excess tax benefits(“windfalls”) uponsettlement of an awardare recorded in equity.“Shortfalls” are recordedas a reduction of equity tothe extent the companyhas accumulatedwindfalls in its pool ofwindfall tax benefits. Ifthe company does nothave accumulatedwindfalls, shortfalls arerecorded to income taxexpense.

In addition, the excess taxbenefits upon settlementof an award would bereported as cash inflowsfrom financing activities.

tax deduction is based onthe future stock price).

When the expected taxbenefits from equityawards exceed therecorded cumulativerecognized expensemultiplied by the tax rate,the tax benefit up to theamount of the tax effect ofthe cumulative bookcompensation expense isrecorded in the incomestatement; the excess isrecorded in equity.

When the expected taxbenefit is less than the taxeffect of the cumulativeamount of recognizedexpense, the entire taxbenefit is recorded in theincome statement. IFRS 2does not include theconcept of a pool ofwindfall tax benefits tooffset shortfalls.

In addition, all taxbenefits or shortfalls uponsettlement of an awardgenerally are reported asoperating cash flows.



3.15 Recognition of social charges (e.g., payrolltaxes)

The timing of recognition of social charges generally will be earlier under IFRS than

US GAAP.


A liability for employeepayroll taxes on employeestock-basedcompensation should berecognized on the date ofthe event triggering themeasurement andpayment of the tax(generally the exercisedate for a nonqualifiedoption or the vesting datefor a restricted stockaward).

Social charges, such aspayroll taxes levied on theemployer in connectionwith stock-basedcompensation plans, areexpensed in the incomestatement when therelated share-basedcompensation expense isrecognized. The guidancein IFRS for cash-settledshare-based paymentswould be followed inrecognizing an expensefor such charges.

Not addressed.

3.16 Valuation—SAB Topic 14 guidance onexpected volatility and expected term

Companies that report under US GAAP may place greater reliance on implied short-

term volatility to estimate volatility. Companies that report under IFRS do not have

the option of using the “simplified method” of calculating expected term provided by

SAB Topic 14. As a result, there could be differences in estimated fair values.


SAB Topic 14 includesguidance on expectedvolatility and expectedterm, which includes (1)guidelines for reliance onimplied volatility and (2)the “simplified method” forcalculating the expectedterm for qualifying awards.

IFRS does not includecomparable guidance.

Not addressed.



3.17 Employee stock purchase plans (ESPP)

ESPPs generally will be deemed compensatory more often under IFRS than under US

GAAP.


ESPPs are compensatoryif terms of the plan:

□ Either (1) are morefavorable than thoseavailable to allshareholders, or (2)include a discountfrom the market pricethat exceeds thepercentage of stockissuance costsavoided (discount of 5percent or less is asafe harbor);

□ Do not allow alleligible employees toparticipate on anequitable basis; or

□ Include any optionfeatures (e.g., look-backs).

ESPPs are alwayscompensatory and treatedlike any other equity-settled share-basedpayment arrangement.IFRS does not allow anysafe-harbor discount forESPPs.

Not addressed.

In practice, most ESPPsare compensatory;however, plans that donot meet any of the abovecriteria are non-compensatory.

3.18 Group share-based payment transactions

Under US GAAP, push-down accounting of the expense recognized at the parent level

generally would apply. Under IFRS, the reporting entity’s obligation will determine

the appropriate accounting.


Generally, push-downaccounting of the expenserecognized at the parentlevel would apply to theseparate financialstatements of thesubsidiary.

For the separate financialstatements of thesubsidiary, equity orliability classification isdetermined based on thenature of the obligationeach entity has in settlingthe awards, even if the

Not addressed.




For liability-classifiedawards settled by theparent company, themark to market expenseimpact of these awardsshould be pushed down tothe subsidiary’s bookseach period, generally as acapital contribution fromthe parent. However,liability accounting at thesubsidiary may beappropriate, dependingon the facts andcircumstances.

award is settled in parentequity.

The accounting for agroup cash-settled share-based paymenttransaction in theseparate financialstatements of the entityreceiving the relatedgoods or services whenthat entity has noobligation to settle thetransaction would be asan equity-settled share-based payment. Thegroup entity settling thetransaction wouldaccount for the share-based payment as cash-settled.

The accounting for agroup equity-settledshare-based paymenttransaction is dependenton which entity has theobligation to settle theaward.

For the entity that settlesthe obligation, arequirement to deliveranything other than itsown equity instruments(equity instruments of asubsidiary would be “ownequity” but equityinstruments of a parentwould not) would resultin cash-settled (liability)treatment. Therefore, asubsidiary that isobligated to issue itsparent’s equity wouldtreat the arrangement as aliability, even though inthe consolidated financialstatements thearrangement would beaccounted for as anequity-settled share-based payment.Conversely, if the parentis obligated to issue theshares directly to




employees of thesubsidiary, then thearrangement should beaccounted for as equity-settled in both theconsolidated financialstatements and theseparate standalonefinancial statements ofthe subsidiary.

Hence, measurementcould vary between thetwo sets of accounts.


3.19.1 IASB exposure draft and research project

The IASB issued an exposure draft in November 2014 on issues discussed with the

Interpretations Committee. The proposal addresses the following issues:

□ Measurement of cash-settled share-based payment transactions that include a

performance condition

□ Classification of share-based payments settled net of tax withholdings

□ Modifications of share-based payment transaction from cash-settled to equity-

settled

The IASB also has a research project on its agenda exploring the most common areas

of complexity in the application of IFRS 2 and their causes.

3.19.1.1 Measurement of cash-settled share-based payment transactions that

include a performance condition

The IASB proposed clarifying the measurement model for cash-settled awards that

include a performance condition to indicate that the measurement model should be

consistent with the measurement of an equity-settled award (i.e., the value should

only be recognized if the achievement of a non-market performance condition is

considered probable).

If the proposed amendment is adopted, we believe US GAAP and IFRS accounting will

be consistent for these awards.



3.19.1.2 Classification of share-based payments settled net of tax withholdings

The IASB proposed amending IFRS 2 to add guidance that specifies that in a share-

based payment transaction where the entity settles the share-based payment

arrangement by withholding a specified portion of the equity instruments to meet its

minimum statutory tax withholding requirements, the award would be classified as

equity-settled in its entirety, if the entire award would otherwise be classified as

equity-settled without the net settlement feature.

If adopted, the proposed amendment would eliminate the difference between current

US GAAP and IFRS for withholding up to the statutory minimum. However, there

would still be a difference if the minimum is exceeded. Additionally, the FASB has also

proposed amending its guidance, which would create a further difference. Refer to

4.19.2.2 below on the FASB’s exposure draft.

3.19.1.3 Modifications of a share-based payment transaction from cash-settled to

equity-settled

The IASB proposed amending IFRS 2 to address a modification of a share-based

payment transaction that changes its classification from cash-settled to equity-settled,

as follows:

□ The new equity-settled award should be measured by reference to the

modification-date fair value of the equity-settled award, because the modification-

date should be viewed as the grant date of the new award;

□ The liability recorded for the original cash-settled award should be derecognized

upon the modification and the equity-settled replacement award should be

recognized to the extent that service has been rendered up to the modification

date; and

□ The difference between the carrying amount of the liability and the amount

recognized in equity as of the modification date should be recorded in profit or

loss immediately in order to show that the liability has been remeasured to its fair

value at the settlement date.


be consistent for these types of modifications.

3.19.2 FASB exposure draft and research projects

The FASB issued an exposure draft in June 2015 intended to simplify the accounting

for share-based payment awards issued to employees. The proposal addressed the

following issues:

□ Income tax effects of share-based payments.

□ Minimum statutory tax withholding requirements.

□ Accounting for forfeitures.



□ Classification of share-based payment awards with repurchase features.

□ Specific proposals for nonpublic companies.

The FASB also added two research projects to its agenda:

□ Nonemployee share-based payment accounting, and

□ Measuring nonpublic company awards at intrinsic value.

3.19.2.1 Income tax effects of share-based payments

The FASB proposed changing the accounting for the income tax effects of share-based

payment awards to record all tax effects through the income statement, as opposed to

recording certain amounts in Additional Paid-in Capital (APIC). This proposal would

eliminate the complications of tracking a “windfall pool” to determine the amounts to

record in APIC. However, it would also increase the volatility of income tax expense.

The FASB also proposed presenting all tax effects as an operating activity in the

statement of cash flows, as opposed to presenting gross windfall tax benefits as a

financing activity.

If the proposed amendments are adopted, US GAAP and IFRS will continue to differ,

both in periods prior to settlement as well as in the treatment of windfall tax benefits.

3.19.2.2 Minimum statutory tax withholding requirements

The FASB proposed revising the current guidance that allows an entity to withhold

shares upon vesting or exercise of an award to satisfy its cash tax withholding

requirement and remit the cash to the taxing authority on the employee’s behalf,

without resulting in liability classification of the award. Currently, the amount that

can be withheld is strictly limited to the employer’s minimum statutory tax

withholding requirement, which creates administrative challenges for many

companies. The FASB’s proposal would allow entities to withhold an amount up to the

highest marginal tax rate applicable to employees in the relevant jurisdiction, without

causing liability classification of the award. The FASB also proposed clarifying that

when withholding shares for tax withholding purposes, the cash paid to the taxing

authority would be classified as a financing activity.

If the proposed amendments are adopted, US GAAP and IFRS will continue to

diverge. However, the IASB has proposed amending its guidance to align it with

current US GAAP. Refer to 4.19.1.2 above on the IASB’s exposure draft.

3.19.2.3 Accounting for forfeitures

The FASB proposal would provide companies with an option to make an entity-wide

accounting policy election to account for award forfeitures as they occur instead of

estimating expected forfeitures as compensation cost is recognized.

If the proposed amendment is adopted, companies that elect to account for forfeitures

as they occur will diverge from IFRS.



3.19.2.4 Classification of share-based payment awards with repurchase features

The FASB proposal would align the classification guidance for put and call rights that

are contingent upon a future event that is within the employee’s control. Such features

would only be incorporated in the analysis of liability classification when the event is

considered probable of occurring before the employee bears the risks and rewards of

stock ownership for a reasonable period of time.

If the proposed amendment is adopted, US GAAP and IFRS will continue to diverge.

3.19.2.5 Specific proposals for nonpublic companies

The FASB proposal includes two proposals for nonpublic companies:

□ A one-time election to change the measurement of liability-classified awards from

fair value to intrinsic value, and

□ A practical expedient for estimating the expected term of an award, allowing a

short-cut method to be used, based on whether the award has either service or

performance conditions.

If the proposed amendments are adopted, US GAAP and IFRS will continue to

diverge.

3.19.2.6 FASB research projects

N on em ployee sh are-based paym en taccoun tin g

The FASB added a separate research project to its agenda to further research potential

improvements to the accounting for nonemployee share-based payment awards,

which will include the scope of the nonemployee award guidance and the accounting

for awards with unresolved performance conditions.

M easurin gn on public com pan y aw ardsatin trin sic value

The FASB added a separate research project to evaluate an alternative that would

permit a nonpublic company to classify all share-based-payment awards as liabilities

and to measure those awards at their intrinsic value.

Chapter 4:Expense recognition—employee benefits

Expense recognition—employee benefits


4.1 Expense recognition—employee benefits

There are a number of significant differences between US GAAP, IFRS and BE GAAP

in the area of accounting for pension and other postretirement and postemployment

benefits. Some differences will result in less earnings volatility, while others will result

in greater earnings volatility. The net effect depends on the individual facts and

circumstances for a given employer. Further differences could have a significant

impact on presentation, operating metrics, and key ratios.

While there are few differences with respect to the measurement of defined benefit

plans between US GAAP and IFRS, there are key differences with regards to cost

recognition and presentation. Under IFRS, the effects of remeasurements (which

include actuarial gains/losses) are recognized immediately in other comprehensive

income (OCI) and are not subsequently recycled through the income statement.

Under US GAAP, these gains/losses are recognized in the income statement either

immediately or in the future.

Under IFRS, all prior service costs (positive or negative) are recognized in profit or

loss when the employee benefit plan is amended and are not allowed to be spread over

any future service period, which may create volatility in profit or loss. This is different

from US GAAP, under which prior service cost is recognized in OCI at the date the

plan amendment is adopted and then amortized into income over the participants’

remaining years of service, service to full eligibility date, or life expectancy, depending

on the facts and circumstances.

In addition, US GAAP requires an independent calculation of interest cost (based on

the application of a discount rate to the projected benefit obligation) and expected

return on assets (based on the application of an expected rate of return on assets to

the calculated asset value), while IFRS applies the discount rate to the net benefit

obligation to calculate a single net interest cost or income.

Under IFRS, there is no requirement to present the various components of pension

cost as a net amount. As such, companies have flexibility to present components of net

benefit cost within different line items on the income statement. Components

recognized in determining net income (i.e., service and finance costs, but not actuarial

gains and losses) may be presented as (1) a single net amount (similar to US GAAP) or

(2) those components may be separately displayed.

Differences between US GAAP and IFRS also can result in different classifications of a

plan as a defined benefit or a defined contribution plan. It is possible that a benefit

arrangement that is classified as a defined benefit plan under US GAAP may be

classified as a defined contribution plan under IFRS and vice versa. Classification

differences would result in changes to the expense recognition model as well as to the

balance sheet presentation.

Note that the FASB and the IASB use the term postemployment differently. The IASB

uses the term postemployment to include pension, postretirement, and other

postemployment benefits, whereas the FASB uses the term postretirement benefits

(OPEB) to include postretirement benefits other than pensions (such as retiree



medical) and the term postemployment benefits to include benefits before retirement

(such as disability or termination benefits).

For simplicity, discussion of benefit cost in the remainder of this chapter refers to

recognition in income. However, a portion of the benefit cost may be capitalized into

inventory, fixed assets, or other balance sheet accounts when associated with

employees whose compensation costs are capitalized.


US GA A P

ASC 420, ASC 710, ASC 712, ASC 715, ASC 820

IFRS

IAS 19, IAS 37, IFRS 13, IFRIC 14

B E GA A P

CBN/CNC 107-3, CBN/CNC 107-3bis

Note



this area.

4.2 Expense recognition—gains/losses

Under IFRS, remeasurement effects are recognized immediately in other

comprehensive income and are not subsequently recorded within profit or loss, while

US GAAP permits two options for recognition of gains and losses, with ultimate

recognition in profit or loss.

Note: Gains and losses as referenced under US GAAP include (1) the differences

between actual and expected return on assets and (2) changes in the measurement of

the benefit obligation. Remeasurements under IFRS, as referenced, include

(1) actuarial gains and losses, (2) the difference between actual return on assets and

the amount included in the calculation of net interest cost, and (3) changes in the

effect of the asset ceiling.


The guidance permitscompanies to either (1)record expense forgains/losses in the periodincurred within thestatement of operations or(2) defer gains/losses

Remeasurements arerecognized immediately inOCI. There is no option torecognize gains/losses inprofit or loss. In addition,the “corridor andspreading” option—which

For defined benefitpension plans, thegenerally accepted practicein Belgium is that noprovision is recorded sincepremiums are paidregularly to the insurance




through the use of thecorridor approach (or anysystematic method thatresults in fasterrecognition than thecorridor approach).

allows delayed recognitionof gains and losses—isprohibited.

company or the pensionfund and charged toincome in the periodconcerned. In the absenceof clear guidelines, mostBelgian companies do notevaluate whether thepremiums paid and thereturn on plan assets aresufficient to cover theiraccrued pensioncommitments, exceptwhen the company isrequired by law to makeadditional contributions tocover the deficit of theplan. In such situation, theemployer is required torecognize a provision forsuch additionalcontributions as soon asthe insurer or pensionfund has established adeficit and informed theemployer about itsobligation to provideadditional funds.

The IFRS accountingtreatment can also beapplied under BelgianGAAP for the followingreasons:

the accounting treatmentprescribed by IFRS gives agood matching of costsand revenue in respect ofservices rendered by theemployees;

the employer isresponsible for anyunderfunding of the planat the time an employeeleaves the company, andretains ultimateresponsibility if theinsurance company or thepension fund has nosufficient plan assets tosatisfy the company’scommitments.




There is therefore noconflict, but a majordifference arises inpractice: Belgiancompanies willing tocomply with IFRS have toperform the necessaryactuarial valuations inorder to assess thepossible underfunding oroverfunding of the planand, based on the resultsof this computation,record a deferral or aprovision for pensioncosts.

Whether gains/losses arerecognized immediately oramortized in a systematicfashion, they areultimately recorded withinthe statement ofoperations as componentsof net periodic benefitcost.

Once recognized in OCI,gains/losses are notsubsequently recordedwithin profit or loss. Thestandard no longerrequires that the amountsrecognized in OCI beimmediately taken toretained earnings; theycan also remain in aspecific reserve or ‘other’reserves within equity.

N/A

4.3 Expense recognition—prior service costs andcredits

IFRS requires immediate recognition in income for the effects of plan amendments

that create an increase (or decrease) to the benefit obligation (i.e., prior service cost).

IFRS requirements are significantly different from US GAAP, which requires prior

service costs, including costs related to vested benefits, to be initially recognized in

OCI and then amortized through net income over future periods.




Prior service cost (whetherfor vested or unvestedbenefits) should berecognized in othercomprehensive income atthe date of the adoption ofthe plan amendment andthen amortized intoincome over one of thefollowing:

□ The participants’remaining years ofservice (for pensionplans, except where allor almost all planparticipants areinactive)

□ The participants’remaining years ofservice to fulleligibility date (forother postretirementbenefit plans, exceptwhere all or almost allplan participants areinactive)

□ The participants’ lifeexpectancy (for plansthat have all or almostall inactiveparticipants)

Negative prior service costshould be recognized as aprior service credit inother comprehensiveincome and used first toreduce any remainingpositive prior service costincluded in accumulatedother comprehensiveincome. Any remainingprior service creditsshould then be amortizedover the same periods asdescribed above.

Recognition of all pastservice costs is required atthe earlier of when a planamendment occurs orwhen the entity recognizesrelated restructuring costs(in the event of acurtailment). Unvestedpast service cost may notbe spread over a futureservice period.Curtailments that reducebenefits are no longerdisclosed separately, butare considered as part ofthe past service costs.

Expenses are recognized inthe period when incurredand when the relatedrevenues are recognized(general matchingprinciple). Accounting forspecific features of definedbenefit plans (such asamendments) is notaddressed specifically inBE GAAP (see above).



4.4 Expense recognition—expected return onplan assets

Under IFRS, companies calculate a net interest cost (income) by applying the discount

rate to the defined benefit liability (asset). US GAAP uses an expected rate of return

on plan assets and permits companies to use a calculated value of plan assets

(reflecting changes in fair value over a period of up to five years) in determining the

expected return on plan assets and in accounting for gains and losses.


Expected return is basedon an expected rate ofreturn on assets.

Plan assets should bemeasured at fair value forbalance sheet recognitionand for disclosurepurposes. However, forpurposes of determiningthe expected return onplan assets and the relatedaccounting for gains andlosses, plan assets can bemeasured by using eitherfair value or a calculatedvalue that recognizeschanges in fair value over aperiod of not more thanfive years.

Net interest cost or incomeis calculated by applyingthe discount rate (asdescribed below) to thedefined benefit liability orasset of the plan. Thedefined benefit asset orliability is the surplus ordeficit (i.e., the net amountof the defined benefitobligation less plan assets)which is recognized on thebalance sheet afterconsidering the assetceiling test.

Plan assets should alwaysbe measured at fair value.

Not addressed.

4.5 Income statement classification

Under IFRS, companies have the option to present different components of netbenefit cost within different line items on the income statement.

This could result in companies recording interest cost within financing.


All components of netbenefit cost must beaggregated and presentedas a net amount in theincome statement.

Although it is appropriateto allocate a portion of netbenefit cost to different lineitems (such as cost of goodssold or general andadministrative expenses,

Employers have flexibilityto either(1) present all componentsrecognized in determiningnet income (i.e., serviceand net interest cost butnot gains and losses) as asingle net amount (similarto US GAAP) or (2)present those componentsseparately within the

Not addressed.




based on which line itemsother employee costs areincluded), disaggregatingthe components of netbenefit cost is notpermitted.

income statement.

4.6 Measurement frequency

IFRS requires interim remeasurements in more circumstances than US GAAP.


The measurement of planassets and benefitobligations is required asof the employer’s fiscalyear-end balance sheetdate, unless the plan issponsored by aconsolidated subsidiary orequity method investeewith a different fiscalperiod. Interimremeasurements generallyoccur only if there is asignificant event, such as aplan amendment,curtailment, or settlement.

Employers typicallyremeasure the benefitobligation and plan assetsat each interim period todetermine the balancesheet and OCI component,but that will not lead to achange in service cost orinterest cost (unless therewas a plan amendment,curtailment, orsettlement).

Not addressed.

4.7 Substantive commitment to provide pensionor other postretirement benefits

Differences in the manner in which a substantive commitment to increase future

pension or other postretirement benefits is determined may result in an increased

benefit obligation under IFRS.


The determination ofwhether a substantivecommitment exists toprovide pension benefitsbeyond the written termsof a given plan’s formularequires carefulconsideration. Althoughactions taken by anemployer can demonstrate

In certain circumstances, ahistory of regular increasesmay indicate a presentcommitment to makefuture plan amendments.In such cases, aconstructive obligation (toincrease benefits) is thebasis for determining theobligation.

Not addressed.




the existence of asubstantive commitment,a history of retroactiveplan amendments is notsufficient on its own.However, inpostretirement benefitplans other than pensions,the substantive planshould be the basis fordetermining theobligation. This mayconsider an employer’spast practice orcommunication ofintended changes, forexample in the area ofsetting caps on cost-sharing levels.

4.8 Defined benefit versus defined contributionplan classification

Certain plans currently accounted for as defined benefit plans under US GAAP may be

accounted for as defined contribution plans under IFRS and vice versa. Classification

differences would result in differences to expense recognition as well as to balance

sheet presentation.


A defined contributionplan is any arrangementthat provides benefits inreturn for servicesrendered, establishes anindividual account for eachparticipant, and is basedon contributions by theemployer or employee tothe individual’s accountand the related investmentexperience.

An arrangement qualifiesas a defined contributionplan if an employer’s legalor constructive obligationis limited to the amount itcontributes to a separateentity (generally, a fund oran insurance company).There is no requirementfor individual participantaccounts.

Belgian GAAP does nothave specific standardsfor the recognition andmeasurement of the costof pensions and otherpost-retirement benefits.Accounting law requiresentities to set upprovisions for theirobligations relating toretirement or survivor’spensions, early retirementand other similarpensions or allowances.However, entities are alsobound by law to fund theirpension obligations withan independent pensionfund or insurancecompany. Consequently,the usual practice in




Belgium is to expense asincurred the premiumcharged by the insurancecompany or pension fund,on the assumption thatthe amount of thepremium constitutes anappropriate measure ofthe economic cost of theirpension obligations forthe period concerned.

Multiemployer plans aretreated similar to definedcontribution plans. Apension plan to which twoor more unrelatedemployers contribute isgenerally considered to bea multiemployer plan. Acommon characteristic of amultiemployer plan is thatthere is commingling ofassets contributed by theparticipating employers.

Subsidiaries whoseemployees participate in aplan sponsored by a parentcompany also followmultiemployer planaccounting in theirseparate stand-alonefinancial statements.

For multiemployer plans,the accounting treatmentused is based on thesubstance of the terms ofthe plan. If the plan is adefined benefit plan insubstance, it should beaccounted for as such, andthe participating employershould record itsproportionate share of allrelevant amounts in theplan. However, definedbenefit accounting maynot be required if thecompany cannot obtainsufficient information.

Subsidiaries thatparticipate in parent-sponsored plans are notmultiemployer plans. Theaccounting by thesubsidiary will depend onthe specific facts andcircumstances.

Note that multiemployerplans are not addressed inthe Belgian GAAP.

4.9 Curtailments

A number of differences exist in relation to how curtailments are defined, how both

curtailment gains and losses are calculated, and when such gains should be recorded.

Losses are typically recorded in the same period, when the loss is probable.

When a curtailment is caused by a plan amendment (e.g., a plan freeze), the timing of

recognizing a gain or loss is the same under US GAAP or IFRS.

There are additional differences in the timing of the recognition of gains or losses

related to plan amendments, curtailments, and termination benefits that occur in

connection with a restructuring.




A curtailment is defined asan event that significantlyreduces the expected yearsof future service of presentemployees or eliminatesfor a significant number ofemployees the accrual ofdefined benefits for someor all of their futureservice.

Curtailment gains arerecognized when realized(i.e., once the terminationshave occurred or the planamendment is adopted).The guidance permitscertain offsets ofunamortized gains/lossesin a curtailment but doesnot permit pro ratarecognition of theremaining unamortizedgains/losses.

The definition of acurtailment is limited to “asignificant reduction bythe entity in the number ofemployees covered by aplan.”

Curtailment gains andlosses should be recordedwhen the curtailmentoccurs.

IFRS requires the gain orloss related to planamendments,curtailments, andtermination benefits thatoccur in connection with arestructuring to berecognized when therelated restructuring costis recognized, if that isearlier than the normalIAS 19 recognition date.

Not addressed.

4.10 Settlements

Fewer settlements may be recognized under US GAAP (because of an accounting

policy choice that is available under US GAAP but not IFRS).


A settlement gain or lossnormally is recognized inearnings when thesettlement occurs.However, an employermay elect an accountingpolicy whereby settlementgain or loss recognition isnot required if the cost ofall settlements within aplan year does not exceedthe sum of the service andinterest cost componentsof net benefit cost for thatperiod.

A settlement gain or loss isrecognized when thesettlement occurs. If thesettlements are due tolump sum elections byemployees as part of thenormal operatingprocedures of the plan,settlement accountingdoes not apply.

Not addressed.

Different definitions of partial settlements may lead to more settlements being

recognized under IFRS.




A partial settlement of anyone participant’sobligation is generally notallowed. If a portion of theobligation for vestedbenefits to planparticipants is satisfiedand the employer remainsliable for the balance ofthose participants’ vestedbenefits, the amount thatis satisfied is notconsidered settled.

A partial settlement occursif a transaction eliminatesall further legal orconstructive obligationsfor part of the benefitsprovided under a definedbenefit plan.

Not addressed.

Varying settlement calculation methodologies can result in differing amounts being

recognized in income and other comprehensive income.


Settlement accountingrequires complexcalculations unique to USGAAP to determine howmuch of the gains andlosses is recognized incurrent period earnings.

Settlement accountingrequires complexcalculations unique toIFRS to determine howmuch is recognized incurrent period earnings ascompared to othercomprehensive income.

Not addressed.

4.11 Asset ceiling

Under IFRS, there is a limitation on the value of the net pension asset that can be

recorded on the balance sheet. Territory-specific regulations may determine limits on

refunds or reductions in future contributions that may impact the asset ceiling test.


There is no limitation onthe size of the net pensionasset that can be recordedon the balance sheet.

An asset ceiling test limitsthe amount of the netpension asset that can berecognized to the lower of(1) the amount of the netpension asset or (2) thepresent value of anyeconomic benefitsavailable in the form ofrefunds or reductions infuture contributions to theplan. IFRIC 14 clarifiesthat prepayments arerequired to be recognized

Not addressed.




as assets in certaincircumstances.

The guidance also governsthe treatment anddisclosure of amounts, ifany, in excess of the assetceiling. In addition, thelimitation on the assetoften will create anadditional liability becausecontributions may berequired that would lead toor increase anirrecoverable surplus.

4.12 Measurement of defined benefit obligationwhen both employers and employeescontribute

Under IFRS guidance, the accounting for plans where an employer’s exposure may be

limited by employee contributions may differ. The benefit obligation may be smaller

under IFRS than US GAAP.


The measurement of planobligations does not reflecta reduction when theemployer’s exposure islimited or where theemployer can increasecontributions fromemployees from currentlevels to help meet adeficit.

The measurement of planobligations where risksassociated with the benefitare shared betweenemployers and employeesshould reflect thesubstance of thearrangements where theemployer’s exposure islimited or where theemployer can increasecontributions fromemployees to help meet adeficit.

IFRS allows contributionsthat are linked to service,and do not vary with thelength of employee service,to be deducted from thecost of benefits earned inthe period that the serviceis provided rather thanspreading them over theemployees’ working lives.

Not addressed.




Contributions that arelinked to service, and varyaccording to the length ofemployee service, must bespread over the serviceperiod using the sameattribution method that isapplied to the benefits;either in accordance withthe formula in the pensionplan, or, where the planprovides a materiallyhigher level of benefit forservice in later years, on astraight line basis.

4.13 Plan asset valuation

Although US GAAP and IFRS models are measured at fair value, US GAAP reduces

fair value for the cost to sell and IFRS does not.


Plan assets should bemeasured at fair value lesscost to sell. Under USGAAP, contracts withinsurance companies(other than purchases ofannuity contracts) shouldbe accounted for asinvestments and measuredat fair value. In somecases, the contract valuemay be the best availableevidence of fair valueunless the contract has adeterminable cashsurrender value orconversion value, whichwould provide betterevidence of the fair value.

Plan assets should bemeasured at fair value,which is defined as theprice that would bereceived to sell an asset orpaid to transfer a liabilityin an orderly transactionbetween marketparticipants at themeasurement date.

Not addressed.

Under IFRS, the fair valueof insurance policiesshould be estimated using,for example, a discountedcash flow model with adiscount rate that reflectsthe associated risk and theexpected maturity date or




expected disposal date ofthe assets. Qualifyinginsurance policies thatexactly match the amountand timing of some or allof the benefits payableunder the plan aremeasured at the presentvalue of the relatedobligations. Under IFRS,the use of the cashsurrender value isgenerally inappropriate.

4.14 Discount rates

Differences in the selection criteria for discount rates could lead companies to

establish different discount rates under IFRS.


The discount rate is basedon the rate at which thebenefit obligation could beeffectively settled.Companies may look to therate of return on high-quality, fixed-incomeinvestments with similardurations to those of thebenefit obligation toestablish the discount rate.The SEC has stated thatthe term “high quality”means that a bond hasreceived one of the twohighest ratings given by arecognized ratings agency(e.g., Aa or higher byMoody’s).

The discount rate shouldbe determined byreference to market yieldson high-quality corporatebonds in the samecurrency as the benefits tobe paid with durations thatare similar to those of thebenefit obligation.

Not addressed.

The guidance does notspecifically addresscircumstances in which adeep market in high-quality corporate bondsdoes not exist (such as incertain foreignjurisdictions). However, inpractice, a hypotheticalhigh-quality corporatebond yield is determined

Where a deep market ofhigh-quality corporatebonds does not exist,companies are required tolook to the yield ongovernment bonds whenselecting the discount rate.A synthetically constructedbond yield designed tomimic a high-qualitycorporate bond may not be




based on a spread added torepresentative governmentbond yields.

used to determine thediscount rate.

4.15 Accounting for termination indemnities

US GAAP allows for more options in accounting for termination indemnity programs.


When accounting fortermination indemnities,there are two acceptablealternatives to account forthe obligation: (1) fulldefined benefit planaccounting or (2) if higher,mark-to-marketaccounting (i.e., basing theliability on the amountthat the company wouldpay out if the employee leftthe company as of thebalance sheet date).

Defined benefit accountingis required for terminationindemnities.

Belgian GAAP providesspecific guidanceregarding the accountingtreatment of differenttypes of provisions.

The earlyretirement/terminationbenefits are offered undercollective labouragreements (‘pre-pensionregime’).

Under Belgian GAAP,provisions for earlyretirement indemnitiesshould be recognizedwhen the early retirementis notified individually tothe employees.

S ource:

C B N / C N C 1 0 7 - 3

C B N / C N C 1 0 7 - 3 bis

4.16 Deferred compensation arrangements—employment benefits

The accounting for these arrangements, which include individual senior executive

employment arrangements, varies under IFRS and US GAAP frameworks. IFRS

provides less flexibility than US GAAP with respect to the expense attribution and

measurement methodology.


Individual deferredcompensationarrangements that are notconsidered, in the

IFRS does not distinguishbetween individual seniorexecutive employmentarrangements and a “plan”

Not addressed.




aggregate, to be a “plan”do not follow the pensionaccounting standard.Deferred compensationliabilities are measured atthe present value of thebenefits expected to beprovided in exchange foran employee’s service todate. If expected benefitsare attributed to morethan one individual year ofservice, the costs should beaccrued in a systematicand rational manner overthe relevant years ofservice in which theemployee earns the rightto the benefit (to the fulleligibility date).

A number of acceptableattribution models areused in practice, includingthe sinking-fund modeland the straight-linemodel. Gains and lossesare recognizedimmediately in the incomestatement.

in the way that US GAAPdoes. Whether apostemployment benefit isprovided for one employeeor all employees theaccounting is the sameunder IFRS. Deferredcompensation accountingrelates to benefits that arenormally paid while inservice but more than 12months after the end ofthe accounting period inwhich they are earned.

The liability associatedwith deferredcompensation contractsclassified as other long-term benefits under IAS 19is measured by theprojected-unit-creditmethod (equivalent topostemployment-definedbenefits). All prior servicecosts and gains and lossesare recognizedimmediately in profit orloss.

4.17 Accounting for taxes

The timing of recognition for taxes related to benefit plans differs.


A contribution tax shouldbe recognized as acomponent of net benefitcost in the period in whichthe contribution is made.

Taxes related to benefitplans should be includedeither in the return onassets or the calculation ofthe benefit obligation,depending on their nature.For example, taxes payableby the plan oncontributions are includedin actuarial assumptionsfor the calculation of thebenefit obligation.

Not addressed.




4.18.1 IASB exposure draft and research project

The IASB issued an exposure draft in June 2015 to address issues discussed with the

Interpretations Committee. The proposal addresses the following issues:

□ Remeasurements at a significant event.

□ Availability of refunds from a defined benefit plan managed by an independent

trustee.

The IASB also has a research project on its agenda to explore the accounting for

hybrid plans.

4.18.1.1 Remeasurements at a significant event

The IASB proposed clarifying the accounting related to the remeasurement of the net

defined benefit liability (asset) in the event of a plan amendment, curtailment, or

settlement such that the calculations of current service cost and net interest cost in the

post-event period should be remeasured consistent with the net defined benefit

liability. This would include using updated assumptions and the remeasured defined

benefit liability when remeasuring the current service cost and net interest cost.


be consistent.

4.18.1.2 Availability of refunds from a defined benefit plan managed by an

independent trustee

The IASB proposed clarifying whether a trustee’s power can affect a company’s

unconditional right to a refund and restrict the recognition of an asset. It clarified that

amounts of a surplus that a company recognizes as an asset on the basis of a future

refund should not include amounts that another party can unilaterally use for other

purposes. It also distinguishes between the power to make investment decisions and

the power to wind up a plan or the power to use a surplus to enhance benefits. Also,

when determining the availability of a refund or reduction in future contributions, a

company should consider statutory requirements, contractual agreements, and any

constructive obligation. The proposal further clarified that upon a remeasurement for

a significant event, the asset ceiling would need to be reassessed and any adjustment

to the asset ceiling would be recognized in other comprehensive income.

If the proposed amendment is adopted, the current US GAAP and IFRS difference

with regard to the asset ceiling described in SD 5.11 will remain.



4.18.2 FASB Accounting Standards Update No. 2015-04, Compensation—

Retirement Benefits (Topic 715): Practical Expedient for the

Measurement Date of an Employer’s Defined Benefit Obligation and Plan

Assets

As part of its overall simplification efforts, the FASB issued new guidance in April

2015 that provides a practical expedient for companies that have a fiscal year-end that

does not coincide with a calendar month-end. The guidance permits a company to

elect as an accounting policy the use of the calendar month-end closest to the fiscal

year-end for measuring plan assets and obligations. The funded status would be

adjusted for contributions and other significant events that occur between the

alternative measurement date and the fiscal year-end. A similar practical expedient

can also be used for interim remeasurements of significant events that occur on other

than calendar month-end dates. This guidance is effective for fiscal years beginning

after December 15, 2015 for public companies, and a year later for nonpublic

companies. Early adoption is permitted, and transition would be prospective.

IFRS does not provide for a practical expedient, and therefore this guidance creates a

difference between IFRS and US GAAP accounting standards.

PwC 1-1

Chapter 5:Assets - nonfinancialassets

Assets─nonfinancial assets


5.1 Assets—nonfinancial assets

The guidance under US GAAP, IFRS and BE GAAP as it relates to nonfinancial assets

(e.g., intangibles; property, plant, and equipment, including leased assets; inventory;

and investment property) contains some significant differences with potentially far-

reaching implications. The differences between US GAAP and IFRS primarily relate to

differences in impairment indicators, asset unit of account, impairment measurement

and subsequent recoveries of previously impaired assets. Overall, differences for long-

lived assets held for use could result in earlier impairment recognition under IFRS as

compared to US GAAP.

Under IFRS, expenditure on start-up activities (ie start-up costs) is expensed when

incurred, unless it is included in the cost of an item of property, plant and equipment

in accordance with IAS 16. Start-up costs may consist of establishment costs such as

legal and secretarial costs incurred in establishing a legal entity, expenditure to open a

new facility or business (ie pre-opening costs) or expenditures for starting new

operations or launching new products or processes (ie pre-operating costs).

Start-up costs such as costs of capital increase, borrowing costs and restructuring

expenses are capitalized under certain conditions under BE GAAP. For example,

restructuring costs are capitalized only when (1) they are exceptional, well defined and

relate to the substantial change in the organizational structure; and (2) have a long

term positive impact on the profitability of the entity (Source: CBN/CNC 2011/24).

These start-up costs are depreciated over a maximum period of 5 years except

borrowing costs which are depreciated over the duration of the borrowing (Source:

CBN/CNC 2010/15).

In the area of inventory, IFRS prohibits the use of the last in, first out (LIFO) costing

methodology, which is an allowable option under US GAAP and BE GAAP. As a result,

a company that adopts IFRS and utilizes the LIFO method under US GAAP or BE

GAAP would have to move to an allowable costing methodology, such as first in, first

out (FIFO) or weighted-average cost. For US-based operations, differences in costing

methodologies could have a significant impact on reported operating results as well as

on current income taxes payable, given the Internal Revenue Service (IRS) book/tax

LIFO conformity rules. Belgian GAAP allows specific identification method, weighted

average method, FIFO or LIFO method (with additional disclosures).

IFRS provides criteria for lease classification that are similar to US GAAP criteria.However, the IFRS criteria do not override the basic principle that classification isbased on whether the lease transfers substantially all of the risks and rewards ofownership to the lessee. This could result in varying lease classifications for similarleases under these two frameworks. Other key differences involve areas such as sale-leaseback accounting, build-to-suit leases, leveraged leases, and real estatetransactions. According to BE GAAP, the capital portion of lease payments shouldnecessarily reconstitute the fair value of the leased asset in order to qualify thetransaction as a finance lease. Therefore, although the principle is substantially thesame as IFRS, its application can lead to different results under these two accountingframeworks.



As further discussed in the Recent/proposed guidance section, the FASB and IASB are

carrying out a joint project on leases and have re-exposed the proposals in May 2013.

The proposed changes are expected to impact almost all entities and would

significantly change lease accounting.


US GAAP

ASC 205, ASC 250, ASC 330, ASC 360-10, ASC 360-20, ASC 410-20, ASC 410-20-25,

ASC 835-20, ASC 840, ASC 840-40, ASC 908-30, ASC 976

IFRS

IAS 2, IAS 16, IAS 17, IAS 23, IAS 36, IAS 37, IAS 40, IAS 41, IFRS 5, IFRS 13,

IFRIC 4, IFRIC 17, SIC 15

BE GAAP

CBN/CNC 126/11, CBN/CNC 138/5, CBN/CNC 2010/3, CBN/CNC 2010/15,

CBN/CNC 2011/14, CBN/CNC 2011/24, CBN/CNC 2012/2, CBN/CNC 2012/13.

Note



this area.

L on g-lived assets

5.2 Impairment of long-lived assets held foruse—general

The IFRS-based impairment model might lead to the recognition of impairments of

long-lived assets held for use earlier than would be required under US GAAP.

There are also differences related to such matters as what qualifies as an impairment

indicator and how recoveries in previously impaired assets get treated.


US GAAP requires a two-step impairment test andmeasurement model asfollows:

S tep 1—The carryingamount is first comparedwith the undiscountedcash flows. If the carryingamount is lower than the

IFRS uses a one-stepimpairment test. Thecarrying amount of anasset is compared with therecoverable amount. Therecoverable amount is thehigher of (1) the asset’s fairvalue less costs of disposalor (2) the asset’s value in

An impairment loss/exceptional depreciationis recognized when thecarrying value of fixedassets exceeds their valuein use or, in the case of idletangible assets, theirestimated realizable value.




undiscounted cash flows,no impairment loss isrecognized, although itmight be necessary toreview depreciation (oramortization) estimatesand methods for therelated asset.

S tep 2 —If the carryingamount is higher than theundiscounted cash flows,an impairment loss ismeasured as the differencebetween the carryingamount and fair value.Fair value is defined as theprice that would bereceived to sell an asset inan orderly transactionbetween marketparticipants at themeasurement date (an exitprice). Fair value shouldbe based on theassumptions of marketparticipants and not thoseof the reporting entity.

use.

In practice, individualassets do not usually meetthe definition of a CGU. Asa result, assets are rarelytested for impairmentindividually but are testedwithin a group of assets.

Fair value less costs ofdisposal represents theprice that would bereceived to sell an asset orpaid to transfer a liabilityin an orderly transactionbetween marketparticipants at themeasurement date lesscosts of disposal.

Value in use representsentity-specific or CGU-specific future pretax cashflows discounted topresent value by using apretax, market-determined rate thatreflects the currentassessment of the timevalue of money and therisks specific to the assetor CGU for which the cashflow estimates have notbeen adjusted.

BE GAAP only indicate inbroad terms whenexceptional depreciation isrecorded or reversed.Some of the conceptsaddressed in IAS 36 arenot dealt with in BE GAAP.They do not conflict withBE GAAP principles butdifferences may arise inthe application. Forexample, the concept ofcash-generating unit is notused.

Reversal of exceptionaldepreciation is recognizedfor all intangible andtangible fixed assets (thusincluding goodwill) when itis no longer economicallyjustified.

Changes in market interestrates are not consideredimpairment indicators.

Changes in market interestrates can potentiallytrigger impairment and,hence, are impairmentindicators.

The reversal ofimpairments is prohibited.

If certain criteria are met,the reversal ofimpairments, other thanthose of goodwill, ispermitted.

For noncurrent,nonfinancial assets(excluding investmentproperties and biologicalassets) carried at fair valueinstead of depreciatedcost, impairment lossesrelated to the revaluation




are recorded in othercomprehensive income tothe extent of prior upwardrevaluations, with anyfurther losses beingreflected in the incomestatement.

A pplication ofvaluation tech n iques—The calculation of fairvalue no longer will defaultto a present valuetechnique. Althoughpresent value techniquesmight be appropriate, thereporting entity mustconsider all appropriatevaluation techniques in thecircumstances.

If the asset is recoverablebased on undiscountedcash flows, the discountingor fair value typedeterminations are notapplicable.

5.2.1 Impairment of long-lived assets—cash flow estimates

As noted above, impairment testing under US GAAP starts with undiscounted cash

flows, whereas the starting point under IFRS is discounted cash flows. Aside from that

difference, IFRS is more prescriptive with respect to how the cash flows themselves

are identified for purposes of calculating value in use.


Future cash flow estimatesused in an impairmentanalysis should include:

□ All cash inflowsexpected from the useof the long-lived asset(asset group) over itsremaining useful life,based on its existingservice potential.

□ Any cash outflowsnecessary to obtainthose cash inflows,including futureexpenditures to

Cash flow estimates usedto calculate value in useunder IFRS shouldinclude:

□ Cash inflows from thecontinuing use of theasset or the activitiesof the CGU.

□ Cash outflowsnecessarily incurred togenerate the cashinflows fromcontinuing use of theasset or CGU(including cash

Not addressed.




maintain (but notimprove) the long-lived asset (assetgroup).

□ Cash flows associatedwith the eventualdisposition, includingselling costs, of thelong-lived asset (assetgroup).

US GAAP specifies that theremaining useful life of agroup of assets over whichcash flows may beconsidered should bebased on the remaininguseful life of the “primary”asset of the group.

outflows to preparethe asset for use) andthat are directlyattributable to theasset or CGU.

□ Cash outflows that areindirectly attributable(such as those relatingto central overheads)but that can beallocated on areasonable andconsistent basis to theasset or CGU

□ Cash flows expected tobe received (or paid)for the disposal ofassets or CGUs at theend of their usefullives

□ Cash outflows tomaintain the operatingcapacity of existingassets, including, forexample, cash flowsfor day-to-dayservicing

Cash flows are from theperspective of the entityitself. Expected future cashflows should representmanagement’s bestestimate and should bebased on reasonable andsupportable assumptionsconsistent with otherassumptions made in thepreparation of thefinancial statements andother information used bythe entity for comparableperiods.

Cash flow projections usedto measure value in useshould be based onreasonable andsupportable assumptionsof economic conditionsthat will exist over theasset’s remaining usefullife. Cash flows expected toarise from futurerestructurings or fromimproving or enhancingthe asset’s performanceshould be excluded.

Cash flows are from theperspective of the entityitself. Projections based onmanagement’sbudgets/forecasts shallcover a maximum periodof five years, unless alonger period can bejustified. Estimates of cashflow projections beyondthe period covered by themost recent




budgets/forecasts shouldextrapolate the projectionsbased on thebudgets/forecasts using asteady or declining growthrate for subsequent years,unless an increasing ratecan be justified. Thisgrowth rate shall notexceed the long-termaverage growth rate for theproducts, industries, orcountry in which the entityoperates, or for the marketin which the asset is usedunless a higher rate can bejustified.

5.2.2 Impairment of long-lived assets—asset groupings

Determination of asset groupings is a matter of judgment and could result in

differences between IFRS and US GAAP.


For purposes ofrecognition andmeasurement of animpairment loss, a long-lived asset or asset groupshould represent thelowest level for which anentity can separatelyidentify cash flows that arelargely independent of thecash flows of other assetsand liabilities.

A CGU is the smallestidentifiable group of assetsthat generates cash inflowsthat are largelyindependent of the cashinflows from other assetsor groups of assets. It canbe a single asset.Identification of an entity’sCGUs involves judgment.If an active market (asdefined by IFRS 13) existsfor the output produced byan asset or group of assets,that asset or group shouldbe identified as a CGU,even if some or all of theoutput is used internally.

The concept of cash-generating unit is notaddressed.

In limited circumstances, along-lived asset (e.g.,corporate asset) might nothave identifiable cashflows that are largelyindependent of the cashflows of other assets andliabilities and of other




asset groups. In thosecircumstances, the assetgroup for that long-livedasset shall include allassets and liabilities of theentity.

5.3 Carrying basis

The ability to revalue assets (to fair value) under IFRS might create significant

differences in the carrying value of assets as compared with US GAAP.


US GAAP generally utilizeshistorical cost andprohibits revaluationsexcept for certaincategories of financialinstruments, which arecarried at fair value.

Historical cost is theprimary basis ofaccounting. However,IFRS permits therevaluation to fair value ofsome intangible assets;property, plant, andequipment; andinvestment property andinventories in certainindustries (e.g.,commoditybroker/dealer).

IFRS also requires thatbiological assets bereported at fair value.

Belgian GAAP generallyrequires historical cost andpermits the revaluation oftangible fixed assets andsome financial fixed assetsunder certain conditions:the value of the assetsdetermined by reference totheir usefulness to theentity, should clearly anddurably exceed theircarrying value. Where suchassets are necessary to theentity to carry out itsbusiness, revaluationshould be justified by theprofitability of theenterprise or the line ofbusiness concerned.

Source: CBN/CNC 2011/14



In tan gible assets1

5.4 Internally developed intangibles

US GAAP prohibits, with limited exceptions, the capitalization of development costs.

Development costs are capitalized under IFRS if certain criteria are met.

Further differences might exist in such areas as software development costs, where US

GAAP provides specific detailed guidance depending on whether the software is for

internal use or for sale. The principles surrounding capitalization under IFRS, by

comparison, are the same, whether the internally generated intangible is being

developed for internal use or for sale.


In general, both researchcosts and developmentcosts are expensed asincurred, making therecognition of internallygenerated intangible assetsrare.

However, separate,specific rules apply incertain areas. For example,there is distinct guidancegoverning the treatment ofcosts associated with thedevelopment of softwarefor sale to third parties.Separate guidance governsthe treatment of costsassociated with thedevelopment of softwarefor internal use.

The guidance for the twotypes of software varies ina number of significantways. There are, forexample, differentthresholds for whencapitalization commences,and there are also differentparameters for what typesof costs are permitted tobe capitalized.

Costs associated with thecreation of intangibleassets are classified intoresearch phase costs anddevelopment phase costs.Costs in the researchphase are alwaysexpensed. Costs in thedevelopment phase arecapitalized, if all of thefollowing six criteria aredemonstrated:

□ The technicalfeasibility ofcompleting theintangible asset.

□ The intention tocomplete theintangible asset.

□ The ability to use orsell the intangibleasset.

□ How the intangibleasset will generateprobable futureeconomic benefits (theentity shoulddemonstrate theexistence of a marketor, if for internal use,the usefulness of theintangible asset).

□ The availability ofadequate resources to

Research and developmentcosts are defined as asingle concept, and ifeligible for capitalization,amortized on the basis of arebuttable presumptionthat the maximum usefullife does not exceed fiveyears.

This single concept maychange as a result of theapplication of the newEuropean Directive onaccounting matters whichdoes not longer accept thecapitalization of researchrelated expenses.

Research and developmentthat meet criteria similarto those in IAS 38 arecapitalized.

Costs relating to theinternal development ofsoftware that meet certaincriteria are capitalized (tothe extent they do notexceed prudent estimate oftheir value in use or futureeconomic benefits for theentity).

Research and development

1 Excluding goodwill which is covered in the Business Combinations section of this guide.




complete thedevelopment and touse or sell it.

□ The ability to measurereliably theexpenditureattributable to theintangible asset duringits development.

costs should be amortizedover their estimated usefullife, which should notexceed five years unless alonger period can bejustified and thejustification is disclosed inthe footnotes.

Source: CBN/CNC2012/13, CBN/CNC 138/5.

Expenditures on internallygenerated brands,mastheads, publishingtitles, customer lists, anditems similar in substancecannot be distinguishedfrom the cost ofdeveloping the business asa whole. Therefore, suchitems are not recognizedas intangible assets.

Development costsinitially recognized asexpenses cannot becapitalized in a subsequentperiod.

5.5 Acquired research and development assets

Under US GAAP, capitalization depends on both the type of acquisition (asset

acquisition or business combination) as well as whether the asset has an alternative

future use.

Under IFRS, acquired research and development assets are capitalized if is probable

that they will have future economic benefits.


Research and developmentintangible assets acquiredin an asset acquisition arecapitalized only if theyhave an alternative futureuse. For an asset to havealternative future use, itmust be reasonablyexpected (greater than a50% chance) that an entitywill achieve economic

The price paid reflectsexpectations about theprobability that the futureeconomic benefits of theasset will flow to theentity. The probabilityrecognition criterion isalways assumed to be metfor separately acquiredintangible assets.

Similar to IFRS.




benefit from suchalternative use and furtherdevelopment is not neededat the acquisition date touse the asset.

5.6 Indefinite-lived intangible assets—level ofassessment for impairment testing

Under US GAAP, the assessment is performed at the asset level. Under IFRS, the

assessment may be performed at a higher level (i.e., the CGU level). The varying

assessment levels can result in different conclusions as to whether an impairment

exists.


Separately recordedindefinite-lived intangibleassets, whether acquiredor internally developed,shall be combined into asingle unit of accountingfor purposes of testingimpairment if they areoperated as a single assetand, as such, areessentially inseparablefrom one another.

Indefinite-lived intangibleassets may be combinedonly with other indefinite-lived intangible assets;they may not be tested incombination with goodwillor with a finite-lived asset.

US GAAP literatureprovides a number ofindicators that an entityshould consider in makinga determination ofwhether to combineintangible assets.

As most indefinite-livedintangible assets (e.g.,brand name) do notgenerate cash flowsindependently of otherassets, it might not bepossible to calculate thevalue in use for such anasset on a standalonebasis. Therefore, it isnecessary to determine thesmallest identifiable groupof assets that generatecash inflows that arelargely independent of thecash inflows from otherassets or groups of assets,(known as a CGU), inorder to perform the test.

Under Belgian GAAP,intangible assets may onlyhave an indefinite usefullife in exceptionalcircumstances (e.g. for theacquisition of a worldwide-known brand).

The concept of cash-generating-unit is notused. Therefore, each assetwill be subject toimpairment testing.




5.6.1 Indefinite-lived intangible assets—impairment testing

Under US GAAP, an entity can choose to first assess qualitative factors in determining

if further impairment testing is necessary. This option does not exist under IFRS.


ASC 350, Intangibles-Goodwill and Other,requires an indefinite-lived intangible asset to betested for impairmentannually, or morefrequently if events orchanges in circumstancesindicate that the assetmight be impaired.

An entity may first assessqualitative factors todetermine if a quantitativeimpairment test isnecessary. Further testingis only required if theentity determines, basedon the qualitativeassessment, that it is morelikely than not that anindefinite-lived intangibleasset’s fair value is lessthan its carrying amount.Otherwise, no furtherimpairment testing isrequired.

IAS 36, Impairment ofAssets, requires an entityto test an indefinite-livedintangible asset forimpairment annually. Italso requires animpairment test inbetween annual testswhenever there is anindication of impairment.

No specific guidance.

An entity can choose toperform the qualitativeassessment on none, some,or all of its indefinite livedintangible assets. An entitycan bypass the qualitativeassessment for anyindefinite-lived intangibleasset in any period andproceed directly to thequantitative impairmenttest and then choose toperform the qualitativeassessment in anysubsequent period.

IAS 36 allows an entity tocarry forward the mostrecent detailed calculationof an asset’s recoverableamount when performingits current periodimpairment test, providedthe following criteria aremet: (i) the asset isassessed for impairment asa single asset (that is itgenerates cash flowsindependently of otherassets and is not reviewedfor impairment as part of aCGU), (ii) the most recentimpairment test resultedin an amount thatexceeded the asset’scarrying amount by asubstantial margin; and




(iii) an analysis of eventsthat have occurred andchanges in circumstancessince the last reviewindicate that the likelihoodthat the asset’s currentrecoverable amount wouldbe less than its carryingamount is remote.

5.6.2 Indefinite-lived intangible assets—impairment charge measurement

Even when there is an impairment under all three frameworks, the amount of the

impairment charge may differ.


Impairments of indefinite-lived intangible assets aremeasured by comparingfair value to carryingamount.

Indefinite-lived intangibleasset impairments arecalculated by comparingthe recoverable amount tothe carrying amount (seeabove for determination oflevel of assessment). Therecoverable amount is thehigher of fair value lesscosts of disposal or valuein use. The value in usecalculation uses thepresent value of futurecash flows.

Under Belgian GAAP,indefinite-lived intangiblesmay only be impaired incase of long-termdepreciation or loss.


5.7 Impairments of software costs to be sold,leased, or otherwise marketed

Impairment measurement model and timing of recognition of impairment are

different under US GAAP and IFRS.


When assessing potentialimpairment, at least ateach balance sheet date,the unamortizedcapitalized costs for eachproduct must be comparedwith the net realizablevalue of the softwareproduct. The amount by

Under IFRS, intangibleassets not yet available foruse are tested annually forimpairment because theyare not being amortized.Once such assets arebrought into use,amortization commencesand the assets are tested

Intangible assets aresubject to exceptionalamortization when, due tochanges in economic ortechnologicalcircumstances, theircarrying value exceedstheir recoverable amount.




which the unamortizedcapitalized costs of asoftware product exceedthe net realizable value ofthat asset shall be writtenoff. The net realizablevalue is the estimatedfuture gross revenue fromthat product reduced bythe estimated future costsof completing anddisposing of that product.

The net realizable valuecalculation does not utilizediscounted cash flows.

for impairment when thereis an impairmentindicator.

The impairment iscalculated by comparingthe recoverable amount(the higher of either (1)fair value less costs ofdisposal or (2) value inuse) to the carryingamount. The value in usecalculation uses thepresent value of futurecash flows.

5.8 Advertising costs

Under IFRS, advertising costs may need to be expensed sooner compared to US

GAAP.


The costs of other thandirect response advertisingshould be either expensedas incurred or deferredand then expensed the firsttime the advertising takesplace. This is anaccounting policy decisionand should be appliedconsistently to similartypes of advertisingactivities.

Certain direct responseadvertising costs areeligible for capitalizationif, among otherrequirements, probablefuture economic benefitsexist. Direct responseadvertising costs that havebeen capitalized are thenamortized over the periodof future benefits (subjectto impairmentconsiderations).

Costs of advertising areexpensed as incurred. Theguidance does not providefor deferrals until the firsttime the advertising takesplace, nor is there anexception related to thecapitalization of directresponse advertising costsor programs.

Prepayment foradvertising may berecorded as an asset onlywhen payment for thegoods or services is madein advance of the entity’shaving the right to accessthe goods or receive theservices.

Costs of advertising areexpensed when incurred.





Aside from direct responseadvertising-related costs,sales materials such asbrochures and catalogsmay be accounted for asprepaid supplies until theyno longer are owned orexpected to be used, inwhich case their costwould be a cost ofadvertising.

The cost of materials, suchas sales brochures andcatalogues, is recognizedas an expense when theentity has the right toaccess those goods.

P roperty,plan tan d equipm en t

5.9 Depreciation

Under IFRS, differences in asset componentization guidance might result in the need

to track and account for property, plant, and equipment at a more disaggregated level.


US GAAP generally doesnot require the componentapproach for depreciation.

While it would generallybe expected that theappropriateness ofsignificant assumptionswithin the financialstatements would bereassessed each reportingperiod, there is no explicitrequirement for an annualreview of residual values.

IFRS requires thatseparate significantcomponents of property,plant, and equipment withdifferent economic lives berecorded and depreciatedseparately.

The guidance includes arequirement to reviewresidual values and usefullives at each balance sheetdate.

Concept of depreciation issimilar to IFRS but thecomponent approach isnot addressed. Belgianaccounting law allows foraccelerated depreciationplans based on existing taxrules. When suchdepreciations are in excessof depreciations based oneconomic justifiablemeasurements, the excesshas to be disclosed in thenotes.

5.10 Overhaul costs

US GAAP may result in earlier expense recognition when portions of a larger asset

group are replaced.


US GAAP permitsalternative accountingmethods for recognizingthe costs of a majoroverhaul. Costs

IFRS requirescapitalization of the costsof a major overhaulrepresenting areplacement of an

Not addressed.

Belgian practice is similarto IFRS, except that thecost of major repairs and




representing areplacement of anidentified component canbe (1) expensed asincurred,(2) accounted for as aseparate component asset,or (3) capitalized andamortized over the periodbenefited by the overhaul.

identified component.

Consistent with thecomponentization model,the guidance requires thatthe carrying amount ofparts or components thatare replaced bederecognized.

overhauls occurring atregular intervals is oftenprovided for (provision formajor repairs andmaintenance) instead ofbeing capitalized as anasset cost when relevantrecognition criteria aremet.

5.11 Asset retirement obligations

Initial measurement might vary because US GAAP specifies a fair value measure and

IFRS does not. IFRS results in greater variability, as obligations in subsequent periods

get adjusted and accreted based on current market-based discount rates.


Asset retirementobligations (AROs) arerecorded at fair value andare based upon the legalobligation that arises as aresult of the acquisition,construction, ordevelopment of a long-lived asset.

The use of a credit-adjusted, risk-free rate isrequired for discountingpurposes when anexpected present-valuetechnique is used forestimating the fair value ofthe liability.

The guidance also requiresan entity to measurechanges in the liability foran ARO due to passage oftime by applying aninterest method ofallocation to the amount ofthe liability at thebeginning of the period.The interest rate used formeasuring that changewould be the credit-adjusted, risk-free ratethat existed when theliability, or portion

IFRS requires thatmanagement’s bestestimate of the costs ofdismantling and removingthe item or restoring thesite on which it is locatedbe recorded when anobligation exists. Theestimate is to be based ona present obligation (legalor constructive) that arisesas a result of theacquisition, construction,or development of a fixedasset. If it is not clearwhether a presentobligation exists, the entitymay evaluate the evidenceunder a more-likely-than-not threshold. Thisthreshold is evaluated inrelation to the likelihoodof settling the obligation.

The guidance uses a pretaxdiscount rate that reflectscurrent marketassessments of the timevalue of money and therisks specific to theliability.

Changes in themeasurement of an

Practice is broadly similarto IFRS.




thereof, was initiallymeasured.

In addition, changes to theundiscounted cash flowsare recognized as anincrease or a decrease inboth the liability for anARO and the related assetretirement cost. Upwardrevisions are discountedby using the currentcredit-adjusted, risk-freerate. Downward revisionsare discounted by usingthe credit-adjusted, risk-free rate that existed whenthe original liability wasrecognized. If an entitycannot identify the priorperiod to which thedownward revision relates,it may use a weighted-average, credit-adjusted,risk-free rate to discountthe downward revision toestimated future cashflows.

existing decommissioning,restoration, or similarliability that result fromchanges in the estimatedtiming or amount of thecash outflows or otherresources, or a change inthe discount rate, adjustthe carrying value of therelated asset under thecost model. Adjustmentsmay result in an increaseof the carrying amount ofan asset beyond itsrecoverable amount. Animpairment loss wouldresult in suchcircumstances.Adjustments may notreduce the carryingamount of an asset to anegative value. Once thecarrying value reacheszero, further reductionsare recorded in profit andloss. The periodicunwinding of the discountis recognized in profit orloss as a finance cost as itoccurs.

5.12 Borrowing costs

Borrowing costs under IFRS are broader and can include more components than

interest costs under US GAAP.

US GAAP allows for more judgment in the determination of the capitalization rate,

which could lead to differences in the amount of costs capitalized.

IFRS does not permit the capitalization of borrowing costs in relation to equity-

method investments, whereas US GAAP may allow capitalization in certain

circumstances.


Capitalization of interestcosts is required while aqualifying asset is beingprepared for its intendeduse.

The guidance does not

Borrowing costs directlyattributable to theacquisition, construction,or production of aqualifying asset arerequired to be capitalized

Similar to IFRS.

Acquisition cost of tangibleand intangible assets caninclude interest on capitalborrowed to finance their




require that all borrowingsbe included in thedetermination of aweighted-averagecapitalization rate.Instead, the requirement isto capitalize a reasonablemeasure of cost forfinancing the asset’sacquisition in terms of theinterest cost incurred thatotherwise could have beenavoided.

Eligible borrowing costsdo not include exchangerate differences fromforeign currencyborrowings. Also,generally, interest earnedon invested borrowedfunds cannot offsetinterest costs incurredduring the period.

An investment accountedfor by using the equitymethod meets the criteriafor a qualifying asset whilethe investee has activitiesin progress necessary tocommence its plannedprincipal operations,provided that theinvestee’s activities includethe use of funds to acquirequalifying assets for itsoperations.

as part of the cost of thatasset.

The guidanceacknowledges thatdetermining the amount ofborrowing costs directlyattributable to anotherwise qualifying assetmight require professionaljudgment. Having saidthat, the guidance firstrequires the considerationof any specific borrowingsand then requiresconsideration of allgeneral borrowingsoutstanding during theperiod.

In broad terms, aqualifying asset is one thatnecessarily takes asubstantial period of timeto get ready for itsintended use or sale.Investments accounted forunder the equity methodwould not meet the criteriafor a qualifying asset.

Eligible borrowing costsinclude exchange ratedifferences from foreigncurrency borrowings.

acquisition up to theperiod preceding the dateon which fixed assets areready for use.


L eases

5.13 Lease scope

IFRS is broader in scope and may be applied to certain leases of intangible assets.


The guidance for leases(ASC 840, Leases) appliesonly to property, plant,and equipment.

The scope of IFRS leaseguidance (IAS 17, Leases)is not restricted toproperty, plant, andequipment. Accordingly, it

BE GAAP does not includeintangibles in the caption“Finance lease and similarrights”.




Although the guidance isrestricted to tangibleassets, entities cananalogize to the leaseguidance for leases ofsoftware.

may be applied morebroadly (for example, tosome intangible assets andinventory).

Specifically, ASC 985-20addresses the accountingby lessors for leases ofcomputer equipment andsoftware. ASC 350-40-25-16 specifies that acompany acquiringsoftware under a licensingor leasing agreementshould account for thetransaction by analogy toASC 840.

However, the standardcannot be applied to leasesof biological assets,licensing agreements, orleases to explore for or useminerals, oil, natural gas,and similar non-regenerative resources.

5.14 Lease classification—general

Leases might be classified differently under IFRS than under US GAAP. Different

classification can have a profound effect on how a lease is reflected within the

financial statements.


The guidance under ASC840 contains four specificcriteria for determiningwhether a lease should beclassified as an operatinglease or a capital lease by alessee. The criteria forcapital lease classificationbroadly address thefollowing matters:

□ Ownership transfer ofthe property to thelessee

□ Bargain purchaseoption

□ Lease term in relationto economic life of theasset

□ Present value ofminimum leasepayments in relationto fair value of theleased asset

The guidance under IAS 17focuses on the overallsubstance of thetransaction. Leaseclassification as anoperating lease or afinance lease (i.e., theequivalent of a capitallease under US GAAP)depends on whether thelease transferssubstantially all of therisks and rewards ofownership to the lessee.

Although similar leaseclassification criteriaidentified in US GAAP areconsidered in theclassification of a leaseunder IFRS, there are noquantitative breakpointsor bright lines to apply(e.g., 90 percent). IFRS

The basic principle forqualifying as a financelease in BE GAAP is thesame as under IFRS:substantially all the risksand rewards should betransferred to the lesseebased on the substance oftransaction rather than onits legal form. However,the application of thisprinciple can differ sinceBelgian accountinglegislation only looks atone criterion to assesswhether the risks andrewards are transferred tothe lessee.




also lacks guidance similarto ASC 840-10-25-14 withrespect to defaultremedies.

The criteria containcertain specific quantifiedthresholds such aswhether the lease termequals or exceeds 75% ofthe economic life of theleases asset (“75% test”) orthe present value of theminimum lease paymentsequals or exceeds 90percent of the fair value ofthe leased property (“90%test”).

Events of default must beevaluated pursuant to ASC840-10-25-14 to assesswhether remedies payableupon default are minimumlease payments forpurposes of applying the90% test.

The guidance indicatesthat the maximum amountof potential paymentsunder all non-performanceevents of default must beincluded in the leaseclassification 90% testunless each of thefollowing 4 criteria aremet: (i) the covenant iscustomary, (ii) predefinedcriteria relating solely tothe lessee and itsoperations have beenestablished for thedetermination of the eventof default,(iii) the occurrence of theevent of default isobjectively determinable;and (iv) it is reasonable toassume at lease inceptionthat an event of defaultwill not occur.

For a lessor to classify alease as a direct financingor sales-type lease under

Under IFRS there areadditionalindicators/potentialindicators that may resultin a lease being classifiedas a finance lease. Forexample, a lease of special-purpose assets that onlythe lessee can use withoutmajor modificationgenerally would beclassified as a financelease. This would also bethe case for any lease thatdoes not subject the lessorto significant risk withrespect to the residualvalue of the leasedproperty.

There are no incrementalcriteria for a lessor toconsider in classifying alease under IFRS.Accordingly, leaseclassification by the lessorand the lessee typicallyshould be symmetrical.

A finance lease is deemedto exist when the sum ofthe minimum leasepayments is equal to orgreater than the lessor’sinvestment in the leasedasset (including relatedinterest and othertransaction costs).Purchase optionsincluded in leases forassets other than realestate assets and thatrepresent no more than15% of the lessor’sinvestment are includedin the minimum leasepayments.




the guidance, twoadditional criteria must bemet.

5.15 Sale-leaseback arrangements

Differences in the frameworks might lead to differences in the timing of gain

recognition in sale-leaseback transactions. Where differences exist, IFRS might lead to

earlier gain recognition.


The gain on a sale-leaseback transactiongenerally is deferred andamortized over the leaseterm. Immediaterecognition of the full gainis normally appropriateonly when the leaseback isconsidered minor, asdefined.

When a sale-leasebacktransaction results in alease classified as anoperating lease, the fullgain on the sale normallywould be recognizedimmediately if the sale wasexecuted at the fair valueof the asset. It is notnecessary for the leasebackto be minor.

For sale-and-lease-backtransactions resulting in afinance lease, any gain orloss realized by the seller-lessee on the transaction isdeferred for recognition inthe income statement atthe same pace as thedepreciation of the leasedassets.

The result arising from asale and leasebacktransaction resulting in anoperating lease is notexplicitly addressed underBE GAAP. The applicationof the true and fair viewprinciple should avoid anydifferences in this areacompared to IFRS.

If the leaseback is morethan minor but less thansubstantially all of theasset life, a gain is onlyrecognized immediately tothe extent that the gainexceeds (a) the presentvalue of the minimumlease payments if theleaseback is classified asan operating leases; (b) therecorded amount of theleased asset if theleaseback is classified as acapital lease.

If the lessee provides aresidual value guarantee,

If the sale price is belowfair value, any profit orloss should be recognizedimmediately, except that ifthere is a losscompensated by below—market rentals during thelease term the loss shouldbe deferred and amortizedin proportion to the leasepayments over the periodfor which the asset isexpected to be used. If thesale price is above fairvalue, the excess over fairvalue should be deferredand amortized over theperiod for which the asset




the gain corresponding tothe gross amount of theguarantee is deferred untilthe end of the lease; suchamount is not amortizedduring the lease term.

When a sale-leasebacktransaction involves theleaseback of the entireproperty sold and theleaseback is a capital lease,then under ASC 840-40-25-4, the substance of thetransaction is a financingand the profit should bedeferred until the sale isrecognized.

There are onerous rules fordetermining when sale-leaseback accounting isappropriate fortransactions involving realestate (including integralequipment). If the rulesare not met, the saleleaseback will beaccounted for as afinancing. As such, the realestate will remain on theseller-lessee’s balancesheet, and the salesproceeds will be reflectedas debt. Thereafter, theproperty will continue todepreciate, and the rentpayments will be re-characterized as debtservice.

is expected to be used.

When a sale-leasebacktransaction results in afinance lease, the gain isamortized over the leaseterm, irrespective ofwhether the lessee willreacquire the leasedproperty.

There are no real estate-specific rules equivalent tothe US guidance.Accordingly, almost allsale-leasebacktransactions result in sale-leaseback accounting. Theproperty sold would beremoved from the balancesheet, and if the leasebackis classified as anoperating lease, theproperty would not comeback onto the seller-lessee’s balance sheet.

5.16 Leases involving land and buildings

More frequent bifurcation under IFRS might result in differences in the classification

of and accounting for leases involving land and buildings. In addition, accounting for

land leases under IFRS might result in more frequent recordings of finance leases.


Under ASC 840, land andbuilding elementsgenerally are accounted foras a single unit of account,

Under IAS 17, land andbuilding elements must beconsidered separately,unless the land element is

In order to determinewhether the lease of abuilding has to beconsidered as a finance




unless the land represents25 percent or more of thetotal fair value of theleased property.

When considering theclassification of land thatis considered its own unitof account, ASC 840 wouldrequire the lease to beclassified as an operatinglease unless either thetransfer-of-ownershipcriterion or the bargain-purchase-option criterionis met. In those cases thelessee should account forthe land lease as a capitallease.

not material. This meansthat nearly all leasesinvolving land andbuildings should bebifurcated into twocomponents, with separateclassificationconsiderations andaccounting for eachcomponent.

The lease of the landelement should beclassified based on aconsideration of all of therisks and rewardsindicators that apply toleases of other assets.Accordingly, a land leasewould be classified as afinance lease if the leaseterm were long enough tocause the present value ofthe minimum leasepayments to be at leastsubstantially all of the fairvalue of the land.

In determining whetherthe land element is anoperating or a financelease, an importantconsideration is that landnormally has an indefiniteeconomic life.

lease under BE GAAP, thesum of the minimum leasepayments excluding thepart that relates to thecompensation for the useof the land, needs to coverthe investment in thebuilding includinginterests and other costsincurred by the lessor.

5.17 Lease—other

The exercise of renewal/extension options within leases might result in a new lease

classification under US GAAP, but not under IFRS.


The renewal or extensionof a lease beyond theoriginal lease term,including those based onexisting provisions of thelease arrangement,normally triggersaccounting for thearrangement as a new

If the period covered bythe renewal option was notconsidered to be part ofthe initial lease term butthe option is ultimatelyexercised based on thecontractually stated termsof the lease, the originallease classification underthe guidance continues

If renewal options aregranted to the lessee, thecapital amount included inthese renewal payments istaken into account for thedetermination of theamount of the"reconstitution" of thecapital if the total capital




lease. into the extended term ofthe lease; it is notrevisited.

amount for the renewalperiod is not more than15% of the invested capitalamount. This is onlyapplicable for leasing ofassets other than realestate assets.

Leveraged lease accounting is not available under IFRS, potentially resulting in

delayed income recognition and gross balance sheet presentation.


The lessor can classifyleases that wouldotherwise be classified asdirect-financing leases asleveraged leases if certainadditional criteria are met.Financial lessorssometimes preferleveraged lease accountingbecause it often results infaster income recognition.It also permits the lessorto net the relatednonrecourse debt againstthe leveraged leaseinvestment on the balancesheet.

The guidance does notpermit leveraged leaseaccounting. Leases thatwould qualify as leveragedleases under US GAAPtypically would beclassified as finance leasesunder IFRS. Anynonrecourse debt would bereflected gross on thebalance sheet.

Not addressed.

Immediate income recognition by lessors on leases of real estate is more likely under

IFRS.


Under the guidance,income recognition for anoutright sale of real estateis appropriate only ifcertain requirements aremet. By extension, suchrequirements also apply toa lease of real estate.Accordingly, a lessor is notpermitted to classify a leaseof real estate as a sales-typelease unless ownership ofthe underlying propertyautomatically transfers to

IFRS does not havespecific requirementssimilar to US GAAP withrespect to the classificationof a lease of real estate.Accordingly, a lessor ofreal estate (e.g., a dealer)will recognize incomeimmediately if a lease isclassified as a finance lease(i.e., if it transferssubstantially all the risksand rewards of ownershipto the lessee).

Not addressed.




the lessee at the end of thelease term, in which casethe lessor must apply theguidance appropriate foran outright sale.

Additional consideration is required under US GAAP when the lessee is involved with

the construction of an asset that will be leased to the lessee when construction of the

asset is completed.


Lessee involvement in theconstruction of an asset tobe leased uponconstruction completion issubject to specific detailedguidance to determinewhether the lessee shouldbe considered the owner ofthe asset duringconstruction. If the lesseehas substantially all of theconstruction period risks,as determined by specificcriterion included in ASC840-40-55, the lesseemust account forconstruction in progress asif it were the legal ownerand recognize landlordfinanced constructioncosts as debt. Onceconstruction is complete,the arrangement isevaluated as a sale-leaseback.

No specific guidancerelating to lesseeinvolvement in theconstruction of an assetexists under IFRS.

Not addressed.

ASC 840 providesguidance with respect toaccounting for a“construction project” andcan be applied not only tonew construction but alsoto the renovation or re-development of an existingasset.

BE GAAP provides examples of the accounting treatment of incentives given /received by the landlord / tenant at conclusion of the rental agreement. Theseincentives have to be taken in profit or loss on a linear basis during the period of therental agreement as a reduction of rental income / costs. Source: CBN/CNC 2012/2.



O th er

5.18 Distributions of nonmonetary assets toowners

Spin-off transactions under IFRS can result in gain recognition as nonmonetary assets

are distributed at fair value. Under US GAAP, nonmonetary assets are distributed at

their recorded amount, and no gains are recognized.


Accounting for thedistribution ofnonmonetary assets toowners of an enterpriseshould be based on therecorded amount (afterreduction, if appropriate,for an indicatedimpairment of value) ofthe nonmonetary assetsdistributed. Upondistribution, thoseamounts are reflected as areduction of owner’sequity.

Accounting for thedistribution ofnonmonetary assets toowners of an entity shouldbe based on the fair valueof the nonmonetary assetsto be distributed. Adividend payable ismeasured at the fair valueof the nonmonetary assetsto be distributed. Uponsettlement of a dividendpayable, an entity willrecognize any differencesbetween the carryingamount of the assets to bedistributed and thecarrying amount of thedividend payable in profitor loss.

Specific guidance exists fordividends paid in shares.

Dividends in shares existwhen the shareholdercontributes its right toreceive dividends inexchange for new shares ina capital increasetransaction. Suchdividends in shares shouldbe recorded as dividendsreceivable (i.e. income forthe shareholder),subsequently contributedin exchange for new shares(investment for theshareholder, capital for thecompany).

Source: CBN/CNC advice2010/3

5.19 Inventory costing

Companies that utilize the LIFO costing methodology under US GAAP and BE GAAP

might experience significantly different operating results as well as cash flows under

IFRS.

Furthermore, regardless of the inventory costing model utilized, under IFRS

companies might experience greater earnings volatility in relation to recoveries in

values previously written down.


A variety of inventorycosting methodologiessuch as LIFO, FIFO,and/or weighted-average

A number of costingmethodologies such asFIFO or weighted-averagecosting are permitted. The

The cost of inventoriesthat are interchangeable isassigned by using eitherthe FIFO, LIFO or




cost are permitted. use of LIFO, however, isprecluded.

weighted average costformula.

The cost of inventoriesthat are notinterchangeable isdetermined on anindividual basis.

For companies using LIFOfor US income taxpurposes, the book/taxconformity rules alsorequire the use of LIFO forbook accounting/reportingpurposes.

Reversals of write-downsare prohibited.

Reversals of inventorywrite-downs (limited tothe amount of the originalwrite-down) are requiredfor subsequent recoveries.

5.20 Inventory measurement

The measurement of inventory might vary when cost is greater than market (US

GAAP) or net realizable value (IFRS and BE GAAP).


Inventory is measured atthe lower of cost ormarket. Market is thecurrent replacement cost;however, the replacementcost cannot be greater thanthe net realizable value orless than net realizablevalue reduced by a normalsales margin. Netrealizable value isestimated selling price lesscosts of completion andsale.

Inventory is measured atthe lower of cost and netrealizable value. Netrealizable value isestimated selling price lesscosts of completion andsale.

Inventory is also valued atthe lower of cost or netrealizable value.

Under BE GAAP,companies can measureinventories based on directproduction cost (i.e.excluding indirectproduction costs). Thisaccounting policy choiceshould be disclosed in thenotes. Direct and indirectproduction costs areincluded in the cost ofinventories under bothIFRS and US GAAP.



5.21 Biological assets—fair value versus historicalcost

Companies whose operations include management of the transformation of living

animals or plants into items for sale, agricultural produce, or additional biological

assets have the potential for fundamental changes to their basis of accounting

(because IFRS requires fair value-based measurement).


Biological assets aregenerally measured athistorical cost. Theseassets are tested forimpairment in the samemanner as other long-livedassets.

Under IAS 41, biologicalassets are measured at fairvalue less costs to sell forinitial recognition and ateach subsequent reportingdate, except when themeasurement of fair valueis unreliable. All changesin fair value are recognizedin the income statement inthe period in which theyarise.

Not addressed.

An amendment was madein June 2014 whichexcluded bearer plantsfrom the scope of IAS 41and included them in thescope of IAS 16, Property,Plant and Equipment. Theamendment is effective forannual periods beginningon or after 1 January 2016.The produce growing onbearer plants will remainwithin the scope of IAS 41.

5.22 Investment property

Alternative methods or options of accounting for investment property under IFRS

could result in significantly different asset carrying values (fair value) and earnings.


There is no specificdefinition of investmentproperty.

The historical-cost modelis used for most real estatecompanies and operatingcompanies holding

Investment property isseparately defined asproperty (land and/orbuildings) held in order toearn rentals and/or forcapital appreciation. Thedefinition does not includeowner-occupied property,

No separate rules forinvestment property,which is accounted for inthe same way as property,plant and equipment.

Investment properties areinitially and subsequently




investment-type property.

Investor entities—such asmany investmentcompanies, insurancecompanies’ separateaccounts, bank-sponsoredreal estate trusts, andemployee benefit plansthat invest in real estate—carry their investments atfair value.

The fair value alternativefor leased property doesnot exist.

property held for sale inthe ordinary course ofbusiness, or propertybeing constructed ordeveloped for such sale.Properties underconstruction ordevelopment for future useas investment propertiesare within the scope ofinvestment properties.

The acquisition of aninvestment property mayeither be an acquisition ofan asset or a group ofassets or a businesscombination within thescope of IFRS 3, BusinessCombinations.

Investment property isinitially measured at cost(transaction costs areincluded). Thereafter, itmay be accounted for on ahistorical-cost basis or ona fair value basis as anaccounting policy choice.2

When fair value is applied,the gain or loss arisingfrom a change in the fairvalue is recognized in theincome statement. Thecarrying amount is notdepreciated.

The election to account forinvestment property at fairvalue may also be appliedto leased property.

measured in the same wayas property, plant andequipment. They can berevalued following generalguidance on revaluationsapplicable to tangible fixedassets. Any revaluationsurplus is recognized inequity.

2 An entity that chooses the cost model would need to disclose the fair value of its investment property.




5.23.1 Leases—Joint Project of the FASB and IASB

The FASB and IASB each issued a revised Leases Exposure Draft in May 2013 that

attracted significant comments from stakeholders, and which prompted the Boards to

reconsider key elements of the proposed standard. Although some aspects of the

initial proposal have changed, and convergence between the FASB and IASB appears

unlikely, the key objective, to bring most leases on the lessee balance sheet, has been

met.

As redeliberations draw to a close, the FASB has retained a dual income statement

model with classification of different types of leases similar to today. The IASB, on the

other hand, has decided to require lessees to reflect all leases as financings. Over the

past two years, there have also been other changes to the initial proposals related to

classification, measurement, transition, and disclosure.

5.23.1.1 Key provisions

For lessees, the Boards have continued to support balance sheet recognition for most

leases and have retained, but clarified, previous proposals regarding how to determine

whether an arrangement is (or contains) a lease. Although in agreement on how to

identify a lease, the Boards have been unable to arrive at a converged proposal

regarding classification, with each Board voting for different changes to the guidance

proposed in their respective exposure drafts.

The FASB has continued to support a dual approach for classifying leases based on

criteria similar to current US GAAP—rejecting classification based on the nature of the

underlying asset, as had been proposed in the 2013 revised ED. The FASB will require

a lease to be presented as a financing (similar to capital leases today) in the income

statement (referred to as a Type A lease) when (1) payments represent substantially all

of the fair value of the asset, (2) the lease term is for a major portion of the asset’s

economic life, (3) purchase of the asset is considered a bargain, or (4) title transfer is

automatic at the end of the lease. The fair value and economic life tests are expected to

be similar to the 90 percent and 75 percent tests under existing US GAAP guidance,

albeit without the bright lines.

All other leases would be classified as Type B, with costs presented as lease expense

and recognized on a straight-line basis in the income statement over the lease term.

This would produce an expense recognition pattern that is similar to operating leases

under current US GAAP.

In contrast, the IASB has decided to require all leases to be presented as financings for

lessees, given their belief that this approach is conceptually superior and that a single

model will be easier to apply than a dual approach.

Regardless of how the differences in lease classification will impact the income

statement, the Boards agree that on the balance sheet, lessees should initially

recognize a right-to-use asset and lease liability based on the discounted payments



required by the lease. The Boards agreed to an exemption to this presentation for

short-term leases (i.e., a term of one year or less), which would not be recognized on a

lessee’s balance sheet. The IASB decided on an additional exemption for leases of

small assets.

For lessors, in light of significant stakeholder concerns, the Boards voted to eliminate

the “receivable and residual” approach proposed in the revised ED. This would have

treated all leases as a sale, resulting in de-recognition of the leased asset. Real estate

lessors in particular voiced concern about the resulting complexity when applied to

the lease of a portion of an asset (e.g., a floor of a building being leased to a single

tenant). Instead, the Boards agree that lessors with Type B leases should continue to

reflect the underlying asset subject to the lease arrangement on the balance sheet

similar to the classification of leases previously accounted for as operating leases. For

financing arrangements (Type A leases) or sales, the balance sheet should reflect the

lessor’s investment in the lease, which consists of the receivable and the lessor’s

residual interest in the underlying asset.

With respect to the income statement, the FASB and IASB agree that an arrangement

that is effectively a sale should result in recognition of a day-one profit. The FASB,

however, believes that when the lessee does not obtain control of the underlying asset,

the profit should be deferred and recognized over the lease term, even if the lease is

classified as a Type A lease. This could occur when a lessor purchases residual value

insurance–thereby transferring the risks and rewards, but not control, of the

underlying asset, to the lessee.

Lessors would consider all other leases to be Type B, with income statement and

balance sheet treatment similar to today’s operating leases.

For both lessees and lessors, it is critical to determine which payments should be

included in the calculation of their respective assets and, in the case of a lessee, the

lease liability. Previous proposals prompted significant debate. The Boards voted to

include all fixed lease payments in the measurement of the lessor and lessee’s assets

and the lessee’s lease liability. For variable payments (e.g., increases in rent based on

CPI), the Boards voted to include rents on the basis of the rate or index at lease

commencement. The FASB decided that lease payments used to measure the right-to-

use asset and lease liability would not be revisited if the rate or index changes unless

the lease obligation was required to be remeasured for other reasons. In contrast, the

IASB decided to require remeasurement whenever a change in the reference rate

results in a change in cash flows. Variable payments related to the use of the asset

(e.g., percentage rent on sales) would be recognized as incurred. Lessors should not

reassess variable lease payments.

5.23.1.2 Transition

The 2013 Exposure Draft proposed a requirement to apply either a full retrospective

transition approach, or a modified approach, for lessors and lessees. In their February

2015 meeting, the FASB voted against full retrospective transition, in favor of

retaining only a modified retrospective approach. The IASB elected to retain both full

retrospective and modified retrospective transition approaches for lessees, which

should be applied consistently across the entire portfolio of former operating leases.



The IASB further tentatively decided to require lessors to continue to apply existing

lease accounting for leases in effect at the date of initial application (except for

intermediate lessors in a sublease).

Currently, the Boards expect that lessees and lessors will compute lease assets and

liabilities based on the remaining payments for leases existing at, or entered into after

the date of initial application (if the IASB full retrospective approach is not applied).

The Boards will provide transition guidance for different types of lease arrangements,

and will include provisions to simplify the initial application of the proposed standard.

In some cases, these provisions are not converged.

In addition, the IASB decided to permit an entity to grandfather the definition of a

lease for all contracts that are ongoing at the date of initial application of the new

standard. An entity that chooses to grandfather the definition of a lease should do so

for all contracts that are ongoing at the date of initial application. The entity should

disclose that fact.

5.23.1.3 What’s next

The Boards have nearly completed their redeliberations and are working on drafting

the final standard, which could differ in some respects from the tentative decisions

discussed to date. The Boards have indicated that they will not issue another exposure

draft and hope to issue a final standard in the second half of 2015. The Boards have

not yet proposed an effective date.

Adoption of the proposed standard will have a significant impact on a company’s

financial statements and supporting systems and controls. This will require significant

effort. But it is not simply gathering the information or implementing software or

processes. Companies must also consider the effort needed to weigh the benefits of the

recently added transition relief options in order to develop a well thought out

transition plan.

5.23.2 FASB Accounting Standards Update No. 2015-05, Intangibles – Goodwill

and Other – Internal-Use Software (Subtopic 350-40): Customer’s

Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued new guidance on a customer’s accounting for fees paid

in a cloud computing arrangement (CCA). Previously, there was no specific US GAAP

guidance on accounting for such fees from the customer’s perspective. Under the new

guidance, customers will apply the same criteria as vendors to determine whether a

CCA contains a software license or is solely a service contract.

Under the new guidance, fees paid by a customer in a CCA will be within the scope of

the internal-use software guidance if both of the following criteria are met:

□ The customer has the contractual right to take possession of the software at any

time during the CCA period without significant penalty.

□ It is feasible for the customer to run the software on its own hardware (or to

contract with another party to host the software).



Arrangements that do not meet both of the criteria are considered service contracts,

and separate accounting for a license will not be permitted. Arrangements that meet

the criteria are considered multiple-element arrangements to purchase both a

software license and a service of hosting the software. Existing guidance on internal-

use software is applied to the purchased license.

For public companies, the new guidance is effective for annual periods, including

interim periods, beginning after December 15, 2015. For non-public companies, it is

effective for annual periods beginning after December 15, 2015, and interim periods in

annual periods beginning after December 15, 2016. Early adoption is permitted.

5.23.3 IASB Amendments to IAS 16, Property, Plant, and Equipment and IAS 41,

Agriculture: Bearer Plants

In June 2014, the IASB published amendments that change the financial reporting for

bearer plants. The amendment provides bearer plants to be accounted for in the same

way as property, plant and equipment in IAS 16 Property, Plant and Equipment,

because their operation is similar to that of manufacturing. Consequently, the

amendments include bearer plants within the scope of IAS 16, instead of IAS 41. The

produce growing on bearer plants will remain within the scope of IAS 41. The

amendments are effective for annual periods beginning on or after January 1, 2016.

Earlier application is permitted.

5.23.4 IASB Annual Improvements to IFRSs 2012-2014 Cycle: IFRS 5, Non-

current Assets Held for Sale and Discontinued Operations: Changes in

methods of disposal

In September 2014, the IASB issued an amendment to IFRS 5 that clarifies the

guidance related to changes to a plan of sale or to a plan of distribution to owners.

These clarifications are as follows:

□ If an entity has classified an asset (or disposal group) as held for distribution to

owners, but the specified criteria for such classification is no longer met, the entity

should cease to apply held for distribution accounting in the same way as it ceases

to apply the held for sale accounting when it no longer meets the held for sale

criteria.

□ A reclassification from held for sale to held for distribution (or vice versa) does

not constitute a change to a plan of sale or distribution; rather, the change is

considered a continuation of the original plan of disposal. Such a change does not

change the date of classification (i.e., it does not, in itself, extend the one year

period to complete a sale or distribution).

An entity shall apply these amendments prospectively to changes in a method of

disposal that occur in annual periods beginning on or after January 1, 2016. Earlier

application is permitted. If an entity applies these amendments in an earlier period, it

should disclose that fact.



5.23.5 IASB amendments to IAS 16, Property, Plant, and Equipment and IAS 38,

Intangible Assets: Clarification of Acceptable Methods of Depreciation

and Amortization

In May 2014, the IASB issued an amendment to IAS 16 and IAS 38 that clarifies when

a method of depreciation or amortization based on revenue may be appropriate.

The amendment to IAS 16 clarifies that depreciation of an item of property, plant and

equipment based on revenue generated by using the asset is not appropriate.

The amendment to IAS 38 establishes a rebuttable presumption that amortization of

an intangible asset based on revenue generated by using the asset is inappropriate.

The presumption may only be rebutted in certain limited circumstances. These are:

□ Where the intangible asset is expressed as a measure of revenue; or

□ Where it can be demonstrated that revenue and the consumption of the economic

benefits of the intangible asset are highly correlated.

An entity shall apply these amendments prospectively for annual periods beginning

on or after January 1, 2016. Earlier application is permitted. If an entity applies these

amendments for an earlier period, it shall disclose that fact.

PwC 1-1

Chapter 6:Assets - financial assets

Assets—financial assets


6.1 Assets—financial assets

The FASB and IASB have both been working on projects to address the recognition

and measurement of financial instruments. Whilst the Boards were jointly working

together on some aspects of their projects they are no longer converged. With the

publication of IFRS 9, Financial Instruments in July 2014, the IASB has now

completed its project of replacing the classification and measurement, impairment

and hedge accounting guidance. The FASB is almost finished redeliberating its

financial instruments project on classification and measurement and impairment.

Details on these and other developments are discussed in the Recent/proposed

guidance section. The remainder of this section focuses on the current US GAAP and

IFRS guidance.

Under current US GAAP, various specialized pronouncements provide guidance for

the classification of financial assets. IFRS currently has only one standard for the

classification of financial assets and requires that financial assets be classified in one

of four categories: assets held for trading or designated at fair value, with changes in

fair value reported in earnings; held-to-maturity investments; available-for-sale

financial assets; and loans and receivables.

The specialized US guidance and the singular IFRS guidance in relation to

classification can drive differences in measurement (because classification drives

measurement under both IFRS and US GAAP).

Under US GAAP, the legal form of the financial asset drives classification. For

example, debt instruments that are securities in legal form are typically carried at fair

value under the available-for-sale category (unless they are held to maturity)—even if

there is no active market to trade the securities. At the same time, a debt instrument

that is not in the form of a security (for example, a corporate loan) is accounted for at

amortized cost even though both instruments (i.e., the security and the loan) have

similar economic characteristics. Under IFRS, the legal form does not drive

classification of debt instruments; rather, the nature of the instrument (including

whether there is an active market) is considered. As described in table below,

additional differences include the calculation of amortized cost of financial assets that

are carried at amortized cost, impairment models for available-for-sale debt securities

and equities, the reversals of impairment losses, and some embedded derivatives that

are not bifurcated. Under Belgian GAAP, legal form of the financial assets drives

classification; embedded derivatives are not addressed and no bufrication is required.

The table also describes some fundamental differences in the way US GAAP and IFRScurrently assess the potential derecognition of financial assets. These differences canhave a significant impact on a variety of transactions such as asset securitizations.IFRS focuses on whether a qualifying transfer has taken place, whether risks andrewards have been transferred, and, in some cases, whether control over the asset(s)in question has been transferred. US GAAP focuses on whether an entity hassurrendered control over an asset, including the surrendering of legal and effectivecontrol. Derecognition principles under Belgian GAAP do not conflict with IFRSmodel based on transfer of risks and rewards; however under Belgian GAAP twoaccounting policy choices exist for factoring arrangements where credit risk is nottransferred to the factor.




US GAAP

ASC 310, ASC 310-10-30, ASC 310-10-35, ASC 320, ASC 325, ASC 815, ASC 815-15-

25-4 through 25-5, ASC 820, ASC 825, ASC 860

IFRS

IAS 39, IFRS 13, SIC 12

BE GAAP

CBN/CNC 169-1, CBN/CNC 169-2, CBN/CNC 2011/15, CBN/CNC 2011/23, CBN/CNC

2012/5

Note



this area.

C lassification

6.2 Available-for-sale financial assets—fair valueversus cost of unlisted equity instruments

More investments in unlisted equity securities are recorded at fair value under IFRS.


Unlisted equityinvestments generally arescoped out of ASC 320 andwould be carried at cost,unless either impaired orthe fair value option iselected.

Certain exceptionsrequiring that investmentsin unlisted equitysecurities be carried at fairvalue do exist for specificindustries (e.g.,broker/dealers,investment companies,insurance companies, anddefined benefit plans).

There are no industry-specific differences in thetreatment of investmentsin equity instruments thatdo not have quoted marketprices in an active market.Rather, all available-for-sale assets, includinginvestments in unlistedequity instruments, aremeasured at fair value(with rare exceptions onlyfor instances in which fairvalue cannot be reliablymeasured).

Fair value is not reliablymeasurable when therange of reasonable fairvalue estimates issignificant and the

There is no specific guidancefor the treatment ofinvestments in equityinstruments that do not havequoted market prices in anactive market. All long-termfinancial assets, includinginvestments in unlistedequity instruments aremeasured at cost, lessaccumulated impairmentlosses.

Investments in equityinstruments classified underlong-term financial assetscan be revalued providedcertain conditions are met.




probability of the variousestimates within the rangecannot be reasonablyassessed.

6.3 Available-for-sale debt financial assets—foreign exchange gains/losses on debtinstruments

The treatment of foreign exchange gains and losses on available-for-sale debt

securities will create more income statement volatility under IFRS.


The total change in fairvalue of available-for-saledebt securities—net ofassociated tax effects—isrecorded within othercomprehensive income(OCI).

Any component of theoverall change in fairmarket value that may beassociated with foreignexchange gains and losseson an available-for-saledebt security is treated in amanner consistent withthe remaining overallchange in the instrument’sfair value.

For available-for-sale debtinstruments, the totalchange in fair value isbifurcated, with theportion associated withforeign exchangegains/losses on theamortized cost basisseparately recognized inthe income statement. Theremaining portion of thetotal change in fair value isrecognized in OCI, net oftax effect.

Not applicable.

Provisions shall be madefor contingent losses andcharges resulting fromforeign currency positionsor foreign currencytransactions, fromcommodity positions orforward commoditytransactions.

6.4 Effective interest rates—expected versuscontractual cash flows

Differences between the expected and contractual lives of financial assets carried at

amortized cost have different implications under the US GAAP and IFRS frameworks.

The difference in where the two accounting frameworks place their emphasis

(contractual term for US GAAP and expected life for IFRS) can affect asset carrying

values and the timing of income recognition.


For financial assets thatare carried at amortized

For financial assets thatare carried at amortized

Not addressed.




cost, the calculation of theeffective interest rategenerally is based oncontractual cash flowsover the asset’scontractual life.

The expected life, underUS GAAP, is typically usedonly for:

□ Loans if the entityholds a large numberof similar loans andthe prepayments canbe reasonablyestimated.

□ Certain structurednotes.

□ Certain beneficialinterests in securitizedfinancial assets.

□ Certain loans or debtsecurities acquired in atransfer.

cost, the calculation of theeffective interest rategenerally is based on theestimated cash flows(excluding future creditlosses) over the expectedlife of the asset.

Contractual cash flowsover the full contractualterm of the financial assetare used only in those rarecases when it is notpossible to reliablyestimate the cash flows orthe expected life of afinancial asset.

6.4.1 Effective interest rates—changes in expectations

Differences in how changes in expectations (associated with financial assets carried at

amortized cost) are treated can affect asset valuations and the timing of income

statement recognition.


Different models apply tothe ways revised estimatesare treated depending onthe type of financial assetinvolved (e.g., prepayableloans, structured notes,beneficial interests, loans,or debt acquired in atransfer).

Depending on the natureof the asset, changes maybe reflected prospectivelyor retrospectively. None ofthe US GAAP models is theequivalent of the IFRScumulative-catch-up-based approach.

If an entity revises itsestimates of payments orreceipts, the entity adjuststhe carrying amount of thefinancial asset (or group offinancial assets) to reflectboth actual and revisedestimated cash flows.

Revisions of the expectedlife or of the estimatedfuture cash flows mayexist, for example, inconnection with debtinstruments that contain aput or call option thatdoesn’t need to bebifurcated or whosecoupon payments varybecause of an embedded

Not addressed.




feature that does not meetthe definition of aderivative because itsunderlying is anonfinancial variablespecific to a party to thecontract (e.g., cash flowsthat are linked to earningsbefore interest, taxes,depreciation, andamortization; salesvolume; or the earnings ofone party to the contract).

The entity recalculates thecarrying amount bycomputing the presentvalue of estimated futurecash flows at the financialasset’s original effectiveinterest rate. Theadjustment is recognizedas income or expense inthe income statement (i.e.,by the cumulative-catch-up approach).

Generally, floating rateinstruments (e.g., LIBORplus spread) issued at parare not subject to thecumulative-catch-upapproach; rather, theeffective interest rate isrevised as market rateschange.

6.5 Eligibility for fair value option

The IFRS eligibility criteria for use of the fair value option are more restrictive.


With some limitedexceptions for somefinancial assets addressedby other applicableguidance (e.g., aninvestment in aconsolidated subsidiary,employer’s rights underemployee benefit plans),US GAAP permits entities

With the exception ofthose financial assetsoutside the scope of IAS 39(e.g., an investment in aconsolidated subsidiary,employer’s rights underemployee benefit plans,some investments inassociates and jointventures) IFRS permits

Not applicable.




to elect the fair valueoption for any recognizedfinancial assets.

The fair value option mayonly be elected upon initialrecognition of the financialasset or upon some otherspecified election datesidentified in ASC 825-10-25-4.

entities to elect the fairvalue option when;

□ a contract containsone or moreembedded derivativesand the entire contractis not measured as atfair value throughprofit or loss, or

□ it eliminates orsignificantly reduces ameasurement orrecognitioninconsistency(sometimes referred toas ‘an accountingmismatch’), or

□ a group of financialinstruments ismanaged and itsperformance isevaluated on a fairvalue basis inaccordance with a riskmanagement strategy.

The fair value option mayonly be elected upon initialrecognition of the financialasset.

6.6 Fair value option for equity-methodinvestments

While US GAAP and IFRS standards both include a fair value option for equity-method investments, the IFRS-based option has limits as to which entities canexercise it, whereas the US GAAP option is broad-based.


The fair value option existsfor US GAAP entitiesunder ASC 825, FinancialInstruments, wherein theoption is unrestricted.Therefore, any investor’sequity-methodinvestments are eligible forthe fair value option.

IFRS permits venturecapital organizations,mutual funds, and unittrusts (as well as similarentities, includinginvestment-linkedinsurance funds) that haveinvestments in associates(entities over which theyhave significant influence)to carry those investmentsat fair value, with changes

The equity method is used toaccount for associates inconsolidated financialstatements, and the costmodel (cost less anyaccumulated impairmentlosses) is used in separatefinancial statements. No fairvalue option is available forequity-method investments.




in fair value reported inearnings (provided certaincriteria are met) in lieu ofapplying equity-methodaccounting.

6.7 Fair value of investments in investmentcompany entities

Contrary to US GAAP, IFRS does not include a practical expedient for themeasurement of fair value of certain investments.


US GAAP provides apractical expedient for themeasurement of fair valueof certain investments thatreport a net asset value(NAV), to allow use ofNAV as fair value.

Under IFRS, since NAV isnot defined or calculatedin a consistent manner indifferent parts of theworld, the IASB decidedagainst issuing a similarpractical expedient.

Refer to specific legal andreporting requirements forvarious types of investmententities.

6.8 Loans and receivables

Classification is not driven by legal form under IFRS, whereas legal form drives the

classification of “debt securities” under US GAAP. The potential classification

differences drive subsequent measurement differences under IFRS and US GAAP for

the same debt instrument.

Loans and receivables may be carried at different amounts under the different

frameworks.


The classification andaccounting treatment ofnonderivative financialassets such as loans andreceivables generallydepends on whether theasset in question meets thedefinition of a debtsecurity under ASC 320. Ifthe asset meets thatdefinition, it is generallyclassified as trading,available for sale, or heldto maturity. If classified astrading or available for

IFRS defines loans andreceivables asnonderivative financialassets with fixed ordeterminable paymentsnot quoted in an activemarket other than:

□ Those that the entityintends to sellimmediately or in thenear term, which areclassified as held fortrading and those thatthe entity upon initialrecognition designates

BE GAAP does notspecifically address financialassets by classifying theminto different categories, butBelgian legislation includesspecific measurementrules for some types offinancial assets andliabilities, such asparticipating interests(equity investment),receivables and some typesof derivative contracts.

In addition, BE GAAP




sale, the debt security iscarried at fair value. Tomeet the definition of adebt security under ASC320, the asset is requiredto be of a type commonlyavailable on securitiesexchanges or in markets,or, when represented byan instrument, iscommonly recognized inany area in which it isissued or dealt in as amedium for investment.

Loans and receivables thatare not within the scope ofASC 320 fall within thescope of other guidance.As an example, mortgageloans are either:

□ Classified as loansheld for investment, inwhich case they aremeasured at amortizedcost.

□ Classified as loansheld for sale, in whichcase they aremeasured at the lowerof cost or fair value(market), or

□ Carried at fair value ifthe fair value option iselected.

as at fair value throughprofit or loss.

□ Those that the entityupon initialrecognition designatesas available for sale.

□ Those for which theholder may notrecover substantiallyall of its initialinvestment (otherthan because of creditdeterioration) and thatshall be classified asavailable for sale.

An interest acquired in apool of assets that are notloans or receivables (i.e.,an interest in a mutualfund or a similar fund) isnot a loan or receivable.

Instruments that meet thedefinition of loans andreceivables (regardless ofwhether they are legalform securities) arecarried at amortized costin the loan and receivablecategory unless designatedinto either the fair valuethrough profit-or-losscategory or the available-for-sale category. In eitherof the latter two cases, theyare carried at fair value.

IFRS does not have acategory of loans andreceivables that is carriedat the lower of cost ormarket.

requires long termreceivables substantiallysupporting the financialposition of the counterpartyto be presented within thefixed assets.

Under BE GAAP, receivablesare recognized at nominalamount, and under amethod similar to theamortized cost in somecircumstances.

CBN advice 2011/15provides guidance onimpairment of accountsreceivable covered by creditinsurance. Compensation ofimpairment losses incurredand compensation receivedunder the credit insurancepolis in the incomestatement is prohibited.




6.9 Reclassifications

Transfers of financial assets into or out of different categories are permitted in limited

circumstances under US GAAP and IFRS. In general, reclassifications have the

potential to be more common under IFRS. The ability to reclassify is impacted by

initial classification, which can also vary (as discussed above).


Changes in classificationbetween trading, available-for-sale, and held-to-maturity categories occuronly when justified by thefacts and circumstanceswithin the concepts of ASC320. Given the nature of atrading security, transfersinto or from the tradingcategory should be rare,though they do occur.

Financial assets may bereclassified betweencategories, albeit withconditions.

More significantly, debtinstruments may bereclassified from held fortrading or available forsale into loans andreceivables, if the debtinstrument meets thedefinition of loans andreceivables and the entityhas the intent and abilityto hold them for theforeseeable future.

Also, a financial asset canbe transferred fromtrading to available for salein rare circumstances.

Reclassification isprohibited for instrumentswhere the fair value optionis elected.

Not addressed.

Im pairm en tsan d subsequen tloss

6.10 Impairment principles—available-for-saledebt securities

Regarding impairment triggers, IFRS focuses on events that affect the recovery of the

cash flows from the asset regardless of the entity’s intent. US GAAP looks to a two-

step test based on intent or ability to hold and expected recovery of the cash flows.

Regarding measurement of impairment loss upon a trigger, IFRS uses the cumulative

fair value losses deferred in other comprehensive income. Under US GAAP, the

impairment loss depends on the triggering event.




An investment in certaindebt securities classified asavailable for sale isassessed for impairment ifthe fair value is less thancost. An analysis isperformed to determinewhether the shortfall infair value is temporary orother than temporary.

In a determination ofwhether impairment isother than temporary, thefollowing factors areassessed for available-for-sale securities:

S tep 1—Can managementassert (1) it does not havethe intent to sell and (2) itis more likely than not thatit will not have to sellbefore recovery of cost? Ifno, then impairment istriggered. If yes, thenmove to Step 2.

S tep 2 —Doesmanagement expectrecovery of the entire costbasis of the security? Ifyes, then impairment isnot triggered. If no, thenimpairment is triggered.

Once it is determined thatimpairment is other thantemporary, theimpairment lossrecognized in the incomestatement depends on theimpairment trigger:

□ If impairment istriggered as a result ofStep 1, the loss inequity due to changesin fair value is releasedinto the incomestatement.

If impairment is triggeredin Step 2, impairment lossis measured by calculatingthe present value of cashflows expected to be

A financial asset isimpaired and impairmentlosses are incurred only ifthere is objective evidenceof impairment as the resultof one or more events thatoccurred after initialrecognition of the asset (aloss event) and if that lossevent has an impact on theestimated future cashflows of the financial assetor group of financial assetsthat can be estimatedreliably. In assessing theobjective evidence ofimpairment, an entityconsiders the followingfactors:

□ Significant financialdifficulty of the issuer.

□ High probability ofbankruptcy.

□ Granting of aconcession to theissuer.

□ Disappearance of anactive market becauseof financial difficulties.

□ Breach of contract,such as default ordelinquency in interestor principal.

□ Observable dataindicating there is ameasurable decreasein the estimated futurecash flows since initialrecognition.

The disappearance of anactive market because anentity’s securities are nolonger publicly traded orthe downgrade of anentity’s credit rating is not,by itself, evidence ofimpairment, although itmay be evidence ofimpairment whenconsidered with otherinformation.

At the same time, a decline

BE GAAP does notspecifically address financialassets by classifying theminto different categories, butthere are general provisionsrelating to impairment ofassets.

Participating interests andshares classified under long-term financial assets shall bewritten down in case of adurable impairment orreduction in value justifiedby the financial position,profitability or futureprospects of the company inwhich the participatinginterests or shares are held.It can be economicallyjustified not to record anywrite-down even if theacquisition pricesubstantially exceeds theacquired portion of the netassets of the company inwhich the investment ismade.

Amounts receivable,including fixed incomesecurities recorded as long-term financial assets, shallbe written down, whenreceipt on the due date of allor part of the nominalamount is uncertain ordoubtful.

Short-term investments aswell as cash at hand and inbank shall be written downwhen their realizable valueat the balance sheet date islower than their acquisitioncost.

Short-term amountsreceivable shall be writtendown when receipt on thedue date of all or part of thenominal amount isuncertain or doubtful or




collected from theimpaired security. Thedetermination of suchexpected credit loss is notexplicitly defined; onemethod could be todiscount the best estimateof cash flows by theoriginal effective interestrate. The differencebetween the fair value andthe post-impairmentamortized cost is recordedwithin OCI.

in the fair value of a debtinstrument below itsamortized cost is notnecessarily evidence ofimpairment. For example,a decline in the fair valueof an investment in acorporate bond thatresults solely from anincrease in market interestrates is not an impairmentindicator and would notrequire an impairmentevaluation under IFRS.

An impairment analysisunder IFRS focuses onlyon the triggering creditevents that negativelyaffect the cash flows fromthe asset itself and doesnot consider the holder’sintent.

Once impairment of a debtinstrument is determinedto be triggered, thecumulative loss recognizedin OCI due to changes infair value is released intothe income statement.

when the realizable value ofthe balance sheet date islower than the carryingvalue.

6.11 Impairment principles—held-to-maturitydebt instruments

Regarding impairment triggers, IFRS focuses on events that affect the recovery of the

cash flows from the asset regardless of the entity’s intent. US GAAP looks to a two-

step test based on intent or ability to hold and expected recovery of the cash flows.

Regarding measurement of impairment loss upon a trigger, IFRS looks to the incurred

loss amount. Under US GAAP, the impairment loss depends on the triggering event.


The two-step impairmenttest mentioned above isalso applicable to certaininvestments classified asheld to maturity. It wouldbe expected that held-to-maturity investmentswould not trigger Step 1

Impairment is triggeredfor held-to-maturityinvestments based onobjective evidence ofimpairment describedabove for available-for-sale debt instruments.

Amounts receivable,including fixed incomesecurities recorded as long-term financial assets, shallbe written down, whenreceipt on the due date of allor part of the nominal




(as tainting would result).Rather, evaluation of Step2 may trigger impairment.

Once triggered,impairment is measuredwith reference to expectedcredit losses as describedfor available-for-sale debtsecurities. The differencebetween the fair value andthe post-impairmentamortized cost is recordedwithin OCI and accretedfrom OCI to the carryingvalue of the debt securityover its remaining lifeprospectively.

Once impairment istriggered, the loss ismeasured by discountingthe estimated future cashflows by the originaleffective interest rate. As apractical expedient,impairment may bemeasured based on theinstrument’s observablefair value.

amount is uncertain ordoubtful.

6.12 Impairment of available-for-sale equityinstruments

Impairment on available-for-sale equity instruments may be triggered at different

points in time under IFRS compared with US GAAP.


US GAAP looks to whetherthe decline in fair valuebelow cost is other thantemporary. The factors toconsider include:

□ The length of the timeand the extent towhich the marketvalue has been lessthan cost.

□ The financialcondition and near-term prospects of theissuer, including anyspecific events thatmay influence theoperations of theissuer, such as changesin technology that mayimpair the earningspotential of theinvestment or thediscontinuance of asegment of the

Similar to debtinvestments, impairmentof available-for-sale equityinvestments is triggered byobjective evidence ofimpairment. In addition toexamples of eventsdiscussed above, objectiveevidence of impairment ofavailable-for-sale equityincludes:

□ Significant orprolonged decline infair value below cost,or

□ Significant adversechanges intechnological, market,economic, or legalenvironment

Each factor on its owncould trigger impairment(i.e., the decline in fairvalue below cost does not

Participating interests andshares classified under long-term financial assets shall bewritten down in case of adurable impairment orreduction in value justifiedby the financial position,profitability or futureprospects of the company inwhich the participatinginterests or shares are held.It can be economicallyjustified not to record anywrite-down even if theacquisition pricesubstantially exceeds theacquired portion of the netassets of the company inwhich the investment ismade.




business that mayaffect the futureearnings potential.

□ The intent and abilityof the holder to retainits investment in theissuer for a period oftime sufficient to allowfor any anticipatedrecovery in marketvalue.

need to be both significantand prolonged).

The evaluation of theother-than-temporaryimpairment triggerrequires significantjudgment in assessing therecoverability of thedecline in fair value belowcost. Generally, the longerand greater the decline,the more difficult it is toovercome the presumptionthat the available-for-saleequity is other thantemporarily impaired.

Whether a decline in fairvalue below cost isconsidered significantmust be assessed on aninstrument-by-instrumentbasis and should be basedon both qualitative andquantitative factors.

What is a “prolonged”decline in fair value willalso require judgementand a policy will need to beestablished. In general, aperiod of 12 months orgreater below original costis likely to be a“prolonged” decline.However, the assessmentof “prolonged” should notbe compared to the entireperiod that the investmenthas been or is expected tobe held.

6.13 Losses on available-for-sale equity securitiessubsequent to initial impairment recognition

In periods after the initial recognition of an impairment loss on available-for-sale

equity securities, further income statement charges are more likely under IFRS.


Impairment chargesestablish a new cost basis.As such, further reductionsin value below the newcost basis may beconsidered temporary(when compared with the

Impairment charges donot establish a new costbasis. As such, furtherreductions in value belowthe original impairmentamount are recordedwithin the current-period

Not addressed.




new cost basis). income statement.

6.14 Impairments—measurement and reversal oflosses

Under IFRS, impairment losses on debt instruments may be reversed through the

income statement. Under US GAAP, reversals are permitted for debt instruments

classified as loans; however, one-time reversal of impairment losses on debt securities

is prohibited. Expected recoveries are reflected over time by adjusting the interest rate

to accrue interest income.


Impairments of loans heldfor investment measuredunder ASC 310-10-35 andASC 450 are permitted tobe reversed; however, thecarrying amount of theloan can at no time exceedthe recorded investment inthe loan.

For financial assets carriedat amortized cost, if in asubsequent period theamount of impairment lossdecreases and the decreasecan be objectivelyassociated with an eventoccurring after theimpairment wasrecognized, the previouslyrecognized impairmentloss is reversed. Thereversal, however, doesnot exceed what theamortized cost would havebeen had the impairmentnot been recognized.

Under BE GAAP, if in asubsequent period theamount of impairment lossdecreases and the decreasecan be objectively associatedwith an event occurring afterthe impairment wasrecognized, the previouslyrecognized impairment lossis reversed.

One-time reversals ofimpairment losses for debtsecurities classified asavailable-for-sale or held-to-maturity securities,however, are prohibited.Rather, any expectedrecoveries in future cashflows are reflected as aprospective yieldadjustment.

Reversals of impairmentson equity investments areprohibited.

For available-for-sale debtinstruments, if in asubsequent period the fairvalue of the debtinstrument increases andthe increase can beobjectively related to anevent occurring after theloss was recognized, theloss may be reversedthrough the incomestatement.

Reversals of impairmentson equity investmentsthrough profit or loss areprohibited.



Fin an cialassetd erecogn ition

6.15 Derecognition

The determination of whether financial assets should be derecognized (e.g., in

securitizations or factorings) is based on very different models under the different

frameworks.

Full derecognition under US GAAP is more common than under IFRS. However, the

IFRS model includes continuing involvement presentation that has no equivalent

under US GAAP.


The guidance focuses onan evaluation of thetransfer of control. Theevaluation is governed bythree key considerations:

□ Legal isolation of thetransferred asset fromthe transferor.

□ The ability of thetransferee (or, if thetransferee is asecuritization vehicle,the beneficial interestholder) to pledge orexchange the asset (orthe beneficial interestholder).

□ No right or obligationof the transferor torepurchase.

The guidance focuses onevaluation of whether aqualifying transfer hastaken place, whether risksand rewards have beentransferred, and, in somecases, whether controlover the asset(s) inquestion has beentransferred.

The transferor first appliesthe consolidation guidanceand consolidates any andall subsidiaries or specialpurpose entities itcontrols.

General rules forderecognition provided forunder IFRS do not conflictwith BE GAAP.

As such, derecognition canbe achieved even if thetransferor has significantongoing involvement withthe assets, such as theretention of significantexposure to credit risk.

ASC 860 does not apply totransfers in which thetransferee is considered aconsolidated affiliate of thetransferor, as defined inthe standard. If this is thecase, regardless of whetherthe transfer criteria aremet, derecognition is notpossible as the assets are,in effect, transferred to the

The model can be appliedto part of a financial asset(or part of a group ofsimilar financial assets) orto the financial asset in itsentirety (or a group ofsimilar financial assets intheir entirety).

Under IAS 39, fullderecognition isappropriate once both ofthe following conditionshave been met:

□ The financial asset hasbeen transferredoutside theconsolidated group.

□ The entity has

When an enterprise sellsan asset and, at the sametime, enters into aseparate agreement torepurchase the asset at alater date, the transactionis considered to befiduciary in nature. Theasset sold is kept in thebalance sheet of the seller,and the amounts receivedfrom the buyer arerecorded as a borrowing(as an amount receivablefor the purchaser). Aguarantee is disclosed inthe notes to the financialstatements. The difference




consolidated entity.

There is no concept ofcontinuinginvolvement/partialderecognition under USGAAP.

When accounting for atransfer of an entirefinancial asset thatqualifies for saleaccounting, the assettransferred in the salemust be derecognizedfrom the transferor’sbalance sheet. The totalcarrying amount of theasset is derecognized, andany assets and liabilitiesretained are recognized atfair value. The transferorshould separatelyrecognize any servicingassets or servicingliabilities retained in thetransfer at their fairvalues. A gain or loss onthe transfer is calculatedas the difference betweenthe net proceeds receivedand the carrying value ofthe assets sold.

If a participating interestwas sold, the transferormust allocate the previouscarrying value of the entirefinancial asset between theparticipating interest soldand retained.

transferredsubstantially all of therisks and rewards ofownership of thefinancial asset.

The first condition isachieved in one of twoways:

□ When an entitytransfers thecontractual rights toreceive the cash flowsof the financial asset,or

□ When an entity retainsthe contractual rightsto the cash flows butassumes a contractualobligation to pass thecash flows on to one ormore recipients(referred to as a pass-through arrangement).

Many securitizations donot meet the strict pass-through criteria torecognize a transfer of theasset outside of theconsolidated group and asa result fail the firstcondition forderecognition.

If there is a qualifyingtransfer, an entity mustdetermine the extent towhich it retains the risksand rewards of ownershipof the financial asset. IAS39 requires the entity toevaluate the extent of thetransfer of risks andrewards by comparing itsexposure to the variabilityin the amounts and timingof the transferred financialassets’ net cash flows, bothbefore and after thetransfer.

between the sale price andthe repurchase price isconsidered as interest andrecorded as income overthe term of the contract.Any revenue generated bythe asset is recorded bythe seller.

Security-lending is alsoconsidered as a borrowing,rather than a salestransaction. Accordingly,the accounting treatmentrequired is to transfer thesecurities to a receivableaccount included in thesame subheading andvalued according toaccounting policiesapplicable to them.

In addition, when anenterprise lends securitiesfor a determined period oftime, with the borrowerhaving the obligation toprovide the lender withsimilar securities atexpiration date, there is atransfer of ownership.However, the lender stillbears the price risk on therelated securities.

These securities aretransferred to a receivableaccount included in thesame subheading andvalued according to theaccounting policiesapplicable to them. Theborrower accounts for ashort-term investment anda debt: accounting policieswill vary depending onwhether the borrower hasan exposure or not.

If the entity’s exposuredoes not changesubstantially,derecognition would not




be appropriate. Rather, aliability equal to theconsideration receivedwould be recorded(financing transaction). If,however, substantially allrisks and rewards aretransferred, the entitywould derecognize thefinancial asset transferredand recognize separatelyany asset or liabilitycreated through any rightsand obligations retained inthe transfer (e.g., servicingassets).

Many securitizationtransactions include someongoing involvement bythe transferor that causesthe transferor to retainsubstantial risks andrewards, thereby failingthe second condition forderecognition, even if thepass-through test is met.

If the transferred asset ispart of a larger financialasset (e.g., when an entitytransfers interest cashflows that are part of adebt instrument) and thepart transferred qualifiesfor derecognition in itsentirety, the previouscarrying amount of thelarger financial asset shallbe allocated between thepart that continues to berecognized and the partthat is derecognized, basedon the relative fair valuesof those parts on the dateof the transfer.

When an asset transfer hasbeen accomplished but theentity has neither retainednor transferredsubstantially all risks andrewards, an assessment asto control becomesnecessary. The transferorassesses whether the




transferee has the practicalability to sell the financialasset transferred to a thirdparty. The emphasis is onwhat the transferee can doin practice and whether itis able, unilaterally, to sellthe transferred financialasset without imposingany restrictions on thetransfer. If the transfereedoes not have the ability tosell the transferredfinancial asset, control isdeemed to be retained bythe transferor and thetransferred financial assetmay require a form ofpartial derecognitioncalled continuinginvolvement. Undercontinuing involvement,the transferred financialasset continues to berecognized with anassociated liability.

When the entity hascontinuing involvement inthe transferred financialasset, the entity mustcontinue to recognize thetransferred financial assetto the extent of itsexposure to changes in thevalue of the transferredfinancial asset. Continuinginvolvement is measuredas either the maximumamount of considerationreceived that the entitycould be required to repay(in the case of guarantees)or the amount of thetransferred financial assetthat the entity mayrepurchase (in the case ofa repurchase option).




6.16.1 FASB and IASB Financial Instruments Projects

6.16.1.1 Overview

Both the FASB’s and IASB’s projects on financial instruments were intended to

address the recognition and measurement of financial instruments, including

impairment and hedge accounting. Although once a joint project the Boards have

since proceeded down different paths. The IASB had been conducting its work in

separate phases: (1) classification and measurement of financial assets, (2)

classification and measurement of financial liabilities, (3) impairment, and (4) hedge

accounting. The FASB initially elected to issue one comprehensive exposure draft on

financial instruments.

In July 2014 the IASB finalized its project when it published the complete version of

IFRS 9, Financial instruments, which replaces most of the guidance in IAS 39. This

includes guidance on the classification and measurement of financial assets that is

based on an entity’s business model for managing financial assets and their

contractual cash flow characteristics. It also contains a new expected credit losses

impairment model which replaces the current incurred loss impairment model. The

new hedging guidance that was issued in November 2013 has also been included.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018.

The FASB has substantially completed deliberations on its classification and

measurement project and is redeliberating the impairment project. It is expected to

issue final guidance for both projects by the end of 2015. The FASB is continuing to

deliberate issues on the hedging project and is expected to issue an exposure draft in

2015.

6.16.1.2 FASB and IASB Impairment Projects

The FASB and IASB had originally proposed differing impairment models that they

developed separately.

On May 26, 2010, the FASB released its financial instrument accounting exposure

draft, Accounting for Financial Instruments and Revisions to the Accounting for

Derivative Instruments and Hedging Activities. The FASB proposed a single model

for recognizing and measuring impairment of financial assets recorded at fair value

with changes in fair value recognized in OCI.

In November 2009, the IASB issued an exposure draft that proposed fundamental

changes to the current impairment guidance for financial assets accounted for at

amortized cost.

Many constituents who commented on those proposals emphasized the need for the

Boards to develop a converged impairment approach. In January 2011, the Boards

issued a joint supplementary document, Accounting for Financial Instruments and



Revisions to the Accounting for Derivative Instruments and Hedging Activities—

Impairment, to gather input on new impairment approaches.

In June 2011, the Boards decided to change course on their proposed model for

impairment of financial assets and discussed a new approach dividing financial assets

into three categories (referred to as “buckets” by the Boards) for impairment

purposes. The allocation to each category would be based on deterioration in credit

quality and would ultimately determine the amount of the credit losses to be

recognized.

In August 2012, the FASB concluded after considering constituent feedback that

aspects of the “three bucket” impairment model were difficult to understand and

presented operational challenges that could not be addressed through implementation

guidance. As a result, the FASB decided not to move forward with an exposure draft

on the “three bucket” approach. The IASB decided to continue with the model. In July

2014, the IASB published the new and complete version of IFRS 9, which includes the

new impairment requirements.

6.16.1.3 FASB Proposed Accounting Standards Update, Financial Instruments—

Credit Losses (Subtopic 825-15)

In December 2012, the FASB issued a proposal that introduces a new model for

accounting for credit losses on financial instruments. The proposal calls for an entity

to recognize credit losses based on its current estimate of contractual cash flows not

expected to be collected.

The FASB’s model will require recognition of full lifetime expected credit losses uponinitial recognition of the financial asset, whereas the IASB would only record fulllifetime expected credit losses upon a significant deterioration in credit risk. Absent asignificant deterioration in credit risk, the IASB model would require a provision forcredit losses that result from default events that are possible within 12 months afterthe reporting date.

The objective of recording an allowance for credit losses under the CECL approach is

to reflect the estimate of an entity’s expectation of credit losses over the life of the

debt. Expected credit losses are a current estimate of all contractual cash flows not

expected to be collected. Estimates of credit losses must be based on relevant

information about past events, including historical loss experience, current

conditions, and reasonable and supportable forecasts that affect the expected

collectability of the remaining contractual cash flows. There is no probability of loss

threshold that must be met prior to recording credit losses.

The FASB is in the process of deliberating various aspects of its proposed accounting

model, with the following key points of focus:

□ Accounting for debt securities classified as available for sale (“AFS”). Recent

deliberations have resulted in a proposal that AFS securities would not follow a

CECL model but would instead revise current accounting guidance for recognizing

and measuring impairment. Key proposed changes are the removal from current

guidance of considerations such as duration of unrealized loss position and post



balance sheet date recoveries when recognizing impairment. Additionally, another

proposed change is the use of a valuation account such as an allowance to record

impairment, as opposed to the model in today’s guidance that would require

recognition of impairment as a write down in the AFS security’s cost basis.

□ Whether the current proposal requiring a “day 1” CECL losses for purchased

credit impaired (“PCI”) assets recorded as a gross up to the balance sheet should

be expanded to any other originated or purchased assets. Currently, the proposed

standard would require a day 1 CECL allowance recognized through the income

statement for all originated assets and for purchased assets not deemed to be PCI.

□ Developing implementation examples to address complexities of applying the

accounting model in practice. Specifically, navigating the ability to use estimation

approaches that explicitly utilize time value of money concepts versus estimation

approaches that do not, and providing implementation guidance on what defines

a “loss rate” for purposes of inputs to estimation techniques.

Based on the deliberation points above, the FASB is estimating the issuance of final

guidance by the end of 2015.

6.16.1.4 IFRS 9, Financial Instruments—Expected Credit Losses

The IASB issued in July 2014 the complete version of IFRS 9, Financial instruments,

which includes the new impairment model. The new guidance introduces an expected

credit loss impairment model that replaces the incurred loss model used today. The

IASB’s model, now known as the “expected credit losses” model, has the following key

elements.

General model

Under the IASB’s model, an entity will recognize an impairment loss at an amount

equal to the 12-month expected credit loss (stage 1). If the credit risk on the financial

instrument has increased significantly since initial recognition (even without objective

evidence of impairment), it should recognize an impairment loss at an amount equal

to the lifetime expected credit loss (stage 2). Interest income is calculated using the

effective interest method on the gross carrying amount of the asset. When there is

objective evidence of impairment (that is, the asset is impaired under the current rules

of IAS 39, Financial instruments: Recognition and Measurement), lifetime expected

credit losses are recognized and interest is calculated on the net carrying amount after

impairment (stage 3).

The 12-month expected credit loss measurement represents all cash flows not

expected to be received (“cash shortfalls”) over the life of the financial instrument that

result from those default events that are possible within 12 months after the reporting

date. Lifetime expected credit loss represents cash shortfalls that result from all

possible default events over the life of the financial instrument.



Scope

The new guidance applies to: (a) debt instruments measured at amortized cost;

(b) debt instruments measured at fair value through other comprehensive income;

(c) all loan commitments not measured at fair value through profit or loss (FVPL);

(d) financial guarantee contracts within the scope of IFRS 9 that are not accounted for

at FVPL; and (e) lease receivables within the scope of IAS 17, Leases, and trade

receivables or contract assets within the scope of IFRS 15, Revenue from Contracts

with Customers, that give rise to an unconditional right to consideration.

Calculation of the impairment

Expected credit losses are determined using an unbiased and probability-weighted

approach and should reflect the time value of money. The calculation is not a best-

case or worst-case estimate. Rather, it should incorporate at least the probability that

a credit loss occurs and the probability that no credit loss occurs.

Assessment of credit deterioration

When determining whether lifetime expected losses should be recognized, an entity

should consider the best information available, including actual and expected changes

in external market indicators, internal factors, and borrower-specific information.

Where more forward-looking information is not available, delinquency data can be

used as a basis for the assessment.

Under the IASB’s model, there is a rebuttable presumption that lifetime expected

losses should be provided for if contractual cash flows are 30 days past due. An entity

has an option to recognize 12-month expected credit losses (i.e., not to apply the

general model) for financial instruments that are equivalent to “investment grade.”

Purchased or originated credit impaired assets

Impairment is determined based on full lifetime expected credit losses for assets

where there is objective evidence of impairment on initial recognition. Lifetime

expected credit losses are included in the estimated cash flows when calculating the

asset’s effective interest rate (“credit-adjusted effective interest rate”), rather than

being recognized in profit or loss. Any later changes in lifetime expected credit losses

will be recognize immediately in profit or loss.

Trade and lease receivables

For trade receivables or contract assets which contain a significant financing

component in accordance with IFRS 15 and lease receivables, an entity has an

accounting policy choice: either it can apply the simplified approach (that is, to

measure the loss allowance at an amount equal to lifetime expected credit loss at

initial recognition and throughout its life), or it can apply the general model. The use

of a provision matrix is allowed, if appropriately adjusted to reflect current events and

forecast future conditions.



If the trade receivables or contract assets do not contain a significant financing

component, lifetime expected credit losses will be recognized.

Disclosures

Extensive disclosures are required, including reconciliations of opening to closing

amounts and disclosure of assumptions and inputs.

6.16.1.5 FASB classification and measurement project

The FASB has substantially completed deliberations on its financial instruments—

classification and measurement project. It is expected to result in only a few changes

to current US GAAP. The most significant change for financial assets relates to

accounting for equity securities, which do not qualify for consolidation or the equity

method of accounting. These investments will be recognized at fair value through net

income, except for certain non-publicly traded investments that may qualify for a

practical expedient in determining their measurement.

Refer to SD 10.13 for the recent redeliberations on classification and measurement of

financial liabilities.

6.16.1.6 IFRS 9, Financial Instruments—Classification and measurement

Classification under IFRS 9 for investments in debt instruments is driven by the

entity’s business model for managing financial assets and their contractual cash flow

characteristics. A debt instrument is measured at amortized cost if both of the

following criteria are met:

□ The asset is held to collect its contractual cash flows; and

□ The asset’s contractual cash flows represent ‘solely payments of principal and

interest’ (“SPPI”).

Financial assets included within this category are initially recognized at fair value and

subsequently measured at amortized cost.

A debt instrument is measured at fair value through other comprehensive income

(“FVOCI”) if both of the following criteria are met:

□ The objective of the business model is achieved both by collecting contractual cash

flows and selling financial assets; and

□ The asset’s contractual cash flows represent SPPI.

Debt instruments included within the FVOCI category are initially recognized and

subsequently measured at fair value. Movements in the carrying amount should be

taken through OCI, except for the recognition of impairment gains or losses, interest

revenue and foreign exchange gains and losses which are recognized in profit and loss.

Where the financial asset is derecognized, the cumulative gain or loss previously

recognized in OCI is reclassified from equity to profit or loss.



Under the new model, FVPL is the residual category. Financial assets should be

classified as FVPL if they do not meet the criteria of FVOCI or amortized cost.

Financial assets included within the FVPL category should be measured at fair value

with all changes taken through profit or loss.

Regardless of the business model assessment, an entity can elect to classify a financial

asset at FVPL if doing so reduces or eliminates a measurement or recognition

inconsistency (‘accounting mismatch’).

The new standard requires that all equity investments be measured at fair value. IFRS

9 removes the cost exemption for unquoted equities and derivatives on unquoted

equities but provides guidance on when cost may be an appropriate estimate of fair

value. Fair value changes of equity investments are recognized in profit and loss

unless management has elected the option to present in OCI unrealized and realized

fair value gains and losses. However, this option does not apply to equity investments

that are held for trading, puttable instruments, or contingent consideration. Such

designation is available on initial recognition on an instrument-by-instrument basis

and is irrevocable. There is no subsequent recycling of fair value gains and losses to

profit or loss; however, ordinary dividends from such investments will continue to be

recognized in profit or loss.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018, subject to

endorsement in certain territories.

6.16.2 FASB Proposed Accounting Standards Update: Accounting for Financial

Instruments and Revisions to the Accounting for Derivative Instruments

and Hedging Activities and IASB IFRS 9 Financial Instruments, Hedge

accounting and amendments to IFRS 9, IFRS 7 and IAS 39

Refer to SD 11.21 for discussion of the guidance.

6.16.3 IASB Exposure Draft—Measuring Quoted Investments in Subsidiaries,

Joint Ventures and Associates at Fair Value (Proposed amendments to

IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for

IFRS 13)

IFRS 13 and Topic 820 largely have the same requirements in relation to

determination of fair value.

In September 2014 the IASB issued an exposure draft to clarify that an entity should

measure the fair value of quoted investments and quoted CGUs as the product of the

quoted price for the individual financial instruments that make up the investments

held by the entity and the quantity of financial instruments. The exposure draft also

includes proposed amendments to the Illustrative Examples for IFRS 13 to illustrate

the application of the portfolio exception for a portfolio that comprises only quoted

financial instruments whose market risks are substantially the same.

The FASB is not expected to incorporate similar guidance in ASC 820 at this time.



6.16.4 FASB Accounting Standards Update No. 2014-11, Transfers and Servicing

(Topic 860): Repurchase-to-Maturity Transactions, Repurchase

Financings, and Disclosures

Issued in June 2014, ASU 2014-11 amended the accounting guidance for repurchase-

to-maturity agreements (commonly referred to as “repos-to-maturity”) and

repurchase agreements executed in conjunction with so-called “repurchase financing”

transactions. The new standard also requires transferors to provide additional

disclosures about certain transfers of financial assets, including those reported as

secured borrowings.

The new standard defines a repo-to-maturity transaction as a repurchase agreement

in which the settlement date of the agreement to repurchase a transferred financial

asset is at the maturity date of that financial asset and the agreement does not require

the transferor to reacquire the financial asset. Repo-to-maturity transactions are now

required to be reported as secured borrowings in all instances. (Under the previous

accounting standards in ASC 860, these transactions could qualify for sale accounting

under certain circumstances.)

With respect to repurchase financial transactions, transferors will no longer apply the

current “linked” accounting model to repurchase agreements executed

contemporaneously with the initial transfer of the underlying financial asset with the

same counterparty. Instead, ASU 2014-11 directs that the accounting for each

transaction (that is, the initial transfer and the attendant repurchase agreement) be

evaluated on a stand-alone basis.

The new accounting standards in ASU 2014-11 may lead to greater consistency in the

accounting for repurchase transactions under US GAAP and IFRS, even though the

underlying approach differs. IFRS embodies a “risk and rewards” approach—in

contrast to ASC 860’s control-based transfer model—that generally results in

repurchase agreements being reported as secured borrowings.

Chapter 7:Liabilities - taxes

Liabilities─taxes


7.1 Liabilities—taxes

Both US GAAP and IFRS base their deferred tax accounting requirements on balance

sheet temporary differences, measured at the tax rates expected to apply when the

differences reverse. Discounting of deferred taxes is also prohibited under both

frameworks. Although the two frameworks share many fundamental principles, they

are at times applied in different manners and there are different exceptions to the

principles under each framework. This often results in differences in income tax

accounting between the two frameworks. Some of the more significant differences

relate to the allocation of tax expense/benefit to financial statement components

(“intraperiod allocation”), the treatment of tax effects of intercompany transfers of

assets, income tax accounting with respect to share-based payment arrangements, and

presentation of deferred taxes on the face of the balance sheet.

The relevant differences are set out below, other than those related to share-based

payment arrangements, which are described in the Expense recognition—share-based

payments chapter.


US GA A P

ASC 740

IFRS

IAS 1, IAS 12, IAS 34, IAS 37

B E GA A P


CBN/CNC 2015/1

Note



this area.

7.2 Hybrid taxes

Hybrid taxes are based on the higher of a tax applied to a net amount of income less

expenses (such as taxable profit or taxable margin) and a tax applied to a gross

amount which is not considered income (such as revenue or capital). Hybrid taxes are

assessed differently under US GAAP and IFRS, which could lead to differences in

presentation in the income statement and recognition and measurement of deferred

taxes.

Liabilities─taxes



Taxes based on a grossamount which is notconsidered income (suchas revenue or capital) arenot accounted for asincome taxes and shouldbe reported as pre-taxitems. A hybrid tax isconsidered an income taxand is presented as incometax expense only to theextent that it exceedsthetax based on the amountnot considered income in agiven year.

Deferred taxes should berecognized and measuredaccording to thatclassification.

Accounting for hybridtaxes is not specificallyaddressed within IFRS.

Applying the principles inIAS 12 to the accountingfor hybrid taxes, entitiescan adopt either one of thefollowing approaches andapply it consistently:

□ Designate the taxbased on the grossamount notconsidered income asthe minimum amountand recognize it as apre-tax item. Anyexcess over thatminimum amountwould then bereported as income taxexpense; or

□ Designate the taxbased on the netamount of income lessexpenses as theminimum amount andrecognize it as incometax expense. Anyexcess over thatminimum would thenbe reported as a pre-tax item.

□ Deferred taxes shouldbe recognized andmeasured according tothat classification.

Not addressed.

7.3 Tax base of an asset or a liability

Under IFRS, a single asset or liability may have more than one tax base, whereas there

would generally be only one tax base per asset or liability under US GAAP.


Tax base is based upon therelevant tax law. It isgenerally determined bythe amount that isdepreciable for taxpurposes or deductible

Tax base is based on thetax consequences whichwill occur based upon howan entity is expected torecover or settle thecarrying amount of assets

Not addressed.

Liabilities─taxes



upon sale or liquidation ofthe asset or settlement ofthe liability.

and liabilities.

The carrying amount ofassets or liabilities can berecovered or settledthrough use or throughsale.

Assets and liabilities mayalso be recovered orsettled through use andthrough sale together. Inthat case, the carryingamount of the asset orliability is bifurcated,resulting in more than asingle temporarydifference related to thatitem.

A rebuttable presumptionexists that investmentproperty measured at fairvalue will be recoveredthrough sale.

7.4 Initial recognition of an asset or a liability

In certain situations, there will be no deferred tax accounting under IFRS that would

exist under US GAAP and vice versa.


A temporary differencemay arise on initialrecognition of an asset orliability. In asset purchasesthat are not businesscombinations, a deferredtax asset or liability isrecorded with the offsetgenerally recorded againstthe assigned value of theasset. The amount of thedeferred tax asset orliability is determined byusing a simultaneousequations method.

An exemption exists fromthe initial recognition oftemporary differences inconnection withtransactions that qualify as

An exception exists thatdeferred taxes should notbe recognized on the initialrecognition of an asset orliability in a transactionwhich is not a businesscombination and affectsneither accounting profitnor taxable profit/loss atthe time of the transaction.No special treatment ofleveraged leases existsunder IFRS.

Under BE GAAP, theconcept of deferred tax isdifferent compared toIFRS and US GAAPaccounting frameworks.

Under BE GAAP, deferredtax is recognized inspecific cases described inCBN/CNC advice 2013/14:The advice gives detailedguidance on how toaccount for deferred taxon capital grants andrealized capital gains forwhich a deferred currenttaxation is applicablerequiring an adjustment tothe deferred tax liabilityinitially measured at the

Liabilities─taxes



leveraged leases underlease-accounting guidance.

enacted tax rate when theentity expects to pay lowertaxes in the future due toentitlements to tax creditssuch as the notionalinterest deduction. Inpractice such adjusteddeferred tax liability canbest be estimated byapplying the estimatedfuture effective tax rate tothe capital gains andcapital grants subject todeferred taxation. Suchan approach is not allowedunder IFRS and US GAAP.

Deferred taxes arising ontemporary differencesother than thosementioned above are notrecognized under BEGAAP.

It is, however, possible torecord deferred taxliabilities in consolidatedfinancial statements if it isprobable that an actual taxcharge will arise in theforeseeable future.Furthermore, recognitionof deferred tax assets inthe consolidated financialstatements is permitted ifrecovery is probable.

S ource: C B N / C N C2 0 1 3 / 1 4

Liabilities─taxes


7.5 Recognition of deferred tax assets

US GAAP and IFRS take differing approaches to the recognition of deferred tax assets.

It would be expected that net deferred tax assets recorded would be similar under

both standards.


Deferred tax assets arerecognized in full, but arethen reduced by avaluation allowance if it isconsidered more likelythan not that some portionof the deferred taxes willnot be realized.

Deferred tax assets arerecognized to the extentthat it is probable (or“more likely than not”)that sufficient taxableprofits will be available toutilize the deductibletemporary difference orunused tax losses.

Not addressed. Under BEGAAP, no deferred taxassets are recognized inthe statutory accounts asdeferred taxation underBE GAAP only deals withspecific transactionsresulting in a deferred(current) taxation of theunderlying taxable profits.

7.6 Deferred taxes on investments insubsidiaries, joint ventures, and equityinvestees

Differences in the recognition criteria surrounding undistributed profits and other

outside basis differences could result in changes in recognized deferred taxes under

IFRS.


With respect toundistributed profits andother outside basisdifferences, differentrequirements existdepending on whetherthey involve investmentsin subsidiaries, jointventures, or equityinvestees.

As it relates to investmentsin domestic subsidiaries,deferred tax liabilities arerequired on undistributedprofits arising after 1992unless the amounts can berecovered on a tax-freebasis and the entityanticipates utilizing thatmethod.

As it relates to investments

With respect toundistributed profits andother outside basisdifferences related toinvestments in foreign anddomestic subsidiaries,branches and associates,and interests in jointarrangements, deferredtaxes are recognizedexcept when a parentcompany, investor, jointventure or joint operator isable to control the timingof reversal of thetemporary difference andit is probable that thetemporary difference willnot reverse in theforeseeable future.

The general guidance

Not applicable.

Liabilities─taxes



in domestic corporate jointventures, deferred taxliabilities are required onundistributed profits thatarose after 1992.

No deferred tax liabilitiesare recognized onundistributed profits andother outside basisdifferences of foreignsubsidiaries and corporatejoint ventures that meetthe indefinite reversalcriterion.

Deferred taxes aregenerally recognized ontemporary differencesrelated to investments inequity investees.

US GAAP contains specificguidance on how toaccount for deferred taxeswhen there is a change inthe status of aninvestment. A deferred taxliability related toundistributed profits of aforeign investee that wouldnot otherwise be requiredafter the foreign investeebecomes a subsidiary is“frozen.” The deferred taxliability continues to berecognized to the extentthat dividends from thesubsidiary do not exceedthe parent company’sshare of the subsidiary’searnings subsequent to thedate it became asubsidiary, until thedisposition of thesubsidiary.

Deferred tax assets forinvestments insubsidiaries and corporatejoint ventures may berecorded only to the extentthey will reverse in theforeseeable future.

regarding deferred taxeson undistributed profitsand other outside basisdifferences is appliedwhen there is a change inthe status of an investmentfrom significant influenceor joint control to a beingsubsidiary.

Deferred tax assets forinvestments in foreign anddomestic subsidiaries,branches and associates,and interests in jointarrangements are recordedonly to the extent that it isprobable that thetemporary difference willreverse in the foreseeablefuture and taxable profitwill be available againstwhich the temporarydifference can be utilized.

Liabilities─taxes


7.7 Recognition of deferred taxes where the localcurrency is not the functional currency

US GAAP prohibits the recognition of deferred taxes on exchange rate changes and tax

indexing related to nonmonetary assets and liabilities in foreign currency while it may

be required under IFRS.


No deferred taxes arerecognized for differencesrelated to nonmonetaryassets and liabilities thatare remeasured from localcurrency into theirfunctional currency byusing historical exchangerates (if those differencesresult from changes inexchange rates or indexingfor tax purposes).

Deferred taxes should berecognized for thedifference between thecarrying amountdetermined by using thehistorical exchange rateand the relevant tax base,which may have beenaffected by exchange ratechanges or tax indexing.

Not applicable.

7.8 Uncertain tax positions

Differences with respect to recognition, unit-of-account, measurement and the

treatment of subsequent events may result in varying outcomes under the different

frameworks.


Uncertain tax positions arerecognized and measuredusing a two-step process:(1) determine whether abenefit may be recognizedand (2) measure theamount of the benefit. Taxbenefits from uncertaintax positions may berecognized only if it ismore likely than not thatthe tax position issustainable based on itstechnical merits.

Uncertain tax positions areevaluated at the individualtax position level.

The tax benefit ismeasured by using acumulative probabilitymodel: the largest amount

Accounting for uncertaintax positions is notspecifically addressedwithin IFRS. IAS 37excludes income taxesfrom its scope and is notused to measure uncertaintax positions. Theprinciples in IAS 12 areapplied to uncertain taxpositions. The taxaccounting should followthe manner in which anentity expects the taxposition to be resolvedwith the taxationauthorities at the balancesheet date.

Practice has developedsuch that uncertain taxpositions may be evaluatedat the level of the individual

Since there is no specificguidance under BE GAAP,general recognition rulesapply.

Provisions must berecorded to cover clearlyidentified losses or chargesthat result from pastevents at the balance sheetdate, and which are eitherlikely or certain to occur,but not reliablyquantifiable as to theiramount.

Examples are given of thetypes of cost for whichprovision should be made.

Generally BE GAAP allowentities much greater

Liabilities─taxes



of tax benefit that isgreater than 50 percentlikely of being realizedupon ultimate settlement.

uncertainty or group ofrelated uncertainties.Alternatively, they may beconsidered at the level oftotal tax liability to eachtaxing authority.

latitude in exercisingjudgement about the needfor provisions. In practice,together with a tendencyto emphasize theimportance of the attributeof prudence, this meansthat certain provisionsrecorded in conformitywith BE GAAP would notqualify for recognitionunder either IFRS or USGAAP.

Acceptable methods bywhich to measure taxpositions include (1) theexpected-value/probability-weighted-averageapproach and (2) thesingle-best-estimate/most-likely-outcome method.Use of the cumulativeprobability model requiredby US GAAP is notconsistent with IFRS.

Relevant developmentsaffecting uncertain taxpositions after the balancesheet date but beforeissuance of the financialstatements (including thediscovery of informationthat was not available as ofthe balance sheet date)would be considered anon-adjusting subsequentevent for which no effectwould be recorded in thecurrent-period financialstatements.

Relevant developmentsaffecting uncertain taxpositions occurring afterthe balance sheet date butbefore issuance of thefinancial statements(including the discovery ofinformation that was notavailable as of the balancesheet date) would beconsidered either anadjusting or non-adjustingevent depending onwhether the newinformation providesevidence of conditions thatexisted at the end of thereporting period.

Liabilities─taxes


7.9 Special deductions, investment tax credits,and tax holidays

US GAAP has specific guidance related to special deductions and investment tax

credits, generally grounded in US tax law. US GAAP also addresses tax holidays. IFRS

does not specify accounting treatments for any specific national tax laws and entities

instead are required to apply the principles of IAS 12 to local legislation.


Several specific deductionsunder US tax law havebeen identified under USGAAP as specialdeductions. Specialdeductions are recognizedin the period in which theyare claimed on the taxreturn. Entities subject tograduated tax rates shouldevaluate whether theongoing availability ofspecial deductions is likelyto move the entity into alower tax band whichmight cause deferred taxesto be recorded at a lowerrate.

Special deductions are notdefined under IFRS butare treated in the sameway as tax credits. Taxcredits are recognized inthe period in which theyare claimed on the taxreturn, however certaincredits may have thesubstantive effect ofreducing the entity’seffective tax rate for aperiod of time. The impacton the tax rate can affecthow entities should recordtheir deferred taxes. Inother cases the availabilityof credits might reduce anentity’s profits in a waythat moves it into a lowertax band, and again thismay impact the rate atwhich deferred taxes arerecorded.

In respect of investmentdeductions related to R&Dprojects, the Belgian taxadministration issuedspecific accountingguidance dealing with theaccounting treatment ofthese tax credits in thestatutory accounts. Forpractical reasons, thisguidance is used whenpreparing the statutoryaccounts notwithstandingthe fact that this taxguidance has neither beenintroduced into theBelgian accounting lawitself nor been confirmedby the Belgian AccountingCommission.

S ource:C i.RH .4 2 1 / 5 7 9 .0 7 2( A FER/ A O IF N ° 6 0 / 2 0 1 0 )

It is preferable to accountfor investment tax creditsusing the “deferralmethod” in which theentity spreads the benefitof the credit over the life ofthe asset. However,entities might alternativelyelect to recognize thebenefit in full in the year inwhich it is claimed (the“flow-through method”).

Deferred taxes are notrecorded for any taxholiday but rather thebenefit is recognized in theperiods over which theapplicable tax rate isreduced or that the entity

IAS 12 states thatinvestment tax credits areoutside the scope of theincome taxes guidance.IFRS does not defineinvestment tax credits, butwe believe that as ageneral rule it is a creditreceived for investment ina recognized asset.Depending on the natureof the credit it might beaccounted for in one ofthree ways:

□ In the same way asother tax credits;

□ As a government grantunder IAS 20; or

□ As an adjustment to

Liabilities─taxes



is exempted from taxes.Entities should, however,consider the rate at whichdeferred taxes arerecorded on temporarydifferences. Temporarydifferences expected toreverse during the periodof the holiday should berecorded at the rateapplicable during theholiday rather than thenormal statutory incometax rate.

the tax base of theasset to which theinitial recognitionexception is likely toapply.

While IFRS does notdefine a tax holiday, thetreatment is in line withUS GAAP in that theholiday itself does notcreate deferred taxes, butit might impact the rate atwhich deferred taxbalances are measured.

7.10 Intercompany transactions

The frameworks require different approaches when current and deferred taxes on

intercompany transfers of assets are considered.


For purposes of theconsolidated financialstatements, any taximpacts to the seller as aresult of an intercompanysale or transfer aredeferred until the asset issold to a third-party orotherwise recovered (e.g.,amortized or impaired). Inaddition, the buyer isprohibited fromrecognizing a deferred taxasset resulting from thedifference between the taxbasis and consolidatedcarrying amount of theasset.

There is no exception tothe model for the incometax effects of transferringassets between the entitiesin the consolidated groups.Any tax impacts to theconsolidated financialstatements as a result ofthe intercompanytransaction are recognizedas incurred.

If the transfer results in achange in the tax base ofthe asset transferred,deferred taxes resultingfrom the intragroup saleare recognized at thebuyer’s tax rate.

Not applicable.

Liabilities─taxes


7.11 Change in tax laws and rates

The impact on deferred and current taxes as a result of changes in tax laws and tax

rates may be recognized earlier under IFRS.


US GAAP requires the useof enacted rates whencalculating current anddeferred taxes.

Current and deferred tax iscalculated using enacted orsubstantively enactedrates.

BE GAAP requires the useof enacted tax rates, exceptthe Belgian deferred tax oncapital grants andunrealized capital gains.

7.12 Tax rate on undistributed earnings of asubsidiary

In the case of dual rate tax jurisdiction, the tax rate to be applied on inside basis

difference and outside basis difference in respect of undistributed earnings may differ

between US GAAP and IFRS.


For jurisdictions that havea tax system under whichundistributed profits aresubject to a corporate taxrate higher thandistributed profits, effectsof temporary differencesshould be measured usingthe undistributed tax rate.Tax benefits of future taxcredits that will be realizedwhen the income isdistributed cannot berecognized before theperiod in which thosecredits are included in theentity’s tax return.

A parent company with asubsidiary entitled to a taxcredit for dividends paidshould use the distributedrate when measuring thedeferred tax effects relatedto the operations of theforeign subsidiary.However, theundistributed rate shouldbe used in the

Where income taxes arepayable at a higher orlower rate if part or all ofthe net profit or retainedearnings are distributed asdividends, deferred taxesare measured at the taxrate applicable toundistributed profits.

In consolidated financialstatements, when a parenthas a subsidiary in a dual-rate tax jurisdiction andexpects to distributeprofits of the subsidiary inthe foreseeable future, itshould measure thetemporary differencesrelating to the investmentin the subsidiary at therate that would apply todistributed profits. This ison the basis that theundistributed earnings areexpected to be recoveredthrough distribution andthe deferred tax should bemeasured according to the

Due to the application ofthe Belgian “fairness tax”legislation, a higher taxrate may apply if dividendsare paid out to theshareholders. See nextsection.

Liabilities─taxes



consolidated financialstatements if the parent, asa result of applying theindefinite reversal criteria,has not provided fordeferred taxes on theunremitted earnings of theforeign subsidiary.

For jurisdictions where theundistributed rate is lowerthan the distributed rate,the use of the distributedrate is preferable but theuse of the undistributedrate is acceptable providedappropriate disclosuresare added.

expected manner ofrecovery.

7.13 Fairness tax

Large companies are subject to a fairness tax on their distributed dividends. The

fairness tax is a separate tax at a rate of 5.15% (5% increased with 3% crisis surtax)

calculated on the distributed profits that have not been effectively taxed because of the

notional interest deduction and/or deduction of losses carried forward. The tax is only

applicable if certain conditions are met.


Not specifically addressed. In accordance with IAS 12paragraph 52A, currentand deferred tax assetsand liabilities should bemeasured at the tax rateapplicable to undistributedprofits (i.e. the 33.99%standard Belgiancorporate income tax rate).

Consequently, no changein measurement for insidebasis differences shouldtake place (i.e. theundistributed tax rate of33.99% can in principle beretained).

In accordance with IAS 12,paragraph 51, themeasurement of deferredtax liabilities and deferredtax assets shall reflect the

Since the financialstatements are drawn upafter allocation of theresult and accumulatedresult, the fairness taxshould be recognized inthe same period when theprofits are generated andcannot be deferred to thefollowing accounting year.

The AccountingCommission further refersto its advice 128/6“Accounting for incometaxes” for practicalexamples of theaccounting entries.

S ource: C B N / C N C 2 0 1 4 / 8

Liabilities─taxes



tax consequences thatwould follow from themanner in which the entityexpects, at the end of thereporting period, torecover or settle thecarrying amount of itsassets and liabilities.

7.14 Presentation

Presentation differences related to deferred taxes and uncertain tax positions could

affect the calculation of certain ratios from the face of the balance sheet (including a

company’s current ratio) because IFRS requires deferred taxes to be classified as

noncurrent.


The classification ofdeferred tax assets anddeferred tax liabilitiesfollows the classification ofthe related asset or liabilityfor financial reporting (aseither current ornoncurrent). If a deferredtax asset or liability is notassociated with anunderlying asset orliability, it is classifiedbased on the anticipatedreversal periods. Withinan individual taxjurisdiction, currentdeferred taxes aregenerally offset andclassified as a singleamount and noncurrentdeferred taxes are offsetand classified as a singleamount. Any valuationallowances are allocatedbetween current andnoncurrent deferred taxassets for a tax jurisdictionon a pro rata basis.

A liability for uncertain taxpositions is classified as acurrent liability only to theextent that cash paymentsare anticipated within 12

Deferred tax assets anddeferred tax liabilitiesshould be offset forpresentation purpose if thedeferred taxes relate toincome taxes levied by thesame authority and thereis a legally enforceableright to offset. Deferredtaxes after offsettingshould be presented asnoncurrent on the balancesheet.

Supplemental notedisclosures may beincluded to distinguishdeferred tax assets andliabilities betweenamounts expected to berecovered or settled lessthan or greater than oneyear from the balancesheet date.

A liability for uncertain taxpositions relating tocurrent or prior yearreturns (i.e., within thecurrent tax provision) isgenerally classified as acurrent liability on thebalance sheet becauseentities typically do nothave the unconditional

Not addressed but similarto IFRS in practice.

Liabilities─taxes



months of the reportingdate. Otherwise, suchamounts are reflected asnoncurrent liabilities.

A liability for anunrecognized tax benefitshould be presented as areduction to a deferred taxasset for a net operatingloss or tax creditcarryforward if thecarryforward is availableat the reporting date tosettle any additionalincome taxes that wouldresult from thedisallowance of theuncertain tax position.Netting would not apply,however, if the tax law ofthe applicable jurisdictiondoes not require the entityto use, and the entity doesnot intend to use, thecarryforward for suchpurpose.

The classification ofinterest and penaltiesrelated to uncertain taxpositions (either in incometax expense or as a pretaxitem) represents anaccounting policy decisionthat is to be consistentlyapplied and disclosed.

right to defer settlement ofuncertain tax positions forat least twelve monthsafter the end of thereporting period.

There is no specificguidance under IFRS onthe presentation ofliabilities for uncertain taxpositions when a netoperating losscarryforward or a taxcredit carryforward exists.The general guidance inIAS 12 on the presentationof income taxes applies.

Interest and penaltiesrelated to uncertain taxpositions may be classifiedas finance or otheroperating expenserespectively in the incomestatement, when they canbe clearly identified andseparated from the relatedtax liability; or included inthe tax line if they cannotbe separated from thetaxes, or as matter ofaccounting policy. Theaccounting policy decisionshould be consistentlyapplied and disclosed.

7.15 Intraperiod allocation

Differences can arise in accounting for the tax effect of a loss from continuing

operations. Subsequent changes to deferred taxes could result in less volatility in the

statement of operations under IFRS.


The tax expense or benefitis allocated between thefinancial statementcomponents (such ascontinuing operations,discontinued operations,other comprehensive

Tax follows the item.Current and deferred taxon items recognized inother comprehensiveincome or directly inequity is recognized inother comprehensive

Not addressed.

Liabilities─taxes



income, and equity)following a “with andwithout” approach:

□ First, the total taxexpense or benefit forthe period iscomputed,

□ Then the tax expenseor benefit attributableto continuingoperations iscomputed separatelywithout consideringthe other components,and

□ The differencebetween the total taxexpense or benefit forthe period and theamount attributable tocontinuing operationsis allocated amongstthe other components.

An exception to that modelrequires that allcomponents be consideredto determine the amountof tax benefit that isallocated to a loss fromcontinuing operations.

Subsequent changes indeferred tax balances dueto enacted tax rate and taxlaw changes are takenthrough profit or lossregardless of whether thedeferred tax was initiallycreated through profit orloss or othercomprehensive income,through equity, or inacquisition accounting.The same principle appliesto changes in assertionwith respect to unremittedearnings of foreignsubsidiaries; deferredtaxes are recognized incontinuing operationseven if some of thetemporary difference aroseas a result of foreignexchange recognized in

income or directly inequity, respectively. Wherean entity pays tax on all itsprofits, including elementsrecognized outside profitor loss, the tax allocated tothe different primarystatements is calculated ona reasonable pro ratabasis, or another basis thatis more appropriate in thecircumstances.

No exception to thisprinciple is required underIFRS because IAS 12always requires that thetax consequences followthe underlying item.

Subsequent changes indeferred tax arerecognized in profit orloss, OCI, or equitydepending on where thetransaction(s) giving riseto the deferred tax wererecorded. Entities must“backwards trace” basedupon how the deferred taxbalance arose to determinewhere the change indeferred tax is recorded.

Liabilities─taxes



OCI.

Changes in the amount ofvaluation allowance due tochanges in assessmentabout realization in futureperiods are generally takenthrough the incomestatement, with limitedexceptions for certainequity-related items.

7.16 Disclosures

The disclosures required by US GAAP and IFRS differ in a number of respects, but

perhaps the two most significant differences relate to uncertain tax positions and the

rate used in the effective tax rate reconciliation. Other disclosure differences are

largely a consequence of differences in the underlying accounting models.


Public entities are requiredto present a tabularreconciliation ofunrecognized tax benefitsrelating to uncertain taxpositions from one year tothe next.

The effective tax ratereconciliation is presentedusing the statutory tax rateof the parent company.

Entities with contingenttax assets and liabilitiesare required to provideIAS 37 disclosures inrespect of thesecontingencies, but there isno requirement for atabular reconciliation.

The effective tax ratereconciliation can bepresented using either theapplicable tax rates or theweighted average tax rateapplicable to profits of theconsolidated entities.

Not addressed.

7.17 Interim reporting

A worldwide effective tax rate is used to record interim tax provisions under US

GAAP. Under IFRS, a separate estimated average annual effective tax rate is used for

each jurisdiction.


In general, the interim taxprovision is determined byapplying the estimatedannual worldwide effective

The interim tax provisionis determined by applyingan estimated averageannual effective tax rate to

Not addressed.

Liabilities─taxes



tax rate for theconsolidated entity to theworldwide consolidatedyear-to-date pretaxincome.

interim period pretaxincome. To the extentpracticable, a separateestimated average annualeffective tax rate isdetermined for eachmaterial tax jurisdictionand applied individually tothe interim period pretaxincome of eachjurisdiction.

7.18 Separate financial statements

US GAAP provides guidance on the accounting for income taxes in the separate

financial statements of an entity that is part of a consolidated tax group.


The consolidated currentand deferred tax amountsof a group that files aconsolidated tax returnshould be allocated amongthe group members whenthey issue separatefinancial statements usinga method that issystematic, rational andconsistent with the broadprinciples of ASC 740. Anacceptable method is the“separate return” method.It is also acceptable tomodify this method toallocate current andincome taxes using the“benefits-for-loss”approach.

There is no specificguidance under IFRS onthe methods that can beused to allocate currentand deferred tax amountsof a group that files aconsolidated tax returnamong the group memberswhen they issue separatefinancial statements.

Not addressed.

7.19 Tax shelter


Not addressed. Not addressed. Tax shelter is a fiscalincentive that promotesthe production of audio-visual andcinematographic works. Acompany investing in this

Liabilities─taxes



sector can benefits from anexemption of any retainedtaxable profits up to 150%of the amount actuallypaid. In the accounts of theinvestor, such instrumentis considered as a financialasset since the investor hasonly rights to the cashflows generated by audio-visual works but noownership rights to thedeveloped artistic creation.

For arrangements as fromJanuary 1, 2015 theCBN/CNC advice 2015/1 isapplicable.

S ources:

C B N / C N C 2 0 1 5 / 1

C B N / C N C 2 0 1 2 / 6C B N / C N C 2 0 1 2 / 7

7.20 Share-based payment arrangements

Significant differences in current and deferred taxes exist between US GAAP and IFRS

with respect to share-based payment arrangements. The relevant differences are

described in the Expense recognition—share-based payments chapter.


7.21.1 FASB’s ongoing projects

As a follow-up on the results of the Financial Accounting Foundation’s post-

implementation review of income tax accounting (concluded in November 2013),

along with the FASB’s ongoing simplification initiative, the FASB staff has

recommended eliminating the continuing operations loss exception to the intraperiod

allocation “with and without” approach. Rather than addressing only that specific

exception, however, the FASB requested the staff to conduct additional research

regarding the possibility of eliminating the intraperiod allocation rules by adopting a

single calculation and presentation of income taxes.

In addition, the FASB has now included income taxes as part of its Disclosure

Framework project. Topics being addressed within the Disclosure Framework project

include foreign earnings and uncertain tax positions.

Liabilities─taxes


7.21.2 FASB Exposure Draft, Intra-entity asset transfers and balance sheet

classification of deferred taxes

The Board has published an exposure draft proposing to eliminate the current

exception for recognition of taxes on intercompany transfers of assets, and requiring

the presentation of deferred tax assets and liabilities to be all noncurrent. The

comment deadline for this “two-part” exposure draft closed on May 29, 2015. In both

cases, if the FASB decides to make those changes, such differences in income tax

accounting between US GAAP and IFRS would be eliminated.

7.21.3 FASB Exposure Draft, Financial instruments classification and

measurement—Recognition of deferred tax assets arising from

unrealized losses on debt investments and IASB Exposure Draft,

Recognition of deferred tax assets for unrealized losses

In May 2014, the FASB issued a tentative decision indicating that the assessment of

whether a valuation allowance is needed on deferred tax assets that arise from

unrealized losses on debt investments measured at fair value through other

comprehensive income should be evaluated in combination with the other deferred

tax assets. The effective date for this new standard will be decided during final

deliberations on the project.

The IASB issued an exposure draft to amend IAS 12 to confirm that decreases in the

carrying amount of a fixed-rate debt instrument for which the principal is paid at

maturity give rise to a deductible temporary difference if the instrument is measured

at fair value and its tax base remains at cost, and that such temporary differences are

assessed in combination with other temporary differences. Deferred tax assets are

recognized for such temporary differences, unless recovering the debt instrument by

holding it until an unrealized loss reverses does not reduce future tax payments and

instead only avoids higher tax losses. The amendments also clarify that an entity can

assume in assessing the recoverability of deferred tax assets that an asset is recovered

for more than its carrying value and that future profits are considered before the

impact of reversing deductible temporary differences. These proposed amendments

achieve an outcome for deferred tax accounting that would be consistent with that

proposed by the FASB. The comment period for the exposure draft closed on

December 18, 2014, and on March 24, 2015, the Interpretations Committee

recommended to the Board that they proceed with the proposed amendment.

7.21.4 IASB Exposure Draft, Accounting for uncertainties in income taxes

The IFRS Interpretations Committee will shortly publish a draft interpretation on the

accounting for uncertainties in income taxes. The exposure draft is expected to

propose that an uncertain tax position should be recognized on the balance sheet if it

is probable that it will result in a further tax payment or a tax refund. Once

recognized, uncertain tax positions would be measured at either the single most likely

outcome or a probability weighted average of possible outcomes. The measurement

model would be selected on a position-by-position basis depending on the approach

that best predicts the amount that will be paid or recovered. This measurement model

is different than the US GAAP cumulative probability model, and it is expected that

the US GAAP approach will continue to be prohibited under IFRS.

PwC 1-1

Chapter 8:Liabilities - other

Liabilities─other


8.1 Liabilities—other

The guidance in relation to nonfinancial liabilities (e.g., provisions, contingencies, and

government grants) includes some fundamental differences with potentially

significant implications.

For instance, a difference exists in the interpretation of the term “probable.” IFRSdefines probable as “more likely than not,” but US GAAP defines probable as “likely tooccur.” Because both frameworks reference probable within the liability recognitioncriteria, this difference could lead companies to record provisions earlier under IFRSthan they otherwise would have under US GAAP. The use of the midpoint of a rangewhen several outcomes are equally likely (rather than the low-point estimate, as usedin US GAAP) might also lead to increased or earlier expense recognition under IFRS.Under BE GAAP, a formal decision taken by the board is considered sufficient to recognize aprovision for restructuring, leading to a major difference in the timing of recognition. BEGAAP requires provisions for major repair and maintenance to be recognized progressively,even if there is no present or constructive obligation to incur costs.

IFRS does not have the concept of an ongoing termination plan, whereas severance is

recognized under US GAAP once probable and reasonably estimable. This could lead

companies to record restructuring provisions in periods later than they would under

US GAAP.

As it relates to reimbursement rights, IFRS has a higher threshold for the recognitionof reimbursements of recognized losses by requiring that they be virtually certain ofrealization, whereas the threshold is lower under US GAAP. BE GAAP does not providesuch detailed guidance on recognition and measurement of reimbursement rights, howeverin practice it is similar to IFRS. Netting of expenses and amounts recognized for areimbursement is not allowed under BE GAAP.


US GAAP

ASC 410-20, ASC 410-30, ASC 420, ASC 450-10, ASC 450-20, ASC 460-10, ASC 944-

40, ASC 958-605

IFRS

IAS 19, IAS 20, IAS 37

BE GAAP

CBN/CNC 107/9, CBN/CNC 107-3bis, CBN 2011/13, CBN/CNC 2014/2

Note



this area.

Liabilities─other


8.2 Recognition of provisions

Differences in the definition of “probable” may result in earlier recognition of

liabilities under IFRS.

The IFRS “present obligation” criteria might result in delayed recognition of liabilities

when compared with US GAAP.


A loss contingency is anexisting condition,situation, or set ofcircumstances involvinguncertainty as to possibleloss to an entity that willultimately be resolvedwhen one or more futureevents occur or fail tooccur.

An accrual for a losscontingency is required iftwo criteria are met: (1) ifit is probable that aliability has been incurredand (2) the amount of losscan be reasonablyestimated.

A contingent liability isdefined as a possibleobligation whose outcomewill be confirmed only bythe occurrence ornonoccurrence of one ormore uncertain futureevents outside the entity’scontrol.

A contingent liability is notrecognized. A contingentliability becomes aprovision and is recordedwhen three criteria aremet: (1) a presentobligation from a pastevent exists, (2) it isprobable that an outflow ofresources will be requiredto settle the obligation,and (3) a reliable estimatecan be made.

A provision is a liability ofuncertain timing oramount.

Provisions must berecorded to cover clearlyidentified losses or chargesthat result from pastevents at the balance sheetdate, and which are eitherlikely or certain to occur,but not reliablyquantifiable as to theiramount. Examples aregiven of the types of costfor which provision shouldbe made (pensions, majorrepairs and maintenance,guarantees, litigation,etc.).

The presence of a legal orconstructive obligation isnot required to justify therecording of a provision.

Consequently, BE GAAPallow entities much greaterlatitude in exercisingjudgement about the needfor provisions. In practice,together with a tendencyto emphasize theimportance of the attributeof prudence, this meansthat certain provisionsrecorded in conformitywith BE GAAP would notpass the test to qualify asprovisions under IFRS.

Implicit in the firstcondition above is that it isprobable that one or more

The term “probable” isused for describing asituation in which the

Liabilities─other



future events will occurconfirming the fact of theloss.

The guidance uses theterm “probable” todescribe a situation inwhich the outcome is likelyto occur. While a numericstandard for probable doesnot exist, practicegenerally considers anevent that has a 75 percentor greater likelihood ofoccurrence to be probable.

outcome is more likelythan not to occur.Generally, the phrase“more likely than not”denotes any chance greaterthan 50 percent.

8.3 Measurement of provisions

In certain circumstances, the measurement objective of provisions varies under the

different frameworks.

IFRS results in a higher liability being recorded when there is a range of possible

outcomes with equal probability.


A single standard does notexist to determine themeasurement ofobligations. Instead,entities must refer toguidance established forspecific obligations (e.g.,environmental orrestructuring) todetermine the appropriatemeasurementmethodology.

The amount recognizedshould be the bestestimate of theexpenditure required (theamount an entity wouldrationally pay to settle ortransfer to a third partythe obligation at thebalance sheet date).

Essentially similar toIFRS.

Pronouncements relatedto provisions do notnecessarily havesettlement price or evenfair value as an objective inthe measurement ofliabilities, and theguidance often describesan accumulation of theentity’s cost estimates.

When no amount within arange is a better estimate

Where there is acontinuous range ofpossible outcomes andeach point in that range isas likely as any other, themidpoint of the range isused.

Liabilities─other



than any other amount,the low end of the range isaccrued.

8.4 Discounting of provisions

Provisions will be discounted more frequently under IFRS. At the same time, greater

charges will be reflected as operating (versus financing) under US GAAP.


For losses that meet theaccrual criteria of ASC450, an entity willgenerally record them atthe amount that will bepaid to settle thecontingency, withoutconsidering the time thatmay pass before theliability is paid.Discounting theseliabilities is acceptablewhen the aggregateamount of the liability andthe timing of cashpayments for the liabilityare fixed or determinable.Entities with theseliabilities that are eligiblefor discounting are not,however, required todiscount those liabilities;the decision to discount isan accounting policychoice.

The classification in thestatement of operations ofthe accretion of theliability to its settlementamount is an accountingpolicy decision that shouldbe consistently appliedand disclosed.

When discounting isapplied, the discount rateapplied to a liabilityshould not change fromperiod to period if theliability is not recorded at

IFRS requires that theamount of a provision bethe present value of theexpenditure expected to berequired to settle theobligation. The anticipatedcash flows are discountedusing a pre-tax discountrate (or rates) thatreflect(s) current marketassessments of the timevalue of money and therisks specific to theliability (for which thecash flow estimates havenot been adjusted) if theeffect is material.

Provisions shall bereviewed at the end of eachreporting period andadjusted to reflect thecurrent best estimate. Thecarrying amount of aprovision increases in eachperiod to reflect thepassage of time with saidincrease recognized as aborrowing cost.

Broadly similar to IFRS.

CBN/CNC advice 107/9clearly requires discountfactor to be applied tocalculate provision forearly retirement, if thetiming of expenditureexceeds one year.

Liabilities─other



fair value.

There are certain instancesoutside of ASC 450 (e.g., inthe accounting for assetretirement obligations)where discounting isrequired.

8.5 Restructuring provisions (excluding businesscombinations)

IFRS does not have the concept of an ongoing termination plan, whereas a severance

liability is recognized under US GAAP once it is probable and reasonably estimable.

This could lead companies to record restructuring provisions in periods later than

they would under US GAAP.


Guidance exists fordifferent types oftermination benefits (i.e.,special terminationbenefits, contractualtermination benefits,severance benefits, andone-time benefitarrangements).

If there is a pre-existingarrangement such that theemployer and employeeshave a mutualunderstanding of thebenefits the employee willreceive if involuntarilyterminated, the cost of thebenefits are accrued whenpayment is probable andreasonably estimable. Inthis instance, noannouncement to theworkforce (nor initiationof the plan) is requiredprior to expenserecognition.

Involuntary terminationbenefits, which have nofuture servicerequirement, arerecognized when thetermination plan has beencommunicated to theaffected employees and theplan meets specifiedcriteria. This guidanceapplies to all terminationbenefits.

Restructuring provisionscan only be set up if there isa firm decision of the boardof directors to that effect.

BE GAAP provides thatearly retirementobligations should only berecognized when the earlyretirement is notifiedindividually to theemployees.

Source: CBN/CNC 107-3bis

Liabilities─other


8.6 Onerous contracts

Onerous contract provisions may be recognized earlier and in different amounts

under IFRS.


Provisions are notrecognized for unfavorablecontracts unless the entityhas ceased using the rightsunder the contract (i.e.,the cease-use date).

One of the most commonexamples of anunfavorable contract hasto do with leased propertythat is no longer in use.With respect to suchleased property, estimatedsublease rentals are to beconsidered in ameasurement of theprovision to the extentsuch rentals couldreasonably be obtained forthe property, even if it isnot management’s intentto sublease or if the leaseterms prohibit subleasing.Incremental expense ineither instance isrecognized as incurred.

Provisions are recognizedwhen a contract becomesonerous regardless ofwhether the entity hasceased using the rightsunder the contract.

When an entity commits toa plan to exit a leaseproperty, sublease rentalsare considered in themeasurement of anonerous lease provisiononly if management hasthe right to sublease andsuch sublease income isprobable.

IFRS requires recognitionof an onerous loss forexecutory contracts if theunavoidable costs ofmeeting the obligationsunder the contract exceedthe economic benefitsexpected to be receivedunder it.

In practice, the accountingtreatment is similar toIFRS.

Recording a liability isappropriate only when alessee permanently ceasesuse of functionallyindependent assets (i.e.,assets that could be fullyutilized by another party).

US GAAP generally doesnot allow the recognitionof losses on executorycontracts prior to suchcosts being incurred.

Liabilities─other


8.7 Accounting for government grants

IFRS permits the recognition of government grants once there is reasonable assurance

that requisite conditions will be met, rather than waiting for the conditions to be

fulfilled, as is usually the case under US GAAP. As a result, government grants may be

recognized earlier under IFRS.


If conditions are attachedto the grant, recognition ofthe grant is delayed untilsuch conditions have beenfulfilled. Contributions oflong-lived assets or for thepurchase of long-livedassets are to be credited toincome over the expecteduseful life of the asset forwhich the grant wasreceived.

Government grants arerecognized once there isreasonable assurance thatboth (1) the conditions fortheir receipt will be metand (2) the grant will bereceived. Income-basedgrants are deferred in thebalance sheet and releasedto the income statement tomatch the relatedexpenditure that they areintended to compensate.Asset-based grants aredeferred and matched withthe depreciation on theasset for which the grantarises.

Grants that involverecognized assets arepresented in the balancesheet either as deferredincome or by deductingthe grant in arriving at theasset’s carrying amount, inwhich case the grant isrecognized as a reductionof depreciation.

Under BE GAAP, thegrant from publicauthorities should beaccounted for when theright to receive the grantexits and the amount canbe measured reliably.

Specific guidance existsfor grants in form of in-kind contribution ofassets, investment relatedgrants (capital andinterest related grants)and expenditure relatedgrants.

Recognition ofgovernment grants inprofit or loss is the sameas under IFRS (matchingto the depreciation of therelated assets).

BE GAAP requiresdeferred capital grants tobe reported in a separatecaption withinshareholders’ equity, net ofany deferred tax impact.

Source:

CBN advice 2011/13

A ccoun tin gtreatm en tof agovern m en tgran treceived in form of arecoverable ad van ce

The CBN/CNC advice2014/2 provides furtherguidance to CBN/CNCadvice 2011/13 and dealswith government grantsfrom the Walloon region

Liabilities─other



for research anddevelopment expenses. Ifthe company decides toexploit the results of theresearch, it will have toreimburse the grantcompletely, partially oreven more than theamount of the grantdepending on the resultsof the research. If thecompany decides not theexploit the results of theresearch, it has to transferall rights relating to theresearch project to theWalloon region and it isnot required to reimbursethe grant.

The accounting treatmentof the grant before, duringand after the researchphase is explained for thetwo cases: A. In case thecompany does not exploitthe results of the research(no reimbursement of thegovernment grant) and B.In case the companydecides to exploit theresults of the research(reimbursement of thegovernment grant).


8.8 Reimbursement and contingent assets

Guidance varies with respect to when these amounts should be recognized. As such,

recognition timing differences could rise.


Recovery of recogn izedlosses—An asset relatingto the recovery of arecognized loss shall berecognized whenrealization of the claim forrecovery is deemed

Reim bursem en ts—Where some or all of theexpenditure required tosettle a provision isexpected to be reimbursedby another party, thereimbursement shall be

Reimbursements: broadlysimilar to IFRS.

Liabilities─other



probable.

Recoveriesrepresen tin ggaincon tin gen cies—Gaincontingencies should notbe recognized prior totheir realization. In certainsituations a gaincontingency may beconsidered realized orrealizable prior to thereceipt of cash.

recognized when, and onlywhen, it is virtually certainthat reimbursement will bereceived if the entitysettles the obligation. Theamount recognized for thereimbursement shall betreated as a separate assetand shall not exceed theamount of the provision.

The virtually certainthreshold may, in certainsituations, be achieved inadvance of the receipt ofcash.

C on tin gen tassets—Contingent assets are notrecognized in financialstatements because thismay result in therecognition of income thatmay never be realized. Ifthe inflow of economicbenefits is probable, theentity should disclose adescription of thecontingent asset. However,when the realization ofincome is virtually certain,then the related asset isnot a contingent asset, andits recognition isappropriate.

Contingent assets: notspecifically addressed butbroadly similar to IFRS.

8.9 Levies

IFRS includes specific guidance related to the treatment of levies. US GAAP and BE

GAAP do not include specific guidance. This could result in differences between the

timing and measurement of contingencies related to levies.


Specific guidance does notexist within US GAAP.Levies and their relatedfines and penalties followthe guidance in ASC 450unless other guidanceestablished for the specificobligation exists (e.g.,

Levies are defined as atransfer of resourcesimposed by a governmenton entities in accordancewith laws and/orregulations, other thanthose within the scope ofother standards (such as

Not addressed.

Liabilities─other



environmental). IAS 12); and fines or otherpenalties imposed forbreaches of laws and/orregulations.

IFRIC 21, aninterpretation of IAS 37,Provisions, ContingentLiabilities and ContingentAssets, clarifies that theobligating event that givesrise to a liability to pay alevy is the activitydescribed in the relevantlegislation that triggers thepayment of the levy. Thefact that an entity iseconomically compelled tocontinue operating in afuture period, or preparesits financial statementsunder the going concernprinciple, does not createan obligation to pay a levythat will arise fromoperating in the future.The interpretation alsoclarifies that a liability topay a levy is recognizedwhen the obligating eventoccurs, at a point in timeor progressively over time,and that an obligation topay a levy triggered by aminimum threshold isrecognized when thethreshold is reached.

PwC 1-1

Chapter 9:Financial liabilitiesand equity

Financial liabilities and equity


9.1 Financial liabilities and equity

Under current standards, both US GAAP and IFRS require the assessment of financial

instruments to determine whether either equity or financial liability classification (or

both) is required. Although the IFRS and US GAAP definitions of a financial liability

bear some similarities, differences exist that could result in varying classification of

identical instruments.

As an overriding principle, IFRS requires a financial instrument to be classified as a

financial liability if the issuer can be required to settle the obligation in cash or

another financial asset. US GAAP, on the other hand, defines a financial liability in a

more specific manner. Unlike IFRS, financial instruments may potentially be equity-

classified under US GAAP if the issuer’s obligation to deliver cash or another financial

asset at settlement is conditional. As such, US GAAP will permit more financial

instruments to be equity-classified as compared to IFRS.

Many financial instruments contain provisions that require settlement in cash or

another financial asset if certain contingent events occur. Contingently redeemable

(settleable) instruments are more likely to result in financial liability classification,

and financial instruments that are puttable are generally financial liabilities with very

limited exceptions under IFRS. This is because the issuer cannot unconditionally

avoid delivering cash or another financial asset at settlement. Identical contingently

redeemable (settleable) and/or puttable instruments may be equity-classified under

US GAAP due to the conditional nature of the issuer’s obligation to deliver cash or

another financial asset at settlement.

Oftentimes, reporting entities issue financial instruments that have both a liability

and an equity component (e.g., convertible debt and redeemable preferred stock that

is convertible into the issuer’s common equity). Such instruments are referred to as

compound financial instruments under IFRS and hybrid financial instruments under

US GAAP. IFRS requires a compound financial instrument to be separated into a

liability, and an equity component (or a derivative component, if applicable).

Notwithstanding convertible debt with a cash conversion feature, which is accounted

for like a compound financial instrument, hybrid financial instruments are evaluated

differently under US GAAP. Unless certain conditions requiring bifurcation of the

embedded feature(s) are met, hybrid financial instruments are generally accounted for

as a financial liability or equity instrument in their entirety. The accounting for

compound/hybrid financial instruments can result in significant balance sheet

presentation differences while also impacting earnings.

Settlement of a financial instrument (freestanding or embedded) that results in

delivery or receipt of an issuer’s own shares may also be a source of significant

differences between IFRS and US GAAP. For example, net share settlement would

cause a warrant or an embedded conversion feature to require financial liability

classification under IFRS. A similar feature would not automatically taint equity

classification under US GAAP, and further analysis would be required to determine

whether equity classification is appropriate. Likewise, a derivative contract providing

for a choice between gross settlement and net cash settlement would fail equity

classification under IFRS even if the settlement choice resides with the issuer. If net



cash settlement is within the issuer’s control, the same derivative contract may be

equity-classified under US GAAP.

Written options are another area where US GAAP and IFRS produce different

accounting results. Freestanding written put options on an entity’s own shares are

classified as financial liabilities and recorded at fair value through earnings under US

GAAP. Under IFRS, such instruments are recognized and measured as a financial

liability at the discounted value of the settlement amount and accreted to their

settlement amount. SEC-listed entities must also consider the SEC’s longstanding

view that written options should be accounted for at fair value through earnings.

In addition to the subsequent remeasurement differences described above, the

application of the effective interest method when accreting a financial liability to its

settlement amount differs under IFRS and US GAAP. The effective interest rate is

calculated based on the estimated future cash flows of the instrument under IFRS,

whereas the calculation is performed using contractual cash flows under US GAAP

(with two limited exceptions, puttable and callable debt).


US GAAP

ASC 470-20, ASC 470-20-25-12, ASC 480, ASC 480-10-65-1, ASC 815, ASC 815-15-25-

4 through 25-5, ASC 815-40, ASC 815-40-25, ASC 820, ASC 825, ASC 850, ASC 860,

ASR 268, CON 6

IFRS

IAS 32, IAS 39, IFRS 13, IFRIC 2

BE GAAP

CBN/CNC 2012/20

Note



this area.

C lassification

9.2 Contingent settlement provisions

Contingent settlement provisions, such as provisions requiring redemption upon a

change in control, result in financial liability classification under IFRS unless the

contingency arises only upon liquidation or is not genuine.



Items classified as mezzanine equity under US GAAP generally are classified as

financial liabilities under IFRS.


A contingently redeemablefinancial instrument (e.g.,one redeemable only ifthere is a change incontrol) is outside thescope of ASC 480 becauseits redemption is notunconditional. Anyconditional provisionsmust be assessed to ensurethat the contingency issubstantive.

IAS 32 notes that afinancial instrument mayrequire an entity to delivercash or another financialasset in the event of theoccurrence ornonoccurrence ofuncertain future eventsbeyond the control of boththe issuer and the holderof the instrument.Contingencies may includelinkages to such events asa change in control or toother matters such as achange in a stock marketindex, consumer priceindex, interest rates, or netincome.

Not specifically addressed.

For SEC-listed companiesapplying US GAAP, certaintypes of securities requireclassification in themezzanine equity categoryof the balance sheet.Examples of itemsrequiring mezzanineclassification areinstruments withcontingent settlementprovisions or puttableshares as discussed in thePuttable shares section.

Mezzanine classification isa US public companyconcept that is alsoencouraged (but notrequired) for privatecompanies.

If the contingency isoutside of the issuer’s andholder’s control, the issuerof such an instrument doesnot have the unconditionalright to avoid deliveringcash or another financialasset. Therefore, except inlimited circumstances(such as if the contingencyis not genuine or if it istriggered only in the eventof a liquidation of theissuer), instruments withcontingent settlementprovisions representfinancial liabilities.

As referenced previously,the guidance focuses onthe issuer’s unconditionalability to avoid settlementno matter whether thecontingencies may or maynot be triggered.

There is no concept ofmezzanine classificationunder IFRS.



9.3 Derivative on own shares—fixed-for-fixedversus indexed to issuer’s own shares

When determining the issuer’s classification of a derivative on its own shares, IFRS

looks at whether the equity derivative meets a fixed-for-fixed requirement while US

GAAP uses a two-step model. Although Step 2 of the US GAAP model uses a similar

fixed-for-fixed concept, the application of the concept differs significantly between US

GAAP and IFRS.

These differences can impact classification as equity or a derivative asset or liability

(with derivative classification more common under IFRS).


Equity derivatives need tobe indexed to the issuer’sown shares to be classifiedas equity. The assessmentfollows a two-stepapproach under ASC 815-40-15.

S tep 1—Considers wherethere are any contingentexercise provisions and, ifso, they cannot be basedon an observable marketor index other than thosereferenced to the issuer’sown shares or operations.

Only contracts thatprovide for gross physicalsettlement and meet thefixed-for-fixed criteria(i.e., a fixed number ofshares for a fixed amountof cash) are classified asequity. Variability in theamount of cash or thenumber of shares to bedelivered results infinancial liabilityclassification.

Not addressed.

S tep 2 —Considers thesettlement amount. Onlysettlement amounts equalto the difference betweenthe fair value of a fixednumber of the entity’sequity shares and a fixedmonetary amount, or afixed amount of a debtinstrument issued by theentity, will qualify forequity classification.

If the instrument’s strikeprice (or the number ofshares used to calculatethe settlement amount) isnot fixed as outlinedabove, the instrument maystill meet the equityclassification criteria; thiscould occur where thevariables that might affect

For example, a warrantissued by Company X hasa strike price adjustmentbased on the movementsin Company X’s stockprice. This feature wouldfail the fixed-for-fixedcriteria under IFRS, butthe same adjustmentwould meet the criteriaunder US GAAP. As such,for Company X’saccounting for thewarrant, IFRS wouldresult in financial liabilityclassification, whereas USGAAP would result inequity classification.

However, there is anexception to the fixed-for-fixed criteria in IAS 32 forrights issues. Under this




settlement include inputsto the fair value of a fixed-for-fixed forward or optionon equity shares and theinstrument does notcontain a leverage factor.

In case of rights issues, ifthe strike price isdenominated in a currencyother than the issuer’sfunctional currency, itshall not be considered asindexed to the entity’s ownstock as the issuer isexposed to changes inforeign currency exchangerates. Therefore, rightsissues of this nature wouldbe classified as liabilities atfair value through profit orloss.

exception, rights issues areclassified as equity if theyare issued for a fixedamount of cash regardlessof the currency in whichthe exercise price isdenominated, providedthey are offered on a prorata basis to all owners ofthe same class of equity.

9.4 Derivatives on own shares—settlementmodels

Entities will need to consider how derivative contracts on an entity’s own shares will

be settled. Many of these contracts that are classified as equity under US GAAP (e.g.,

warrants that will be net share settled or those where the issuer has settlement

options) will be classified as derivatives under IFRS. Derivative classification will

create additional volatility in the income statement.


Derivative contracts thatare in the scope of ASC815-40 and both (1)require physicalsettlement or net sharesettlement, and (2) givethe issuer a choice of netcash settlement orsettlement in its ownshares are consideredequity instruments,provided they meet thecriteria set forth within theliterature.

Contracts that are netsettled (net cash or netshares) are classified asliabilities or assets. This isalso the case even if thesettlement method is atthe issuer’s discretion.

Gross physical settlementis required to achieveequity classification.

Not addressed.

Analysis of a contract’sterms is necessary to

Unlike US GAAP, underIFRS, a derivative contract




determine whether thecontract meets thequalifying criteria, some ofwhich can be difficult tomeet in practice.

Similar to IFRS, derivativecontracts that require netcash settlement are assetsor liabilities.

Contracts that give thecounterparty a choice ofnet cash settlement orsettlement in shares(physical or netsettlement) result inderivative classification.However, if the issuer hasa choice of net cashsettlement or sharesettlement, the contractcan still be considered anequity instrument.

that gives one party (eitherthe holder or the issuer) achoice over how it issettled (net in cash, net inshares, or by grossdelivery) is a derivativeasset/liability unless all ofthe settlement alternativeswould result in thecontract being an equityinstrument.

9.5 Written put option on the issuer’s own shares

Written puts that are to be settled by gross receipt of the entity’s own shares are

treated as derivatives under US GAAP, while IFRS requires the entity to set up a

financial liability for the discounted value of the amount of cash the entity may be

required to pay.


A financial instrument—other than an outstandingshare—that at inception(1) embodies an obligationto repurchase the issuer’sequity shares or is indexedto such an obligation, and(2) requires or may requirethe issuer to settle theobligation by transferringassets shall be classified asa financial liability (or anasset, in somecircumstances). Examplesinclude written putoptions on the issuer’sequity shares that are to bephysically settled or net

If the contract meets thedefinition of an equityinstrument (because itrequires the entity topurchase a fixed amount ofits own shares for a fixedamount of cash), anypremium received or paidmust be recorded inequity. Therefore, thepremium received on sucha written put is classifiedas equity (whereas underUS GAAP, the fair value ofthe written put is recordedas a financial liability).

Not addressed.




cash settled.

ASC 480 requires writtenput options to bemeasured at fair value,with changes in fair valuerecognized in currentearnings.

In addition, when an entityhas an obligation topurchase its own sharesfor cash (e.g., under awritten put) the issuerrecords a financial liabilityfor the discounted value ofthe amount of cash thatthe entity may be requiredto pay. The financialliability is recorded againstequity.

9.6 Compound instruments that are notconvertible instruments (that do not containequity conversion features)

Bifurcation and split accounting under IFRS may result in significantly different

treatment, including increased interest expense.


The guidance does nothave the concept ofcompound financialinstruments outside ofinstruments with certainequity conversion features.As such, under US GAAPthe instrument would beclassified wholly withinliabilities or equity.

If an instrument has botha liability component andan equity component—known as a compoundinstrument (e.g.,redeemable preferredstock with dividends paidsolely at the discretion ofthe issuer)—IFRS requiresseparate accounting foreach component of thecompound instrument.

The liability component isrecognized at fair valuecalculated by discountingthe cash flows associatedwith the liabilitycomponent at a marketrate for a similar debt hostinstrument excluding theequity feature, and theequity component ismeasured as the residualamount.

The accretion calculated inthe application of the

Various accountingtreatments (splitaccounting as well ascompound instrumenttreated as a liability) arepossible depending on theparticular form of thecompound instrument.




effective interest ratemethod on the liabilitycomponent is classified asinterest expense.

9.7 Convertible instruments (compoundinstruments that contain equity conversionfeatures)

Differences in how and when convertible instruments get bifurcated and/or how the

bifurcated portions get measured can drive substantially different results.


Equity conversion featuresshould be separated fromthe liability host andrecorded separately asembedded derivatives onlyif they meet certain criteria(e.g., fail to meet the scopeexception of ASC 815).

For convertibleinstruments with aconversion feature thatexchanges a fixed amountof cash for a fixed numberof shares, IFRS requiresbifurcation and splitaccounting between theliability and equitycomponents of theinstrument.

Various accountingtreatments (splitaccounting as well ascompound instrumenttreated as a liability) arepossible depending on theparticular form of thecompound instrument.

If the conversion feature isnot recorded separately,then the entire convertibleinstrument may beconsidered one unit ofaccount—interest expensewould reflect cash interestif issued at par. However,there are a few exceptions:

□ For certain convertibledebt instruments thatmay be settled in cashupon conversion, theliability and equitycomponents of theinstrument should beseparately accountedfor by allocating theproceeds from theissuance of theinstrument betweenthe liabilitycomponent and theembedded conversion

The liability component isrecognized at fair valuecalculated by discountingthe cash flows associatedwith the liabilitycomponent—at a marketrate for nonconvertibledebt—and the equityconversion feature ismeasured as the residualamount and recognized inequity with no subsequentremeasurement.

Equity conversion featureswithin liability hostinstruments that fail thefixed-for-fixedrequirement areconsidered to beembedded derivatives.Such embeddedderivatives are bifurcatedfrom the host debtcontract and measured at




option (i.e., the equitycomponent). Thisallocation is done byfirst determining thecarrying amount of theliability componentbased on the fair valueof a similar liabilityexcluding theembedded conversionoption, and thenallocating to theembedded conversionoption the excess ofthe initial proceedsascribed to theconvertible debtinstrument over theamount allocated tothe liabilitycomponent.

□ A convertible debtmay contain abeneficial conversionfeature (BCF) whenthe strike price on theconversion option is“in the money.” TheBCF is generallyrecognized andmeasured byallocating a portion ofthe proceeds received,equal to the intrinsicvalue of the conversionfeature, to equity.

fair value, with changes infair value recognized in theincome statement.

IFRS does not have aconcept of BCF, as thecompound instrumentsare already accounted forbased on theircomponents.

9.8 Puttable shares/redeemable upon liquidation

9.8.1 Puttable shares

Puttable shares are more likely to be classified as financial liabilities under IFRS.

The potential need to classify certain interests in open-ended mutual funds, unittrusts, partnerships, and the like as liabilities under IFRS could lead to situationswhere some entities have no equity capital in their financial statements.




P uttable sh ares

The redemption ofputtable shares isconditional upon theholder exercising the putoption. This contingencyremoves puttable sharesfrom the scope ofinstruments that ASC 480requires to be classified asa financial liability.

As discussed forcontingently redeemableinstruments, SECregistrants would classifythese instruments as“mezzanine.” Suchclassification isencouraged, but notrequired, for privatecompanies.

P uttable sh ares

Puttable instrumentsgenerally are classified asfinancial liabilities becausethe issuer does not have theunconditional right toavoid delivering cash orother financial assets.Under IFRS, the legal formof an instrument (i.e., debtor equity) does notnecessarily influence theclassification of a particularinstrument.

Under this principle, IFRSmay require certaininterests in open-endedmutual funds, unit trusts,partnerships, and the liketo be classified as liabilities(because holders canrequire cash settlement).This could lead tosituations where someentities have no equitycapital in their financialstatements.

However, an entity isrequired to classifyputtable instruments asequity when they haveparticular features andmeet certain specificconditions in IAS 32. Thisexemption does not applyto puttable instrumentsissued by a subsidiary.Even if the puttableinstruments are classifiedas equity in the financialstatements of the issuingsubsidiary, they are alwaysshown as financialliabilities in theconsolidated financialstatements of the parent.

Not addressed.



9.8.2 Redeemable upon liquidation

Differences with respect to the presentation of these financial instruments issued by a

subsidiary in the parent’s consolidated financial statements can drive substantially

different results.


Red eem able uponliquid ation

ASC 480 scopes outinstruments that areredeemable only uponliquidation. Therefore,such instruments mayachieve equityclassification for finite-lived entities.

Red eem able uponliquid ation

For instruments issued outof finite-lived entities thatare redeemable uponliquidation, equityclassification isappropriate only if certainconditions are met.

Not addressed.

In classifying thesefinancial instrumentsissued by a subsidiary in aparent’s consolidatedfinancial statements, USGAAP permits an entity todefer the application ofASC 480; the result is thatthe redeemablenoncontrolling interestsissued by a subsidiary arenot financial liabilities inthe parent’s consolidatedfinancial statements.

However, when classifyingredeemable financialinstruments issued by asubsidiary (either puttableor redeemable uponliquidation) for a parent’sconsolidated accounts,equity classification at thesubsidiary level is notextended to the parent’sclassification of theredeemable noncontrollinginterests in theconsolidated financialstatements, as the sameinstrument would notmeet the specific IAS 32criteria from the parent’sperspective.

M easurem en t

9.9 Initial measurement of a liability with arelated party

Fundamental differences in the approach to related-party liabilities under the

different accounting models may impact the values at which these liabilities initially

are recorded. The IFRS model may, in practice, be more challenging to implement.




When an instrument isissued to a related party atoff-market terms, oneshould consider whichmodel the instrument fallswithin the scope of as wellas the facts andcircumstances of thetransaction (i.e., theexistence of unstatedrights and privileges) indetermining how thetransaction should berecorded. There is,however, no requirementto initially record thetransaction at fair value.

The presumption in ASC850 that related partytransactions are not atarm’s length and theassociated disclosurerequirements also shouldbe considered.

When an instrument isissued to a related party,the financial liabilityinitially should berecorded at fair value,which may not be thevalue of the considerationreceived.

The difference betweenfair value and theconsideration received(i.e., any additionalamount lent or borrowed)is accounted for as acurrent-period expense,income, or as a capitaltransaction based on itssubstance.

Not addressed.

9.10 Effective-interest-rate calculation

Differences between the expected lives and the contractual lives of financial liabilities

have different implications under the different frameworks unless the instruments in

question are carried at fair value. The difference in where the different accounting

frameworks place their emphasis (contractual term for US GAAP and expected life for

IFRS) can impact carrying values and the timing of expense recognition.

Similarly, differences in how revisions to estimates get treated also impact carrying

values and expense recognition timing, with the potential for greater volatility under

IFRS.


The effective interest rateused for calculatingamortization under theeffective interest methodgenerally discountscontractual cash flowsthrough the contractuallife of the instrument.However, expected lifemay be used in somecircumstances. For

The effective interest rateused for calculatingamortization under theeffective interest methoddiscounts estimated cashflows through theexpected—not thecontractual—life of theinstrument.

Generally, if the entity

Similar to IFRS.




example, puttable debt isgenerally amortized overthe period from the date ofissuance to the first putdate and callable debt canbe amortized either overthe contractual orexpected life as a policydecision.

revises its estimate afterinitial recognition, thecarrying amount of thefinancial liability should berevised to reflect actualand revised estimated cashflows at the originaleffective interest rate, witha cumulative-catch-upadjustment being recordedin profit and loss.Revisions of the estimatedlife or of the estimatedfuture cash flows mayexist, for example, inconnection with debtinstruments that contain aput or call option that doesnot need to be bifurcatedor whose couponpayments vary. Paymentsmay vary because of anembedded feature thatdoes not meet thedefinition of a derivativebecause its underlying is anonfinancial variablespecific to a party to thecontract (e.g., cash flowsthat are linked to earningsbefore interest, taxes,depreciation, andamortization; salesvolume; or the earnings ofone party to the contract).

Generally, floating rateinstruments (e.g., LIBORplus spread) issued at parare not subject to thecumulative-catch-upapproach; rather, theeffective interest rate isrevised as market rateschange.



9.11 Modification or exchange of debt instrumentsand convertible debt instruments

Differences in when a modification or exchange of a debt instrument would be

accounted for as a debt extinguishment can drive different conclusions as to whether

extinguishment accounting is appropriate.


When a debt modificationor exchange of debtinstruments occurs, thefirst step is to considerwhether the modificationor exchange qualifies fortroubled debtrestructuring. If this is thecase, the restructuringfollows the specifictroubled debtrestructuring guidance.

If the modification orexchange of debtinstruments does notqualify for troubled debtrestructuring, one has toconsider whether themodification or exchangeof debt instruments has tobe accounted for as a debtextinguishment.

An exchange ormodification of debtinstruments withsubstantially differentterms is accounted for as adebt extinguishment. Inorder to determinewhether the debt issubstantively different, aquantitative assessmentmust be performed.

If the present value of thecash flows under the newterms of the new debtinstrument differs by atleast 10 percent from thepresent value of theremaining cash flowsunder the original debt,the exchange is considered

Under IFRS, there is noconcept of troubled debtrestructuring.

A substantial modificationof the terms of an existingfinancial liability or part ofthe financial liabilityshould be accounted for asan extinguishment of theoriginal financial liabilityand the recognition of anew financial liability. Inthis regard, the terms aresubstantially different ifthe discounted presentvalue of the cash flowsunder the new terms is atleast 10 percent differentfrom the discountedpresent value of theremaining cash flows ofthe original financialliability. If this test is met,the exchange is consideredan extinguishment.

It is clear that if thediscounted cash flowschange by at least 10percent, the original debtshould be accounted for asan extinguishment. It isnot clear, however, in IAS39 whether thequantitative analysis is anexample or is thedefinition of substantiallydifferent. Accordingly,there is an accountingpolicy choice whereentities can perform either(1) an additionalqualitative analysis of anymodification of terms

The advice CBN/CNC2012/20 explains how thepayment of a debt of acompany by a third partywho has acted as aguarantor towards thecreditor, needs to beaccounted for. In case thedebt of the company ispaid by a third party whohas acted as a guarantortowards the creditor, thedebt to the originalcreditor has to be debited.At the same time, a newdebt needs to be accountedfor towards to theguarantor as the guarantorreceived all rights of theoriginal creditor towardsthe debtor as a result ofthe payment of the debt.

In case the guarantorwaives his claim againstthe debtor, the debtor hasto recognize an exceptionalprofit and the debttowards the guarantor hasto be debited.




an extinguishment. Thediscount rate fordetermining the presentvalue is the effective rateon the old debt.

If the debt modificationsinvolve changes innoncash embeddedfeatures, the followingtwo-step test is required:

S tep 1—If the change incash flows as describedabove is greater than 10percent of the carryingvalue of the original debtinstrument, the exchangeor modification should beaccounted for as anextinguishment. This testwould not include anychanges in fair value of theembedded conversionoption.

when the change indiscounted cash flows isless than 10 percent or (2)only the 10 percent test(quantitative test) asdiscussed above.

S tep 2 —If the test in Step1 is not met, the followingshould be assessed:

□ Whether themodification orexchange affects theterms of an embeddedconversion option,where the differencebetween the fair valueof the option beforeand after themodification orexchange is at least 10percent of the carryingvalue of the originaldebt instrument priorto the modification orexchange.

□ Whether a substantiveconversion option isadded or a conversionoption that wassubstantive at the dateof modification iseliminated.

If either of these criteria ismet, the exchange or

For debt instruments withembedded derivativefeatures, the modificationof the host contract andthe embedded derivativeshould be assessedtogether when applyingthe 10 percent test as thehost debt and theembedded derivative areinterdependent. However,a conversion option that isaccounted for as an equitycomponent would not beconsidered in the 10percent test. In such cases,an entity would alsoconsider whether there is apartial extinguishment ofthe liability through theissuance of equity beforeapplying the 10 percenttest.




modification would beaccounted for as anextinguishment.

9.12 Transaction costs (also known as debt issuecosts)

When applicable, the balance sheet presentation of transaction costs (separate asset

versus a component of the instrument’s carrying value) differs under the different

standards. IFRS prohibits the balance sheet gross up required by US GAAP.


When the financial liabilityis not carried at fair valuethrough income, thirdparty costs are deferred asan asset. Creditor fees arededucted from thecarrying value of thefinancial liability and arenot recorded as separateassets.

Transaction costs areexpensed immediatelywhen the financial liabilityis carried at fair value,with changes recognized inprofit and loss.

When the financial liabilityis not carried at fair valuethrough income,transaction costs includingthird party costs andcreditor fees are deductedfrom the carrying value ofthe financial liability andare not recorded asseparate assets. Rather,they are accounted for as adebt discount andamortized using theeffective interest method.

Transaction costs areexpensed immediatelywhen the financial liabilityis carried at fair value,with changes recognized inprofit and loss.

Under BE GAAP,participating interests andshares classified as long-term financial assets as wellas current investments areinitially measured at cost.Receivables are recorded atnominal amount, and undera method similar to theamortized cost in somecircumstances.

Payables are recorded attheir nominal amount.


9.13.1 IFRS 9, Financial Instruments

In July 2014, the IASB published the complete version of IFRS 9, Financial

Instruments, which replaces most of the guidance in IAS 39. This includes amended

guidance for the classification and measurement of financial assets by introducing a

fair value through other comprehensive income category for certain debt instruments.

It also contains a new impairment model which will result in earlier recognition of

losses.

No changes were introduced for the classification and measurement of financial

liabilities, except for the recognition of changes in own credit risk in other

comprehensive income for liabilities designated at fair value through profit or loss.



These changes are likely to have a significant impact on entities that have significant

financial assets and, in particular, financial institutions.

IFRS 9 will be effective for annual periods beginning on or after January 1, 2018,

subject to endorsement in certain territories.

9.13.2 FASB Proposed Accounting Standards Update, Financial Instruments—

Overall (Subtopic 825-10): Recognition and Measurement of Financial

Assets and Financial Liabilities

In February 2013, the FASB issued a revised proposal for the classification and

measurement of financial instruments. The proposal calls for a mixed measurement

approach for financial assets and financial liabilities — either fair value or amortized

cost. It is intended to be responsive to the considerable feedback the FASB received on

its 2010 exposure draft, which proposed fair value measurement for all financial

instruments. The comment period ended May 15, 2013.

The key proposals with regard to financial liabilities are as follows:

9.13.2.1 Classification and measurement approach

Financial liabilities will generally be measured at amortized cost. However, if either of

the following conditions exists, fair value through net income would be required:

□ The financial liabilities are liabilities for which the company’s business strategy

upon initial recognition is to subsequently transact at fair value;

□ The financial liabilities are short sales

Comparison to IFRS: IFRS 9 carried forward the classification and measurement

approach for financial liabilities in IAS 39 where the amortized cost measurement is

used for liabilities with the exception of trading liabilities, which are measured at fair

value through profit or loss.

9.13.2.2 Hybrid financial and nonfinancial liabilities

Hybrid financial liabilities retain the accounting as currently required under ASC 815-

15. Therefore, separate accounting for embedded derivative features remains, and

embedded derivatives will continue to be measured at fair value through net income.

Once the bifurcation and separate analysis have been performed, the financial host or

debt-equity hybrid host that is recognized as a financial liability will be subject to the

proposed classification and measurement model.

Comparison to IFRS: Similarly, IFRS 9 retains a bifurcation approach for hybrid

financial liabilities. However, there are currently differences between IFRS and US

GAAP in the definition of a derivative and the assessment of whether an embedded

derivative is closely related to its host, which the boards are not currently addressing

(refer to the Derivatives and hedging chapter for existing differences). As a result,

differences will continue to arise as to when bifurcation is required under the two sets

of accounting standards.



9.13.2.3 Convertible debt

An issuer’s accounting for convertible debt will remain unchanged under the FASB’s

proposed approach. Conventional convertible debt, i.e., convertible debt that qualifies

for the derivatives scope exception in ASC 815 and cannot be settled wholly or

partially in cash, will be measured by the issuer at amortized cost in its entirety.

Convertible debt that can be settled upon conversion wholly or partially in cash by the

issuer will continue to be bifurcated into a conversion option, which is recognized in

equity, and a host contract, which is recognized as a liability and measured at

amortized cost. Similarly, the accounting in situations where the embedded

conversion option will need to be separated from the host contract and accounted for

as a derivative or where there is a beneficial conversion feature will remain

unchanged.

Comparison to IFRS: The IAS 39 approach to classification and measurement was

carried forward to IFRS 9. The IAS 32 guidance for determining whether an

instrument should be recognized entirely or in part in equity or liability remains

unchanged. Therefore, the existing differences for convertible debt instruments will

continue to exist after completion of this project.

9.13.2.4 Non-recourse liabilities

Financial liabilities that can only be settled with specified financial assets and do not

have other recourse, are required under the proposal to be measured consistently

(same method and same amount) with those specified assets. For example, beneficial

interests in a securitization that can only be settled using the cash flows from the debt

investments held in the securitization entity will be measured consistently with those

debt investments held in the entity. If the debt investments are carried at amortized

cost and credit impairment is recognized in the reporting period, the beneficial

interests will also be carried at amortized cost and written down for the same

impairment charge as recognized on the assets.

Comparison to IFRS: IFRS 9 does not provide a separate measurement approach for

non-recourse liabilities. Financial assets and liabilities will follow their respective

classification and measurement models. However, under IFRS 9, a fair value option is

provided for financial assets and financial liabilities if measuring those assets or

liabilities at fair value through net income would eliminate or significantly reduce a

measurement mismatch.

9.13.2.5 Fair value option

If the fair value option is elected for a financial liability, any changes in fair value that

result from a change in the company’s own credit risk will be recognized separately in

other comprehensive income. The accumulated gains and losses due to changes in a

company’s own credit will be recycled from accumulated other comprehensive income

to net income when the financial liability is settled before maturity.

The change in fair value due to a change in the company’s own credit risk will be

measured as the portion of the change in fair value that is not due to a change in the

benchmark rate of market risk (e.g., the risk above a base market interest rate).



However, a company can use an alternative method if it believes it to be a more

faithful measurement of that credit risk.

Comparison to IFRS: Unlike the FASB’s proposed approach, IFRS 9 allows an

irrevocable election at initial recognition to measure a financial asset or a financial

liability at fair value through profit or loss if that measurement eliminates or

significantly reduces an accounting mismatch. Additionally, IFRS 9 has a fair value

option for groups of financial assets and/or liabilities that are managed together on a

net fair value basis. Finally, IFRS 9 allows a fair value option for hybrid financial

liabilities if certain conditions are met. In virtually all cases, where the fair value

option is elected for financial liabilities, IFRS 9 requires the effects due to a change in

the company’s own credit to be reflected in other comprehensive income, which is

similar to the FASB’s proposed approach. However, IFRS 9 does not allow recycling if

the liability is settled before maturity.

9.13.3 IFRS Interpretations Committee Draft Interpretation, IAS 32 Financial

Instruments: Presentation—Put Options Written on Non-controlling

Interests

In May 2012, the IFRS Interpretations Committee published a draft interpretation on

the accounting for put options written on non-controlling interests in the parent’s

consolidated financial statements (NCI puts). NCI puts are contracts that oblige a

parent to purchase shares of its subsidiary that are held by a non-controlling-interest

shareholder for cash or another financial asset. The draft interpretation clarifies that

based on paragraph 23 of IAS 32 the subsequent measurement of NCI puts should be

in accordance with IAS 39/IFRS 9, which require changes in the measurement of the

financial liability to be recognized in the income statement. However, after discussing

the Interpretations Committee’s views and the feedback received in the comment

letters, the IASB decided in June 2014 that this project should be incorporated into

the broader project looking at the distinction between liabilities and equity.

9.13.4 FASB Accounting Standards Update No. 2015-03, Simplifying the

Presentation of Debt Issuance Costs

On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Simplifyingthe Presentation of Debt Issuance Costs, which requires debt issuance costs to bepresented in the balance sheet as a direct deduction from the carrying value of theassociated debt liability, consistent with the presentation of a debt discount.

Prior to the issuance of the standard, debt issuance costs were required to bepresented in the balance sheet as a deferred charge (i.e., an asset). This presentationdiffered from the presentation for a debt discount, which is a direct adjustment to thecarrying value of the debt (i.e., a contra liability). The new standard requires that allcosts incurred to issue debt be presented in the balance sheet as a direct deductionfrom the carrying value of the debt, aligning the U.S. GAAP presentation with IFRS.For public business entities, the standard is effective for fiscal years beginning afterDecember 15, 2015. For all other entities, the standard is effective for fiscal yearsbeginning after December 15, 2015.

PwC 1-1

Chapter 10:Derivatives and hedging

Derivatives and hedging


10.1 Derivatives and hedging

Derivatives and hedging represent one of the more complex and nuanced topical areas

within both US GAAP and IFRS. While IFRS generally is viewed as less rules-laden

than US GAAP, the difference is less dramatic in relation to derivatives and hedging,

wherein both frameworks embody a significant volume of detailed implementation

guidance.

In the area of derivatives and embedded derivatives, the definition of derivatives is

broader under IFRS than under US GAAP; therefore, more instruments may be

required to be accounted for at fair value through the income statement under IFRS.

On the other hand, the application of the scope exception around “own use”/“normal

purchase normal sale” may result in fewer derivative contracts at fair value under

IFRS, as these are scoped out of IFRS while elective under US GAAP. Also, there are

differences that should be carefully considered in the identification of embedded

derivatives within financial and nonfinancial host contracts. In terms of measurement

of derivatives, day one gains or losses cannot be recognized under IFRS unless

supported by appropriate observable current market transactions or if all of the inputs

into the valuation model used to derive the day one difference are observable. Under

US GAAP, day one gains and losses are permitted where fair value is derived from

unobservable inputs.

Although the hedging models under IFRS and US GAAP are founded on similar

principles, there are a number of application differences. Some of the differences

result in IFRS being more restrictive than US GAAP, whereas other differences

provide more flexibility under IFRS.

Areas where IFRS is more restrictive than US GAAP include the nature, frequency,

and methods of measuring and assessing hedge effectiveness. As an example, US

GAAP provides for a shortcut method that allows an entity to assume no

ineffectiveness and, hence, bypass an effectiveness test as well as the need to measure

quantitatively the amount of hedge ineffectiveness. The US GAAP shortcut method is

available only for certain fair value or cash flow hedges of interest rate risk using

interest rate swaps (when certain stringent criteria are met). IFRS has no shortcut

method equivalent. To the contrary, IFRS requires that, in all instances, hedge

effectiveness be measured and any ineffectiveness be recorded in profit or loss. IFRS

does acknowledge that in certain situations little or no ineffectiveness could arise, but

IFRS does not provide an avenue whereby an entity may assume no ineffectiveness.

Because the shortcut method is not accepted under IFRS, companies utilizing the

shortcut method under US GAAP will need to prepare the appropriate level of IFRS-

compliant documentation if they want to maintain hedge accounting. The

documentation will need to be in place no later than at the transition date to IFRS if

hedge accounting is to be maintained on an uninterrupted basis. For example, for a

company whose first IFRS-based financial statements will be issued for the three

years ended December 31, 2014, hedging documentation needs to be in place as of the

opening balance sheet date. Hence, documentation needs to be in place as of January

1, 2012, if the entity wants to continue to apply hedge accounting on an uninterrupted

basis.



Another area where IFRS is more restrictive involves the use of purchased options as a

hedging instrument. Under IFRS, when hedging one-sided risk in a forecasted

transaction under a cash flow hedge (e.g., for foreign currency or price risk), only the

intrinsic value of a purchased option is deemed to reflect the one-sided risk of the

hedged item. As a result, for hedge relationships where the critical terms of the

purchased option match the hedged risk, generally, the change in intrinsic value will

be deferred in equity while the change in time value will be recorded in the income

statement. However, US GAAP permits an entity to assess effectiveness based on the

entire change in fair value of the purchased option. There is also less flexibility under

IFRS in the hedging of servicing rights because they are considered nonfinancial

interests.

IFRS is also more restrictive than US GAAP in relation to the use of internal

derivatives. Restrictions under the IFRS guidance may necessitate that entities

desiring hedge accounting enter into separate, third-party hedging instruments for the

gross amount of foreign currency exposures in a single currency, rather than on a net

basis (as is done by many treasury centers under US GAAP).

At the same time, IFRS provides opportunities not available under US GAAP in a

number of areas. Such opportunities arise in a series of areas where hedge accounting

can be accomplished under IFRS, whereas it would have been precluded under

US GAAP. For example, under IFRS an entity can achieve hedge accounting in relation

to the foreign currency risk associated with a firm commitment to acquire a business

in a business combination (whereas US GAAP would not permit hedge accounting). At

the same time, IFRS allows an entity to utilize a single hedging instrument to hedge

more than one risk in two or more hedged items (this designation is precluded under

US GAAP). That difference may allow entities under IFRS to adopt new and

sometimes more complex risk management strategies while still achieving hedge

accounting. IFRS is more flexible than US GAAP with respect to the ability to achieve

fair value hedge accounting in relation to interest rate risk within a portfolio of

dissimilar financial assets and in relation to hedging a portion of a specified risk

and/or a portion of a time period to maturity (i.e., partial-term hedging) of a given

instrument to be hedged. A series of further differences exists as well.

As companies work to understand and embrace the new opportunities and challenges

associated with IFRS in this area, it is important that they ensure that data

requirements and underlying systems support are fully considered.

In November 2013, the IASB published the new general hedge accounting

requirement added to IFRS 9. In July 2014, the IASB issued the complete version of

IFRS 9, Fin an cialIn strum en ts, which replaces the guidance on the classification and

measurement, and impairment. Initial deliberations on macro hedging guidance are

ongoing. Refer to SD 11.21.2 for further discussion. The FASB is expected to issue its

final guidance on classification and measurement and impairment by the end of 2015.

The Board’s redeliberations on hedge accounting are at an early stage and an exposure

draft is expected to be issued by the end of 2015.




US GA A P

ASC 815, ASC 815-15-25-4 through 25-5, ASC 815-20-25-3, ASC 815-20-25-94

through 25-97, ASC 830-30-40-2 through 40-4

IFRS

IAS 39, IFRS 7, IFRIC 9, IFRIC 16

B E GA A P

CBN/CNC 132-4, CBN/CNC 152 -1, CBN/CNC 167-1, CBN/CNC 167-2, CBN/CNC

2010/12, CBN/CNC 2011/18, CBN/CNC 2012/18, CBN/CNC 2013/16

Note



this area.

Derivative definition and scope

10.2 Net settlement provisions

More instruments will qualify as derivatives under IFRS.

Some instruments, such as option and forward agreements to buy unlisted equity

investments, are accounted for as derivatives under IFRS but not under US GAAP.


To meet the definition of aderivative, a financialinstrument or othercontract must require orpermit net settlement.

US GAAP generallyexcludes from the scope ofASC 815 certaininstruments linked tounlisted equity securitieswhen such instruments failthe net settlementrequirement and are,therefore, not accountedfor as derivatives.

An option contractbetween an acquirer and aseller to buy or sell stock of

IFRS does not include arequirement for netsettlement within thedefinition of a derivative.It only requires settlementat a future date.

There is an exceptionunder IAS 39 forderivatives whose fairvalue cannot be measuredreliably (i.e., instrumentslinked to equityinstruments that are notreliably measurable),which could result in nothaving to account for suchinstruments at fair value.In practice, however, this

BE GAAP has noconceptual definition ofderivatives.

CBN/CNC advice 2010/12contains an exhaustive listof financial instrumentsdivided into three group:non-option basedinstruments, option basedinstruments, commodityderivatives. The adviceprovides a hierarchy ofprinciples relating to theaccounting for derivativefinancial instruments: thematching principle issubordinated to the




an acquiree at a futuredate that results in abusiness combination maynot meet the definition ofa derivative as it may failthe net settlementrequirement(e.g., the acquiree’s sharesare not listed so the sharesmay not be readilyconvertible to cash).

exemption is very narrowin scope because in mostsituations it is expectedthat fair value can bemeasured reliably even forunlisted securities.

prudency principle(recognize costs when theyare probable, recognizeincome only whencertain).

Specific examples ofderivatives accounting areprovided for:

CBN/CNC 152 -1: Foreignexchange transactions(including foreignexchange forwardcontracts);

CBN/CNC 167-1 and 167-2: Equity options

CBN/CNC 132-4: Forwardtransactions oncommodities

CBN/CNC 2011/18:Interest rate swaps

CBN/CNC 2012/18:Accounting treatment ofshare options – guidanceon the accounting ofoptions by the optionholder and issuer (writer).The premium paid by theoption holder / received byoption issuer has to beaccounted for as an asset /deferred income up till thematurity date of the optionand is subject toimpairment testing at theoption holder. If fair valueof the option exceeds theamount of the premiumreceived, the option issuer(writer) needs to recognizea provision for this risk.

Belgian companies have todisclose the fair value foreach category of derivativefinancial instruments, incase financial instrumentsare not measured at theirfair value, if the fair valuecan be determined in




accordance with one of themethods as prescribed byarticle 97 of the RoyalDecree of 30 January 2001implementing theCompanies Code.

In addition to the specificdisclosures for each type ofderivative, a comparativeoverview is prepared forall derivative financialinstruments irrespective ofthe fact whether or not itconcerns an (effective)hedging transaction. Inthis overview the value(fair value and carryingvalue), extent and natureof the derivative needs tobe disclosed.

S ource: C B N / C N C2 0 1 3 / 1 6

10.3 Own use versus normal purchase normalsale (NPNS)

The “own use” exception is mandatory under IFRS but the “normal purchase normal

sale” exception is elective under US GAAP.


There are many factors toconsider in determiningwhether a contract relatedto nonfinancial items canqualify for the NPNSexception.

Similar to US GAAP, thereare many factors toconsider in determiningwhether a contract relatedto nonfinancial itemsqualifies for the “own use”exception.

The CBN/CNC advice132/4 provides guidanceon accounting treatment ofcommodity derivatives. No“own use” exemptionoption is possible.

If a contract meets therequirement of the NPNSexception, then thereporting entity mustdocument that it qualifiesin order to apply the NPNSexception—otherwise, itwill be considered aderivative.

While US GAAP requiresdocumentation to applythe NPNS exception (i.e., itis elective), IFRS requiresa contract to be accountedfor as own use (i.e., notaccounted for as aderivative) if the own usecriteria are satisfied.

In case the market value ofinventory decreases aprovision should be set forthe difference between thepurchase price stipulatedby the contract and themarket price. At thepurchase date theprovision is set off against




inventory purchase price.

S ource: C B N / C N C 1 3 2 / 4

Embedded derivatives

10.4 Reassessment of embedded derivatives

Differences with respect to the reassessment of embedded derivatives may result in

significantly different outcomes under the different frameworks. Generally,

reassessment is more frequent under US GAAP.


If a hybrid instrumentcontains an embeddedderivative that is notclearly and closely relatedat inception, and it is notbifurcated (because it doesnot meet the definition ofa derivative), it must becontinually reassessed todetermine whetherbifurcation is required at alater date. Once it meetsthe definition of aderivative, the embeddedderivative is bifurcatedand measured at fair valuewith changes in fair valuerecognized in earnings.

IFRS precludesreassessment of embeddedderivatives after inceptionof the contract unlessthere is a change in theterms of the contract thatsignificantly modifies theexpected future cash flowsthat would otherwise berequired under thecontract.

Embedded derivatives arenot addressed in BelgianGAAP. The legal form offinancial instrumentsprevails for thedetermination of theiraccounting treatment.

S ource: C B N / C N C2 0 1 0 / 1 2

Similarly, the embeddedderivative in a hybridinstrument that is notclearly and closely relatedat inception and isbifurcated must also becontinually reassessed todetermine whether itsubsequently fails to meetthe definition of aderivative. Such anembedded derivativeshould cease to bebifurcated at the point atwhich it fails to meet therequirements forbifurcation.

An embedded derivative

Having said that, if anentity reclassifies afinancial asset out of theheld-for-trading category,embedded derivativesmust be assessed and, ifnecessary, bifurcated.




that is clearly and closelyrelated is not reassessedsubsequent to inceptionfor the “clearly and closelyrelated” criterion. Fornonfinancial hostcontracts, the assessmentof whether an embeddedforeign currency derivativeis clearly and closelyrelated to the host contractshould be performed onlyat inception of thecontract.

10.5 Calls and puts in debt instruments

IFRS and US GAAP have fundamentally different approaches to assessing whether

call and puts embedded in debt host instruments require bifurcation.


Multiple tests are requiredin evaluating whether anembedded call or put isclearly and closely relatedto the debt host. Thefailure of one or both ofthe below outlined tests iscommon and typicallyresults in the need forbifurcation.

Test 1—If a debtinstrument is issued at asubstantial premium ordiscount and a contingentcall or put can acceleraterepayment of principal,the call or put is not clearlyand closely related.

Calls, puts, or prepaymentoptions embedded in ahybrid instrument areclosely related to the debthost instrument if either(1) the exercise priceapproximates theamortized cost on eachexercise date or (2) theexercise price of aprepayment optionreimburses the lender foran amount up to theapproximate present valueof the lost interest for theremaining term of the hostcontract. Once determinedto be closely related asoutlined above, theseitems do not requirebifurcation.

Embedded derivatives arenot addressed in BelgianGAAP. The legal form offinancial instrumentsprevails for thedetermination of theiraccounting treatment.

S ource: C B N / C N C2 0 1 0 / 1 2

Test 2—If there is nocontingent call or put thatcan accelerate repaymentof principal, or if the debtinstrument is not issued ata substantial premium ordiscount, then it must beassessed whether the debt




instrument can be settledin such a way that theholder would not recoversubstantially all of itsrecorded investments orthe embedded derivativewould at least double theholder’s initial return andthe resulting rate would bedouble the then currentmarket rate of return.However, this rule issubject to certainexceptions.

10.6 Nonfinancial host contracts—currenciescommonly used

Although IFRS and US GAAP have similar guidance in determining when to separate

foreign currency embedded derivatives in a nonfinancial host, there is more flexibility

under IFRS in determining that the currency is closely related.


US GAAP requiresbifurcation of a foreigncurrency embeddedderivative from anonfinancial host unlessthe payment is (1)denominated in the localcurrency or functionalcurrency of a substantialparty to the contract, (2)the price that is routinelydenominated in thatforeign currency ininternational commerce(e.g., US dollar for crudeoil transactions), or (3) aforeign currency usedbecause a party operates ina hyperinflationaryenvironment.

Criteria (1) and (2) citedfor US GAAP also applyunder IFRS. However,bifurcation of a foreigncurrency embeddedderivative from anonfinancial host is notrequired if payments aredenominated in a currencythat is commonly used topurchase or sell such itemsin the economicenvironment in which thetransaction takes place.

For example, Company X,in Russia (functionalcurrency and localcurrency is Russian ruble),sells timber to anotherRussian company (with aruble functional currency)in euros. Because the eurois a currency commonlyused in Russia, bifurcationof a foreign currencyembedded derivative fromthe nonfinancial host

Not addressed.

A transaction in a foreigncurrency is recorded inthe functional currencyusing the exchange rate atthe date of transaction(average rates may beused if they do notfluctuate significantly).

At the end of eachreporting period, foreigncurrency monetarybalances are translatedusing the exchange rate atthe closing rate.

The CBN/CNC advice 152-1 rules specific accountingtreatments dealing withdifferent aspects ofunrealised/realisedforeign currencyfluctuations and relatedhedges.

Differences with IFRS




contract would not berequired under IFRS.

exist as Belgian GAAPallows for the usage of thehedged rate whenconditions related tospecific hedges are metand for unhedgedpositions unrealised gainsdetermined per currencyare deferred to thebalance sheet whereasunrealized lossesdetermined per currencyare taken into the incomestatement.

S ource: C B N / C N C 1 5 2 - 1

EUR is used as thefunctional currency,unless the exemption touse another functionalcurrency was obtained.

Measurement of derivatives

10.7 Day one gains and losses

Day one gains and losses occur when the entity uses a model to measure the fair value

of the instrument and the model price at initial recognition is different from the

transaction price.

The ability to recognize day one gains and losses is different under both frameworks,

with gain/loss recognition more common under US GAAP.


In some circumstances,the transaction price is notequal to fair value, usuallywhen the market in whichthe transaction occursdiffers from the marketwhere the reporting entitycould transact. Forexample, banks can accesswholesale and retailmarkets; the wholesaleprice may result in a dayone gain compared to thetransaction price in the

Day one gains and lossesare recognized only whenthe fair value is evidencedby comparison with otherobservable current markettransactions in the sameinstrument or is based ona valuation techniquewhose variables includeonly data from observablemarkets.

Not addressed.




retail market.

In these cases, entitiesmust recognize day onegains and losses even ifsome inputs to themeasurement model arenot observable.

Hedge qualifying criteria

10.8 When to assess effectiveness

Non-SEC-listed entities may see greater flexibility in the frequency of required

effectiveness testing under IFRS.

Although the rules under IFRS allow less-frequent effectiveness testing in certain

situations, SEC-listed entities will still be required to assess effectiveness on a

quarterly basis in conjunction with their interim reporting requirements.


US GAAP requires thathedge effectiveness beassessed wheneverfinancial statements orearnings are reported andat least every three months(regardless of how oftenfinancial statements areprepared).

IFRS requires that hedgesbe assessed foreffectiveness on anongoing basis and thateffectiveness be measured,at a minimum, at the timean entity prepares itsannual or interim financialreports.

Similar to IFRS – ongoingassessment of hedgeeffectiveness is required.


Therefore, if an entity isrequired to produce onlyannual financialstatements, IFRS requiresthat effectiveness be testedonly once a year. An entitymay, of course, choose totest effectiveness morefrequently.



Hedge accounting practices allowed under US GAAP that arenot acceptable under IFRS

10.9 Effectiveness testing and measurement ofhedge ineffectiveness

IFRS requires an increased level of hedge effectiveness testing and/or detailed

measurement compared to US GAAP.

There are a number of similarities between the effectiveness-testing methods

acceptable under US GAAP and those acceptable under IFRS. At the same time,

important differences exist in areas such as the use of the shortcut method and the

critical matched-terms method.


US GAAP does not specifya single method forassessing hedgeeffectiveness prospectivelyor retrospectively. Themethod an entity adoptsdepends on the entity’srisk management strategyand is included in thedocumentation preparedat the inception of thehedge. The most commonmethods used are thecritical-terms match, thedollar-offset method, andregression analysis.

IFRS does not specify asingle method forassessing hedgeeffectiveness prospectivelyor retrospectively. Themethod an entity adoptsdepends on the entity’srisk management strategyand is included in thedocumentation preparedat the inception of thehedge. The most commonmethods used are thecritical-terms match, thedollar-offset method, andregression analysis.

The conditions for hedgeaccounting are broadlysimilar to IFRS includingthe requirement to justifythe effectiveness: hedgingresults in the range 80%-125%, tested at theinception and insubsequent periods.

The hedging transaction iseffective if the fluctuationsof fair value or cash flowsattributable to hedged riskare mitigated. Hedgeeffectiveness should bemeasured by comparisonof changes in fair value ofhedged item and hedginginstrument or by proof of astrong correlation betweenfair value or cash flows ofthe hedged item andhedging instrument.

S ource: C B N / C N C2 0 1 0 / 1 2

Shortcut method

US GAAP provides for ashortcut method thatallows an entity to assumeno ineffectiveness (and,hence, bypass aneffectiveness test) forcertain fair value or cash

Shortcut method

IFRS does not allow ashortcut method by whichan entity may assume noineffectiveness.

IFRS permits portions ofrisk to be designated as thehedged risk for financial




flow hedges of interest raterisk using interest rateswaps (when certainstringent criteria are met).

instruments in a hedgingrelationship such asselected contractual cashflows or a portion of thefair value of the hedgeditem, which can improvethe effectiveness of ahedging relationship.Nevertheless, entities arestill required to testeffectiveness and measurethe amount of anyineffectiveness.

Critical terms match

Under US GAAP, forhedges that do not qualifyfor the shortcut method, ifthe critical terms of thehedging instrument andthe entire hedged item arethe same, the entity canconclude that changes infair value or cash flowsattributable to the riskbeing hedged are expectedto completely offset. Anentity is not allowed toassume (1) noineffectiveness when itexists or (2) that testingcan be avoided. Rather,matched terms provide asimplified approach toeffectiveness testing incertain situations.

The SEC has clarified thatthe critical terms have tobe perfectly matched toassume no ineffectiveness.Additionally, the critical-terms-match method isnot available for interestrate hedges.

Critical terms match

IFRS does not specificallydiscuss the methodology ofapplying a critical-terms-match approach in thelevel of detail includedwithin US GAAP.However, if an entity canprove for hedges in whichthe critical terms of thehedging instrument andthe hedged items are thesame that the relationshipwill always be 100 percenteffective based on anappropriately designedtest, then a similarqualitative analysis may besufficient for prospectivetesting.

Even if the critical termsare the same, retrospectiveeffectiveness must beassessed, andineffectiveness must bemeasured in all casesbecause IFRS precludesthe assumption of perfecteffectiveness.



10.10 Credit risk and hypothetical derivatives

In a cash flow hedge, an entity’s assessment of hedge effectiveness may be impacted

by an entity’s own credit risk or by the credit risk of the hedging derivative’s

counterparty. When using the hypothetical derivative method, a difference between

IFRS and US GAAP may arise depending on (1) whether the derivative is in an asset or

a liability position and (2) the method used for valuing liabilities.


Under US GAAP, ahypothetical derivative willreflect an adjustment forthe counterparty’s (or anentity’s own) credit risk.This adjustment will bebased upon the credit riskin the actual derivative. Assuch, no ineffectivenesswill arise due to credit risk,as the same risk isreflected in both the actualand hypotheticalderivative.

If, however, the likelihoodthat the counterparty willperform ceases to beprobable, an entity wouldbe unable to conclude thatthe hedging relationship ina cash flow hedge isexpected to be highlyeffective in achievingoffsetting cash flows. Inthose instances, thehedging relationship isdiscontinued.

Under IFRS, ahypothetical derivativeperfectly matches thehedged risk of the hedgeditem. Because the hedgeditem would not contain thederivative counterparty’s(or an entity’s own) creditrisk, the hypotheticalderivative would notreflect that credit risk. Theactual derivative, however,would reflect credit risk.The resulting mismatchbetween changes in thefair value of thehypothetical derivativeand the hedginginstrument would result inineffectiveness.

Not addressed, in practicesimilar to IFRS.

10.11 Servicing rights

Differences exist in the recognition and measurement of servicing rights, which may

result in differences with respect to the hedging of servicing rights. This is especially

relevant for financial institutions that originate mortgages and retain the right to

service them.


US GAAP specificallypermits servicing rights tobe hedged for the

Under IFRS, servicingrights are considerednonfinancial items.

Not addressed.




benchmark interest rate orfor overall changes in fairvalue in a fair value hedge.

An entity may, however,avoid the need to applyhedge accounting byelecting to measureservicing rights at fairvalue through profit or lossas both the hedginginstrument and the hedgeditem would be measured atfair value through profit orloss.

Accordingly, they can onlybe hedged for foreigncurrency risk or hedged intheir entirety for all risks(i.e., not only for interestrate risk).

Furthermore, IFRSprecludes measurement ofservicing rights at fairvalue through profit or lossbecause the fair valueoption is applicable only tofinancial items andtherefore cannot beapplied to servicing rights.

10.12 Cash flow hedges with purchased options

For cash flow hedges, US GAAP provides more flexibility than IFRS with respect to

designating a purchased option as a hedging instrument.

As a result of the difference, there may be more income statement volatility for IFRS

entities using purchased options in their hedging strategies.


US GAAP permits anentity to assesseffectiveness based ontotal changes in thepurchased option’s cashflows (that is, theassessment will includethe hedging instrument’sentire change in fairvalue). As a result, theentire change in theoption’s fair value(including time value) maybe deferred in equity basedon the level ofeffectiveness.

Alternatively, the hedgerelationship can excludetime value from thehedging instrument suchthat effectiveness isassessed based on intrinsicvalue.

Under IFRS, whenhedging one-sided risk viaa purchased option in acash flow hedge of aforecasted transaction,only the intrinsic value ofthe option is deemed to bereflective of the one-sidedrisk of the hedged item.Therefore, in order toachieve hedge accountingwith purchased options, anentity will be required toseparate the intrinsic valueand time value of thepurchased option anddesignate as the hedginginstrument only thechanges in the intrinsicvalue of the option.

As a result, for hedgerelationships where thecritical terms of thepurchased option matchthe hedged risk, generally,

Not addressed, in practicesimilar to IFRS.

S ource: C B N / C N C 1 6 7 - 2




the change in intrinsicvalue will be deferred inequity while the change intime value will be recordedin the income statement.

10.13 Foreign currency risk and internalderivatives

Restrictions under the IFRS guidance require that entities with treasury centers that

desire hedge accounting either change their designation or enter into separate third-

party hedging instruments for the gross amount of foreign currency exposures.


US GAAP permits hedgeaccounting for foreigncurrency risk with internalderivatives, providedspecified criteria are metand, thus, accommodatesthe hedging of foreigncurrency risk on a netbasis by a treasury center.The treasury center entersinto derivatives contractswith unrelated thirdparties that would offset,on a net basis for eachforeign currency, theforeign exchange riskarising from multipleinternal derivativecontracts.

Under IFRS, internalderivatives do not qualifyfor hedge accounting inthe consolidated financialstatements (because theyare eliminated inconsolidation). However, atreasury center’s netposition that is laid off toan external party may bedesignated as a hedge of agross position in theconsolidated financialstatements. Carefulconsideration of thepositions to be designatedas hedged items may benecessary to minimize theeffect of this difference.Entities may use internalderivatives as an audit trailor a tracking mechanismto relate externalderivatives to the hedgeditem.

Criteria for qualifying forhedge accounting are asfollows: existence of a risk,a high degree ofcorrelation between themarket value of thehedging transaction andthat of the underlyingasset during the wholeperiod of the hedging,identification of thehedging transaction asfrom the beginning.

In order to apply hedgeaccounting on foreigncurrency transactions, thefollowing conditionsshould be met:

□ The hedging is specificto the foreign currencytransaction.

Amounts and maturitydates for both transactionsmatch (for industrial andcommercial companies,the matching does notneed to be exact providedthe differences are notsignificant).

The internal derivativeswould qualify as hedginginstruments in theseparate financial




statements of thesubsidiaries entering intointernal derivatives with agroup treasury center.

Hedge accounting practices not allowed under US GAAP thatare acceptable under IFRS

10.14 Hedges of a portion of the time period tomaturity

IFRS is more permissive than US GAAP with respect to a partial-term fair value

hedge.


US GAAP does not permitthe hedged risk to bedefined as a portion of thetime period to maturity ofa hedged item.

IFRS permits designationof a derivative as hedgingonly a portion of the timeperiod to maturity of afinancial hedged item ifeffectiveness can bemeasured and the otherhedge accounting criteriaare met. For example, anentity with a 10 percentfixed bond with remainingmaturity of 10 years canacquire a five-year pay-fixed, receive-floatingswap and designate theswap as hedging the fairvalue exposure of theinterest rate payments onthe bond until the fifthyear and the change invalue of the principalpayment due at maturityto the extent affected bychanges in the yield curverelating to the five years ofthe swap. That is, a five-year bond is the imputedhedged item in the actual10-year bond; the interestrate risk hedged is the five-year interest rate implicitin the 10-year bond.

Not addressed.



10.15 Designated risks for financial assets orliabilities

IFRS provides opportunities with respect to achieving hedge accounting for a portion

of a specified risk.

Those opportunities may reduce the amount of ineffectiveness that needs to be

recorded in the income statement under IFRS (when compared with US GAAP).


The guidance does notallow a portion of aspecific risk to qualify as ahedged risk in a hedge offinancial assets orfinancial liabilities. USGAAP specifies that thedesignated risk be in theform of changes in one ofthe following:

□ Overall fair value orcash flows.

□ Benchmark interestrates.

□ Foreign currencyexchange rates

□ Creditworthiness andcredit risk.

The interest rate risk thatcan be hedged is explicitlylimited to specifiedbenchmark interest rates.

The guidance allows aportion of a specific risk toqualify as a hedged risk (solong as effectiveness canbe reliably measured).Designating a portion of aspecific risk may reducethe amount ofineffectiveness that needsto be recorded in theincome statement underIFRS compared to USGAAP.

Under IFRS, portions ofrisks can be viewed asportions of the cash flows(e.g., excluding the creditspread from a fixed-ratebond in a fair value hedgeof interest rate risk) ordifferent types of financialrisks, provided the types ofrisk are separatelyidentifiable andeffectiveness can bemeasured reliably.

Not addressed.

10.16 Fair value hedge of interest rate risk in aportfolio of dissimilar items

IFRS is more flexible than US GAAP with respect to the ability to achieve fair value

hedge accounting in relation to interest rate risk within a portfolio of dissimilar items.

That difference is especially relevant for financial institutions that use such hedging as

a part of managing overall exposure to interest rate risk and may result in risk

management strategies that do not qualify for hedge accounting under US GAAP being

reflected as hedges under IFRS.




US GAAP does not allow afair value hedge of interestrate risk in a portfolio ofdissimilar items.

IFRS allows a fair valuehedge of interest rate riskin a portfolio of dissimilaritems whereby the hedgedportion may be designatedas an amount of acurrency, rather than asindividual assets (orliabilities). Furthermore,an entity is able toincorporate changes inprepayment risk by using asimplified method set outin the guidance, ratherthan specificallycalculating the fair value ofthe prepayment option ona (prepayable) item-by-item basis.

In such a strategy, thechange in fair value of thehedged item is presentedin a separate line in thebalance sheet and does nothave to be allocated toindividual assets orliabilities.

Hedge accounting isspecifically permitted,subject to certain criteria,for forward contractshedging currency andcommodity risks, and forhedges using equityoptions.

There is however, norestriction on risks forwhich hedge accounting ispermitted under BelgianGAAP, and the categoriesprovided for in IFRS donot have specificequivalents under BelgianGAAP.

10.17 Firm commitment to acquire a business

IFRS permits entities to hedge, with respect to foreign exchange risk, a firm

commitment to acquire a business in a business combination, which is precluded

under US GAAP.


US GAAP specificallyprohibits a firmcommitment to enter intoa business combination, oracquire or dispose of asubsidiary, minorityinterest, or equity methodinvestee, from qualifyingas a hedged item for hedgeaccounting purposes (evenif it is with respect toforeign currency risk).

An entity is permitted tohedge foreign exchangerisk to a firm commitmentto acquire a business in abusiness combination onlyfor foreign exchange risk.

Not addressed.



10.18 Foreign currency risk and location ofhedging instruments

In hedging forecasted transactions and net investments for foreign currency exposure,

IFRS provides an opportunity for a parent to hedge the exposures of an indirect

subsidiary regardless of the functional currency of intervening entities within the

organizational structure.


Under the guidance, eitherthe operating unit that hasthe foreign currencyexposure is a party to thehedging instrument oranother member of theconsolidated group thathas the same functionalcurrency as that operatingunit is a party to thehedging instrument.However, for anothermember of theconsolidated group toenter into the hedginginstrument, there may beno intervening subsidiarywith a different functionalcurrency.

For foreign currencyhedges of forecastedtransactions, IFRS doesnot require the entity withthe hedging instrument tohave the same functionalcurrency as the entity withthe hedged item. At thesame time, IFRS does notrequire that the operatingunit exposed to the riskbeing hedged within theconsolidated accounts be aparty to the hedginginstrument.

As such, IFRS allows aparent company with afunctional currencydifferent from that of asubsidiary to hedge thesubsidiary’s transactionalforeign currency exposure.

The same flexibilityregarding location of thehedging instrumentapplies to net investmenthedges.

Foreign currencytransactions which arehedged and meet hedgeaccounting criteria shouldbe translated at the rate ofthe hedging transaction.

Unrealized exchangedifferences on borrowingsmade to finance specificnon-monetary assetswhose value is largelydependent on thefluctuation of the currencyin which they aredenominated can bedeferred and recognized inthe income statementwhen income is generatedby the assets financed.

Forward positions oncommodities may betreated as specific hedgesof underlying commoditypositions, meaning that norevaluation gain or losswill be recorded at thebalance sheet date,assuming that there is aone-to-one link betweenthe forward contract andthe underlying exposureitem.

In situations whereforward contracts oncommodities are enteredinto to hedge a totalposition in the samecommodity, the individualcomponents of theposition and the hedging




contracts should berevalued at the balancesheet date based uponappropriate market rates.A resulting net loss shouldbe recorded in the incomestatement, whilst a netgain should be deferred.

Any gain or loss that isdefinitive as a result ofentering into hedgingtransactions should berecognized immediately.Transactions havingopposite effects should betreated as one singletransaction in order todetermine the potentialprovisions to be recorded.Prudence is required,particularly if the marketis not liquid, in which casetransactions should betreated separately.

10.19 Hedging more than one risk

IFRS provides greater flexibility with respect to utilizing a single hedging instrument

to hedge more than one risk in two or more hedged items.

That difference may allow entities to adopt new and sometimes more complex

strategies to achieve hedge accounting while managing certain risks.


US GAAP does not allow asingle hedging instrumentto hedge more than onerisk in two or more hedgeditems. US GAAP does notpermit creation of ahypothetical component ina hedging relationship todemonstrate hedgeeffectiveness in thehedging of more than onerisk with a single hedginginstrument.

IFRS permits designationof a single hedginginstrument to hedge morethan one risk in two ormore hedged items.

Not addressed.




A single hedginginstrument may bedesignated as a hedge ofmore than one type of riskif the risks hedged can beidentified clearly, theeffectiveness of the hedgecan be demonstrated, andit is possible to ensure thatthere is specificdesignation of the hedginginstrument and differentrisk positions. In theapplication of thisguidance, a single swapmay be separated byinserting an additional(hypothetical) leg,provided that each portionof the contract isdesignated as a hedginginstrument in a qualifyingand effective hedgerelationship.

10.20 Cash flow hedges and basis adjustments onacquisition of nonfinancial items

In the context of a cash flow hedge, IFRS permits more flexibility regarding the

presentation of amounts that have accumulated in equity (resulting from a cash flow

hedge of nonfinancial assets and liabilities).

Therefore, the balance sheet impacts may be different depending on the policy

election made by entities for IFRS purposes. The income statement impact, however,

is the same regardless of this policy election.


In the context of a cashflow hedge, US GAAP doesnot permit basisadjustments. That is,under US GAAP, an entityis not permitted to adjustthe initial carrying amountof the hedged item by thecumulative amount of thehedging instruments’ fairvalue changes that wererecorded in equity.

Under IFRS, “basisadjustment” commonlyrefers to an adjustment ofthe initial carrying value ofa nonfinancial asset ornonfinancial liability thatresulted from a forecastedtransaction subject to acash flow hedge. That is,the initial carrying amountof the nonfinancial itemrecognized on the balance

Hedge accounting isspecifically permitted,subject to certain criteria,for forward contractshedging currency andcommodity risks, and forhedges using equityoptions.

There is however, norestriction on risks forwhich hedge accounting is




US GAAP does refer to“basis adjustments” in adifferent context whereinthe term is used to refer tothe method by which, in afair value hedge, thehedged item is adjusted forchanges in its fair valueattributable to the hedgedrisk.

sheet (i.e., the basis of thehedged item) is adjustedby the cumulative amountof the hedginginstrument’s fair valuechanges that wererecorded in equity.

IFRS gives entities anaccounting policy choice toeither basis adjust thehedged item (if it is anonfinancial item) orrelease amounts to profitor loss as the hedged itemaffects earnings.

permitted under BEGAAP, and the categoriesprovided for in IFRS donot have specificequivalents under BEGAAP.


10.21.1 FASB Proposed Accounting Standards Update, Accounting for Financial

Instruments and Revisions to the Accounting for Derivative Instruments

and Hedging Activities

The FASB is reconsidering the accounting for financial instruments, including hedge

accounting. Among other things, the Board expects the project to result in

simplification of the accounting requirements for hedging activities, resolve hedge

accounting practice issues that have arisen under the current guidance, and make the

hedge accounting model and associated disclosures more useful and understandable

to financial statement users.

In this regard, on May 26, 2010, the FASB issued its exposure draft on financial

instruments. The FASB proposed to carry forward many of its ideas contained in a

2008 exposure draft on hedge accounting. However, the FASB subsequently

suspended work on the hedging project, while it focused on the other parts of the

financial instruments project.

In November 2014, the FASB added the hedging project back to its technical agenda.

In reactivating the project, the Board decided to make only targeted changes to the

existing model in the following areas:

□ Hedge effectiveness requirements.

□ Component hedging.

□ The shortcut and critical terms match methods.

□ Voluntary de-designations of hedge relationships.

□ Recording ineffectiveness.

□ Benchmark interest rates.

□ Simplifying hedge documentation requirements.



□ Presentation and disclosure of hedging instruments, hedged items, and

ineffectiveness.

An exposure draft on hedge accounting is expected to be issued by the end of 2015.

In February 2015 the FASB proposed Accounting Standards Update (ASU) on

disclosures about hybrid financial instruments containing embedded derivatives. The

proposed ASU would require certain additional disclosures by entities with hybrid

financial instruments containing embedded derivatives that require bifurcation. The

intent of the proposed disclosures is to allow users to better understand the linkage

between bifurcated embedded derivatives and the related host contracts.

10.21.2 IASB’s amendment of hedge accounting requirements

In November 2013, the IASB published the new general hedge accounting

requirement added to IFRS 9 as a result of the third phase of its project to revise its

financial instruments accounting model.

The IFRS model is more principle-based than the current IASB and US GAAP models

and the US GAAP proposal, and aims to simplify hedge accounting. It would also align

hedge accounting more closely with the risk management activities undertaken by

companies and provide decision-useful information regarding an entity’s risk

management strategies.

The following key changes to the IAS 39 general hedge accounting model are

contained in the IASB amendment:

□ Replacement of the “highly” effective threshold as the qualifying criteria for

hedging. Instead, an entity’s designation of the hedging relationship should be

based on the economic relationship between the hedged item and the hedging

instrument, which gives rise to offset. Hedge ineffectiveness is still required to be

measured and accounted for in earnings. The new standard defines hedge ratio to

help entities align hedge accounting with its risk management strategy. It also

introduces the concept of “rebalancing” to enable entities to maintain a hedge

ratio without resulting in de-designation and re-designation. The objective of the

IASB is to allow greater flexibility in qualifying for hedge accounting but also to

ensure that entities do not systematically under-hedge to avoid recording any

ineffectiveness.

□ Ability to designate risk components of non-financial items as hedged items. The

IASB’s amendment would permit entities to hedge risk components for non-

financial items, provided such components are separately identifiable and reliably

measurable.

□ Ability to designate as hedged items aggregated exposures that are a combination

of an exposure and a derivative. When designating such a hedged item, an entity

assesses whether the aggregated exposure combines an exposure with a derivative

so that it creates a different aggregated exposure that is managed as one exposure

for a particular risk (or risks).



□ More flexibility in hedging groups of dissimilar items (including net exposures).

The IASB’s amendment would allow hedges of (1) groups of similar items without

a requirement that the fair value change for each individual item be proportional

to the overall group (e.g., hedging a portfolio of S&P 500 shares with an S&P 500

future) as well as (2) groups of offsetting exposures (e.g., exposures resulting from

forecast sale and purchase transactions). Additional qualifying criteria would be

required for such hedges of offsetting exposures.

□ Accounting for the time value component as “cost” of buying the protection when

hedging with options in both fair value and cash flow hedges. The IASB’s

amendment introduces significant changes to the guidance related to the

accounting for the time value of options. It analogizes the time value to an

insurance premium. Hence, the time value would be recorded as an asset on day

one and then released to net income based on the type of item the option hedges.

The same accounting can be applied for forward points in a forward contract.

Additionally, the concept of “cost” of hedging would be broadened to also

incorporate the currency basis spread. This will help to reduce income statement

volatility mainly in cash flow hedges of foreign currency risk.

□ Prohibition of voluntary de-designation of the hedging relationship unless the risk

management objective for such relationship changes. The IASB’s amendment

allows termination of the hedging relationship only if it is no longer viable for risk

management purposes, or the hedging instrument is sold, expired, exercised, or

terminated.

□ Introduction of incremental disclosure requirements to provide users with useful

information on the entity’s risk management practices.

□ Clarifying in the IFRS 9 Basis for Conclusions the relevance of the IAS 39

Implementation Guidance not carried forward to IFRS 9.

□ Providing an accounting policy choice on the hedge accounting model to be

applied. Entities may elect to continue applying the hedging model as per IAS 39

or to adopt IFRS 9. The accounting model must be applied as a whole (no cherry

picking allowed).

The macro hedge accounting principles will be addressed as a separate project. In

April 2014, the IASB issued a discussion paper (DP) on accounting for dynamic risk

management: a portfolio revaluation approach to macro hedging (“macro hedging”).

The DP addresses the accounting for dynamic risk management strategies on open

portfolios (that is, portfolios that change over time). This project is still ongoing. In

the meantime, if an entity transitions to IFRS 9 for hedge accounting, for a fair value

hedge of the interest rate exposure of a portfolio of financial assets or financial

liabilities (and only for such a hedge), an entity may apply the hedge accounting

requirements in IAS 39 instead of the new IFRS 9 requirements.

10.21.3 FASB Accounting Standards Update No. 2014-03, Accounting for Certain

Receive-Variable, Pay-Fixed Interest Rate Swap—Simplified Hedge

Accounting Approach

In January 2014, the FASB issued ASU 2014-03 to provide private companies, other

than financial institutions, not-for-profit entities, and employee benefit plans with an



accounting alternative intended to make it easier for certain interest rate swaps to

qualify for hedge accounting. Under the simplified hedge accounting approach, an

eligible private company would be able to apply hedge accounting to its receive-

variable, pay-fixed interest rate swaps as long as certain conditions are met. Existing

guidance would be simplified in that a company electing this alternative would be able

to (1) assume the cash flow hedge has no ineffectiveness, (2) delay completing its

necessary hedge documentation, and (3) recognize the interest rate swap at its

settlement value, which excludes non-performance risk, instead of at its fair value.

The standard is effective for annual periods beginning after December 15, 2014, and

interim periods within annual periods beginning after December 15, 2015.

The IASB issued IFRS forS M Esin 2009 for non-public entities, where hedge

accounting may be applied to a limited number of risks and hedging instruments.

Although no quantitative effectiveness test is required, there must be an expectation

that the hedge relationship will be highly effective. The hedge relationship must be

designated and documented at inception. All derivative instruments are recognized at

fair value.

10.21.4 Balance sheet netting of derivatives and other financial instruments

Further details on the balance sheet netting of derivatives and other financial

instruments are described in the Assets—financial assets chapter.

PwC 1-1

Chapter 11:Consolidation

Consolidation


11.1 Consolidation

IFRS is a principles-based framework, and the approach to consolidation reflects that

structure. IFRS provides indicators of control, some of which individually determine

the need to consolidate. However, where control is not apparent, consolidation is

based on an overall assessment of all of the relevant facts, including the allocation of

risks and benefits between the parties. The indicators provided under IFRS help the

reporting entity in making that assessment. Consolidation in financial statements is

required under IFRS when an entity is exposed to variable returns from another entity

and has the ability to affect those returns through its power over the other entity.

US GAAP has a two-tier consolidation model: one focused on voting rights (the voting

interest model) and the second focused on a qualitative analysis of power over

significant activities and exposure to potentially significant losses or benefits (the

variable interest model). Under US GAAP, all entities are first evaluated to determine

whether they are variable interest entities (VIEs). If an entity is determined not to be a

VIE, it is assessed on the basis of voting and other decision-making rights under the

voting interest model.

Even in cases for which both US GAAP and IFRS look to voting rights to drive

consolidation, differences can arise. Examples include cases in which de facto control

(when a minority shareholder has the practical ability to exercise power unilaterally)

exists and how the two frameworks address potential voting rights. As a result, careful

analysis is required to identify any differences.

Differences in consolidation under US GAAP and IFRS may also arise when a

subsidiary’s set of accounting policies differs from that of the parent. While under US

GAAP it is acceptable to apply different accounting policies within a consolidation

group to address issues relevant to certain specialized industries, exceptions to the

requirement to consistently apply standards in a consolidated group do not exist

under IFRS. In addition, potential adjustments may occur in situations where a parent

company has a fiscal year-end different from that of a consolidated subsidiary (and

the subsidiary is consolidated on a lag). Under US GAAP, significant transactions in

the gap period may require disclosure only, whereas IFRS may require recognition of

transactions in the gap period in the consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the

Consolidation Analysis, which amends the current consolidation guidance under US

GAAP. These amendments become effective on January 1, 2016; however, when it

becomes effective, consolidation conclusions will continue to be different under US

GAAP and IFRS in certain circumstances. Refer to SD 12.19.1 for further discussion.

BE GAAP is broadly comparable to IFRS. Belgian GAAP also uses the control principle

as basis to determine the consolidation requirements. In principle control is defined

as control de jure or de facto. BE GAAP also considers the consolidation requirements

of entities under common control (groups structured in a horizontal way – consortia).

Some concepts however are not addressed in BE GAAP.

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US GAAP

ASC 205, ASC 323, ASC 323-10-15-8 through 15-11, ASC 325-20, ASC 810, ASC 810-

10-25-1 through 25-14, ASC 810-10-60-4, SAB Topic 5H, SAB Topic 5H (2)-(6)

IFRS

IAS 1, IAS 27 (amended 2011), IAS 28 (amended 2011), IAS 36, IAS 39, IFRS 5, IFRS

10, IFRS 11, IFRS 12

BE GAAP

CBN/CNC 3-3, CBN/CNC 2011/5, CBN/CNC 2012/10, CBN/CNC 2012/12, CBN/CNC

2014/3

Note



this area.

Gen eralrequirem en ts

11.2 Requirements to prepare consolidatedfinancial statements

IFRS does not provide industry-specific exceptions (e.g., investment companies andbroker/dealers) to the requirement for consolidation of controlled entities.

However, IFRS is, in limited circumstances, more flexible with respect to the ability toissue nonconsolidated financial statements (IAS 27, Separate Financial Statements).In addition, on adoption of the amendment to IFRS 10, entities that meet thedefinition of an investment entity would be prohibited from consolidating controlledinvestments except for certain circumstances.


The guidance applies tolegal structures.

Industry-specific guidanceprecludes consolidation ofcontrolled entities bycertain types oforganizations, such asinvestment companies orbroker/dealers.

In 2013, the FASBamended its definition of

Parent entities prepareconsolidated financialstatements that include allsubsidiaries. Anexemption applies to aparent entity when all ofthe following conditionsapply:

□ It is a wholly ownedsubsidiary and theowners of the minority

Consolidated financialstatements must generallybe produced if a parent hasone or more subsidiaries,although some exemptionsfrom the requirement toprepare consolidatedfinancial statements areavailable for intermediateholding companies and forsmall groups. Another

Consolidation



an investment companyand specified that entitiesregistered under theInvestment Company Actof 1940 would qualify.Investment companiesmeasure their investmentsat fair value, including anyinvestments in which theyhave a controllingfinancial interest. Whilethe FASB and the IASBdefinitions of aninvestmentcompany/entity areconverged in most areas,there are several keydifferences (see below). Inaddition, unlike the IASBstandard, US GAAPretains the specializedinvestment companyaccounting inconsolidation by a non-investment companyparent.

interests have beeninformed about and donot object to theparent not presentingconsolidated financialstatements.

□ The parent’s debt orequity securities arenot publicly tradedand the parent is notin the process ofissuing any class ofinstruments in publicsecurities markets.

□ The ultimate or anyintermediate parent ofthe parent publishesconsolidated financialstatements availablefor public use thatcomply with IFRS.

exemption is foreseen forsubsidiaries held fordisposal (Source:CBN/CNC 2011/5).

Subject to conditions, anentity may be exemptedfrom preparingconsolidated accounts.Namely if the parent entityalready prepares andissues consolidatedfinancial statements thatare audited. Thisexemption is notapplicable though if sharesor parts of one of theconsolidated entities arewholly or partially quoted.In addition, parent andsubsidiaries thatindividually or togetherpresent negligible interestregarding theirconsolidated assets,consolidated financialposition or consolidatedincome, are exempted toprepare consolidatedaccounts.

Source: CBN/CNC2012/10 and CBN/CNC2012/12

Consolidated financialstatements are presumedto be more meaningful andare required for SECregistrants.

There are no exemptionsfor consolidatingsubsidiaries in general-purpose financialstatements.

A subsidiary is notexcluded fromconsolidation simplybecause the investor is aventure capitalorganization, mutual fund,unit trust, or similarentity. However, anexception is provided foran investment entity fromconsolidating itssubsidiaries unless thosesubsidiaries are providinginvestment-relatedservices. Instead, theinvestment entitymeasures thoseinvestments at fair valuethrough profit or loss.

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Unlike US GAAP, theexception fromconsolidation only appliesto the financial reportingof an investment entityand that exception doesnot carry over for thefinancial reporting by anon-investment entityparent.

When separate (parentonly) financial statementsare prepared, investmentsin subsidiaries, jointventures and associatesare accounted for at cost orin accordance with IFRS 9.In 2014, an amendment toIAS 27 was issued allowinginvestments insubsidiaries, joint venturesand associates to beaccounted for under theequity method in separatefinancial statements. Thisamendment is effective forannual periods beginningon or after January 1, 2016with early applicationpermitted, and must beapplied on a retrospectivebasis.

11.3 Investment company/entity definition

The US GAAP and IFRS definitions of an investment entity are substantially

converged; however, differences do exist.


An investment company isan entity with thefollowing fundamentalcharacteristics:

□ It is an entity that doesboth of the following:o Obtains funds

from one or moreinvestors andprovides the

The IFRS definition of aninvestment entity issubstantially convergedwith the US GAAPdefinition with thefollowing exceptions:

□ The IFRS definitionrequires an entity tomeasure and evaluatethe performance of

No similar requirementsfor investment companiesexist.

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investor(s) withinvestmentmanagementservices.

o Commits to itsinvestor(s) that’s itbusiness purposeand onlysubstantiveactivities areinvesting thefunds solely forreturns fromcapitalappreciation,investmentincome, or both.

□ The entity or itsaffiliates do not obtainor have the objectiveof obtaining returns orbenefits from aninvestee or its affiliatesthat are not normallyattributable toownership interests orthat are other thancapital appreciation orinvestment income.

An investment companywould also be expected tohave all of the followingtypical characteristics:

□ It has more than oneinvestment.

□ It has more than oneinvestor.

□ It has investors thatare not related partiesof the parent and theinvestment manager.

□ It has ownershipinterests in the form ofequity or partnershipinterests.

□ It managessubstantially all of itsinvestments on a fairvalue basis.

An entity may still beconsidered an investmentcompany if it does notexhibit one or more of the

substantially all of itsinvestments on a fairvalue basis.

□ The IFRS definitiondoes not provide forentities that aresubject to certainregulatoryrequirements (such asthe InvestmentCompany Act of 1940)to qualify asinvestment entitieswithout meeting thestated criteria.

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typical characteristics,depending on facts andcircumstances.

All entities subject to theInvestment Company Actof 1940 are investmentcompanies.

11.4 Consolidation model

Differences in consolidation can arise as a result of:

□ Differences in how economic benefits are evaluated when the consolidation

assessment considers more than just voting rights (i.e., differences in

methodology)

□ Specific differences or exceptions, such as:

o The consideration of variable interests.

o De facto control.

o How potential voting rights are evaluated.

o Guidance related to de facto agents and related parties.

o Reconsideration events.


All consolidation decisionsare evaluated first underthe VIE model. US GAAPrequires an entity with avariable interest in a VIEto qualitatively assess thedetermination of theprimary beneficiary of theVIE.

In applying the qualitativemodel, an entity is deemedto have a controllingfinancial interest if itmeets both of thefollowing criteria:

□ Power to directactivities of the VIEthat most significantlyimpact the VIE’seconomic performance(power criterion).

IFRS focuses on theconcept of control indetermining whether aparent-subsidiaryrelationship exists.

An investor controls aninvestee when it has all ofthe following:

□ Power, through rightsthat give it the currentability, to direct theactivities thatsignificantly affect (therelevant activities thataffect) the investee’sreturns.

□ Exposure, or rights, tovariable returns fromits involvement withthe investee (returnsmust vary and can be

Broadly comparable toIFRS.

The consolidationprinciples are ruled by theRoyal Decree of March 6,1990.

BE GAAP uses the controlprinciple as basis todetermine theconsolidationrequirements. Control isdefined as the power dejure or de facto to exercisea decisive influence on theappointment of themajority of the board ofdirectors or generalmanagement or on theorientation of the policy ofan entity.

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□ Obligation to absorblosses from or right toreceive benefits of theVIE that couldpotentially besignificant to the VIE(losses/benefitscriterion).

In assessing whether anenterprise has acontrolling financialinterest in an entity, itshould consider theentity’s purpose anddesign, including the risksthat the entity wasdesigned to create andpass through to its variableinterest holders.

Only one enterprise, if any,is expected to be identifiedas the primary beneficiaryof a VIE. Although morethan one enterprise couldmeet the losses/benefitscriterion, only oneenterprise, if any, will havethe power to direct theactivities of a VIE thatmost significantly impactthe entity’s economicperformance.

Increased skepticismshould be given tosituations in which anenterprise’s economicinterest in a VIE isdisproportionately greaterthan its stated power todirect the activities of theVIE that most significantlyimpact the entity’seconomic performance. Asthe level of disparityincreases, the level ofskepticism about anenterprise’s lack of poweris expected to increase.

positive, negative, orboth).

□ The ability to use itspower over theinvestee to affect theamount of theinvestor’s returns.

In assessing control of anentity, an investor shouldconsider the entity’spurpose and design toidentify the relevantactivities, how decisionsabout the relevantactivities are made, whohas the current ability todirect those activities, andwho is exposed or hasrights to the returns fromthose activities. Onlysubstantive rights canprovide power.

The greater an investor’sexposure to variability ofreturns, the greater itsincentive to obtain rightsto give it power, i.e., it isan indicator of power andis not by itselfdeterminative of havingpower.

BE GAAP considers theconsolidationrequirements of a parentwith its affiliates (verticallystructured groups) butalso entities undercommon control (groupsstructured in a horizontalway - consortia).

In addition, BE GAAPrequires the presentationof an excess of the cost ofan investment over itsaccounting value of theunderlying net assets to bepresented as 'positiveconsolidation difference'.Such positiveconsolidation differenceshould be amortized. If theperiod of amortization islonger than 5 years, thisshould be properlydisclosed.

Negative consolidationdifferences are notaccounted for in theincome statements but inthe consolidated equity. Arecycling of such anegative consolidationdifference is only allowedwhen the underlyingreason of the negativeconsolidation difference isrelated to expected futurelosses which require arecycling at the time of theaccounting of these losses.

Non-controlling interestsare separately presentedadjacent to the equity.

The translation of thefinancial statements offoreign entities forconsolidation purposes isdone on the basis of twoacceptable methods: themonetary/non-monetary

Consolidation



method or the closing ratemethod. The consolidationlaw prescribes when eachmethod has to be applied.

All other entities areevaluated under the votinginterest model. UnlikeIFRS, only actual votingrights are considered.Under the voting interestmodel, control can bedirect or indirect. Incertain unusualcircumstances, controlmay exist with less than 50percent ownership, whencontractually supported.The concept is referred toas effective control.

When an entity iscontrolled by voting rights,control is presumed toexist when a parent owns,directly or indirectly, morethan 50 percent of anentity’s voting power.Control also exists when aparent owns half or less ofthe voting power but haslegal or contractual rightsto control either themajority of the entity’svoting power or the boardof directors. Control mayexist even in cases wherean entity owns little ornone of a structuredequity. The application ofthe control conceptrequires, in each case,judgment in the context ofall relevant factors.

D e factocon trolcon cept

No de facto controlconcept exists. Effectivecontrol as described aboveis limited to contractualarrangements.

D e factocon trolcon cept

An investor can control anentity where it holds lessthan 50 percent of thevoting rights of the entityand lacks legal orcontractual rights bywhich to control themajority of the entity’svoting power or board ofdirectors (de factocontrol). An example of defacto control is when amajor shareholder holdsan investment in an entitywith an otherwisedispersed publicshareholding. Theassertion of de factocontrol is evaluated on thebasis of all relevant factsand circumstances,including the legal andregulatory environment,

Consolidation



the nature of the capitalmarket, and the ability ofthe majority owners ofvoting shares to votetogether.

P oten tialvotin grigh ts

No specific guidance existsrequiring theconsideration of potentialvoting rights.

P oten tialvotin grigh ts

IFRS requires potentialvoting rights to beconsidered in theassessment of power ifthey are substantive.Sometimes rights can besubstantive even thoughnot currently exercisable.To be substantive, rightsneed to be exercisablewhen decisions about therelevant activities need tobe made.

S h ared pow er

Current US GAAP for VIEsnotes that power is shared,and consequently no partyconsolidates, when two ormore unrelated partiestogether have power todirect the entity’s activitiesthat most significantlyimpact the entity’seconomic performanceand decisions about thoseactivities require theconsent of each partysharing the power.

S h ared pow er

IFRS includes the conceptof shared power by notingthat two or more investorscollectively control anentity and do notindividually control whenthey must act together todirect the relevantactivities. Note that ifthere is joint control(which is different fromcollective control) then thestandard on jointarrangements (IFRS 11)applies.

A gen tversusprin cipalan alysis

Current US GAAP for VIEsincludes specific guidanceto determine whether theremuneration of a decisionmaker is considered avariable interest in theentity. For limitedpartnerships or similarentities that are not VIEs,US GAAP presumes thatthe general partnercontrols the entity,although that presumption

A gen tversusprin cipalan alysis

IFRS includes guidance onagent/principalrelationships. An agentmay be engaged to act onbehalf of a single party or agroup of investors(principals). Certain poweris delegated by theprincipals to the agent. Anagent does not consolidatethe entity. Instead, theprincipal shall treat thedecision-making rights

Consolidation



of control can be overcomeif the limited partnerspossess substantive rightsto remove the generalpartner or liquidate theentity.

delegated to the agent asheld by the principaldirectly. Where there ismore than one principal,each shall assess whetherit has power over theinvestee.

Four key factors need to beconsidered whendetermining whether theinvestor is acting as anagent, as follows:

Indicators relating topower:

□ the scope of itsdecision-makingauthority, and

□ the rights held byother parties.

□ Indicators relating toexposure to variablereturns:o the remuneration it

receives, ando exposure to

variability ofreturns from otherinterests that itholds in the entity.

Related partiesan d d efactoagen ts

US GAAP includes specificguidance on interests heldby related parties. Arelated party groupincludes the reportingentity’s related parties andde facto agents (e.g., closebusiness advisors,partners, employees)whose actions are likely tobe influenced or controlledby the reporting entity.

Related partiesan d d efactoagen ts

IFRS requires that aninvestor consider thenature of rights andexposures held by relatedparties and others todetermine if they areacting as de facto agents.Rights and exposures heldby de facto agents wouldneed to be consideredtogether with theinvestor’s own rights andexposures in theconsolidation analysis.However, there is norelated party tiebreakerguidance as contained inUS GAAP to addresssituations where no partyin a related party group

Consolidation



controls an entity on astand-alone basis but therelated party group as awhole controls the entity.

Individual parties within arelated party group(including de facto agencyrelationships) are requiredto first separately considerwhether they meet boththe power andlosses/benefits criteria. Ifone party within therelated party group meetsboth criteria, it is theprimary beneficiary of theVIE. If no party within therelated party group on itsown meets both criteria,the determination of theprimary beneficiary withinthe related party group isbased on an analysis of thefacts and circumstances,with the objective ofdetermining which party ismost closely associatedwith the VIE.

Recon sid erationeven ts

Determination of whetheran entity is a VIE getsreconsidered either when aspecific reconsiderationevent occurs or, in the caseof a voting interest entity,when voting interests orrights change.

However, thedetermination of a VIE’sprimary beneficiary is anongoing assessment.

Recon sid erationeven ts

IFRS 10 requires theconsolidation analysis tobe reassessed when factsand circumstancesindicate that there arechanges to one or more ofthe elements of the controldefinition.

S ilos

Although US GAAP appliesto legal structures,guidance is provided toaddress circumstances inwhich an entity with avariable interest shall treata portion of the entity as a

S ilos

IFRS incorporatesguidance for silos that issimilar to US GAAP;however, the silo guidanceunder IFRS appliesregardless of whether the

Consolidation



separate VIE if specificassets or activities (a silo)are essentially the onlysource of payment forspecified liabilities orspecified other interests. Aparty that holds a variableinterest in the silo thenassesses whether it is thesilo’s primary beneficiary.The key distinction is thatthe US GAAP silo guidanceapplies only when thelarger entity is a VIE.

larger entity is a VIE.

11.5 Accounting policies and reporting periods

In relation to certain specialized industries, US GAAP allows more flexibility for use of

different accounting policies within a single set of consolidated financial statements.

In the event of nonuniform reporting periods, the treatment of significant

transactions in any gap period varies under the different frameworks, with the

potential for earlier recognition under IFRS.


Consolidated financialstatements are preparedby using uniformaccounting policies for allof the entities in a group.Limited exceptions existwhen a subsidiary hasspecialized industryaccounting principles.Retention of thespecialized accountingpolicy in consolidation ispermitted in such cases.

Consolidated financialstatements are preparedby using uniformaccounting policies for liketransactions and events insimilar circumstances forall of the entities in agroup.

Uniform accountingpolicies- similar to IFRS.However, departures fromthis principle arepermitted in exceptionalcircumstances, i.e. whenapplication of differentrules is justified in view ofthe economic or legalcontext. In such cases,appropriate disclosureshould be made in thenotes.

Reporting date - similar toIFRS, except thatappropriate disclosure ofsignificant transactionsbetween the two dates issufficient.

The consolidated financialstatements of the parentand the subsidiary areusually drawn up at the

The consolidated financialstatements of the parentand the subsidiary areusually drawn up at the

Consolidation



same reporting date.However, theconsolidation of subsidiaryaccounts can be drawn upat a different reportingdate, provided thedifference between thereporting dates is no morethan three months.Recognition is given, bydisclosure or adjustment,to the effects ofintervening events thatwould materially affectconsolidated financialstatements.

same reporting date.However, the subsidiaryaccounts as of a differentreporting date can beconsolidated, provided thedifference between thereporting dates is no morethan three months.Adjustments are made tothe financial statementsfor significant transactionsthat occur in the gapperiod.

Equity in vestm en ts/in vestm en tsin associatesan d join tven tures

11.6 Potential voting rights

The consideration of potential voting rights might lead to differences in whether an

investor has significant influence.


Potential voting rights aregenerally not considered inthe assessment of whetheran investor has significantinfluence.

Potential voting rights areconsidered in determiningwhether the investorexerts significant influenceover the investee. Potentialvoting rights are importantin establishing whether theentity is an associate.Potential voting rights arenot, however, consideredin the measurement of theequity earnings recordedby the investor.

Broadly comparable toIFRS, but the concept ofpresently exercisablepotential voting rights isnot addressed.

Control also exists de facto(rebuttable presumption)when voting rightsrepresenting the majorityof the votes attached to theshares represented at thelast two annualshareholders meetingshave been exercised.

Consolidation


11.7 Definition and types of joint ventures

Differences in the definition or types of joint ventures may result in different

arrangements being considered joint ventures, which could affect reported figures,

earnings, ratios, and covenants.


The term joint venturerefers only to jointlycontrolled entities, wherethe arrangement is carriedon through a separateentity.

A corporate joint ventureis defined as a corporationowned and operated by asmall group of businessesas a separate and specificbusiness or project for themutual benefit of themembers of the group.

Most joint venturearrangements give eachventurer (investor)participating rights overthe joint venture (with nosingle venturer havingunilateral control), andeach party sharing controlmust consent to theventure’s operating,investing, and financingdecisions.

A joint arrangement is acontractual agreementwhereby two or moreparties undertake aneconomic activity that issubject to joint control.Joint control is thecontractually agreedsharing of control of aneconomic activity.Unanimous consent isrequired of the partiessharing control, but notnecessarily of all parties inthe venture.

IFRS classifies jointarrangements into twotypes:

□ Joint operations,which give parties tothe arrangement directrights to the assets andobligations for theliabilities.

□ Joint ventures, whichgive the parties rightsto the net assets oroutcome of thearrangement.

A joint subsidiary is anentity that is subject tocontrol exercised jointly bya limited number ofshareholders when theyhave agreed that thedecisions concerning theorientation of the entity’smanagement policy cannotbe taken without theirmutual consent.

Assets, liabilities, incomeand expenses of jointsubsidiaries areconsolidatedproportionally, afterelimination of intragroupbalances and transactions.The equity method isallowed for jointsubsidiaries whoseactivities are not closelyintegrated with those ofthe parent.

A ccoun tin gtreatm en tof equity m ovem en tsof an associate

The investor’s share of theequity movements of anassociate or a jointsubsidiary accounted forusing the equity method isrecognized directly in theinvestor’s equity.


Consolidation


11.8 Accounting for joint arrangements

Under IFRS, classification of joint arrangement as a joint venture or a joint operation

determines the accounting by the investor. Under US GAAP, the proportional

consolidation method is allowed for entities in certain industries.


Prior to determining theaccounting model, anentity first assesseswhether the joint ventureis a VIE. If the jointventure is a VIE, theaccounting modeldiscussed earlier isapplied. Joint venturesoften have a variety ofservice, purchase, and/orsales agreements, as wellas funding and otherarrangements that mayaffect the entity’s status asa VIE. Equity interests areoften split 50-50 or near50-50, making nonequityinterests (i.e., any variableinterests) highly relevantin consolidation decisions.Careful consideration of allrelevant contracts andgoverning documents iscritical in thedetermination of whethera joint venture is withinthe scope of the variableinterest model and, if so,whether consolidation isrequired.

If the joint venture is not aVIE, venturers apply theequity method to recognizethe investment in a jointlycontrolled entity.Proportionateconsolidation is generallynot permitted except forunincorporated entitiesoperating in certainindustries. A fullunderstanding of therights and responsibilitiesconveyed in management,shareholder, and other

The classification of a jointarrangement as a jointventure or a jointoperation determines theinvestor’s accounting. Aninvestor in a joint venturemust account for itsinterest using the equitymethod in accordance withIAS 28.

An investor in a jointoperation accounts for itsshare of assets, liabilities,income and expensesbased on its direct rightsand obligations.

For the accounting of jointventures in consolidatedfinancial statements, seeprevious topic “Definitionand types of joint ventures”.

For other jointarrangements, limited rulesexist in BE GAAP. TheCBN/CNC issued a detailedstudy (CBN/CNC advice 3-3) on the different methodsapplicable to ‘Temporaryassociations’.

Generally speaking, theproportional method isconsidered to be thepreferred method bestrepresenting the economicreality of the cooperationbetween the partners. Othermethods (including fullconsolidation) are alsoallowed when specificcircumstances justifyanother method.

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governing documents isnecessary.

11.9 Accounting for contributions to a jointlycontrolled entity

Gain recognition upon contribution to a jointly controlled entity is more likely under

IFRS.


As a general rule, aventurer records itscontributions to a jointventure at cost (i.e., theamount of cashcontributed and thecarrying value of othernonmonetary assetscontributed).

When a venturercontributes appreciatednoncash assets and othershave invested cash orother hard assets, it mightbe appropriate torecognize a gain for aportion of thatappreciation. Practice andexisting literature vary inthis area. As a result, thespecific facts andcircumstances affect gainrecognition and requirecareful analysis.

A venturer thatcontributes nonmonetaryassets—such as shares;property, plant, andequipment; or intangibleassets—to a jointlycontrolled entity inexchange for an equityinterest in the jointlycontrolled entity generallyrecognizes in itsconsolidated incomestatement the portion ofthe gain or lossattributable to the equityinterests of the otherventurers, except when:

□ The significant risksand rewards ofownership of thecontributed assetshave not beentransferred to thejointly controlledentity,

□ The gain or loss on theassets contributedcannot be measuredreliably, or

□ The contributiontransaction lackscommercial substance.

Note that where thenonmonetary asset is abusiness, a policy choice iscurrently available for fullor partial gain or lossrecognition.

IAS 28 (Amended 2011)


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provides an exception tothe recognition of gains orlosses only when thetransaction lackscommercial substance.

11.10 Equity method of accounting—exemptionfrom applying the equity method

An exemption from applying the equity method of accounting (i.e., use of the fair

value through profit or loss option) is available to a broader group of entities under US

GAAP.


Equity methodinvestments areconsidered financial assetsand therefore are eligiblefor the fair valueaccounting option. Anentity can measure aninvestment in associates orjoint ventures at fair valuethrough profit or loss,regardless of whether it isa venture capital or similarorganization.

An entity can only electfair value through profit orloss accounting for equitymethod investments heldby venture capitalorganizations, mutualfunds, unit trusts, andsimilar entities, includinginvestment-linkedinsurance funds. In otherinstances, an entity mustapply the equity method toits investments inassociates and jointventures unless it isexempt from preparingconsolidated financialstatements.

No such exemption (the useof fair value through profitor loss) is available. Theequity method has to beused to account forassociates in consolidatedfinancial statements, andthe cost model (cost less anyaccumulated impairmentlosses) in separate financialstatements. For joint-ventures, the proportionalconsolidation methodshould be applied in mostcases. The equity methodcan only be applied wherethe activities of jointsubsidiaries are not closelyintegrated with the activitiesof the parent. The costmodel is to be used inseparate financialstatements.

Consolidation


11.11 Equity method of accounting—classificationas held for sale

Application of the equity method of accounting may cease before significant influence

is lost under IFRS (but not under US GAAP).


Under US GAAP, equitymethod investments arenot classified as held forsale. An investor appliesequity method accountinguntil significant influenceis lost.

If an equity methodinvestment meets the heldfor sale criteria inaccordance with IFRS 5,an investor records theinvestment at the lower ofits (1) fair value less coststo sell or (2) carryingamount as of the date theinvestment is classified asheld for sale.

Not addressed.Proportionate consolidationor equity accountingmethod is applied until theinvestment is derecognized,subject to the impairmenttest.

11.12 Equity method of accounting—acquisitiondate excess of investor’s share of fair valueover cost

IFRS may allow for day one gain recognition (whereas US GAAP would not).


Any acquisition dateexcess of the investor’sshare of the net fair valueof the associate’sidentifiable assets andliabilities over the cost ofthe investment is includedin the basis differencesand is amortized—ifappropriate—over theunderlying asset’s usefullife. If amortization is notappropriate, the differenceis included in the gain/lossupon ultimate dispositionof the investment.

Any acquisition dateexcess of the investor’sshare of net fair value ofthe associates’ identifiableassets and liabilities overthe cost of the investmentis recognized as income inthe period in which theinvestment is acquired.

Any acquisition date excessof the investor’s share of netfair value of the associates’identifiable assets andliabilities over the cost ofthe investment isrecognized directly inequity under the heading“consolidation differences”.

Consolidation


11.13 Equity method of accounting—conformingaccounting policies

A greater degree of conformity is required under IFRS.


The equity investee’saccounting policies do nothave to conform to theinvestor’s accountingpolicies if the investeefollows an acceptablealternative US GAAPtreatment.

An investor’s financialstatements are preparedusing uniform accountingpolicies for similartransactions and events.This also applies to equitymethod investees.

Similar to IFRS. However,departures from thisprinciple are permitted inexceptional circumstances,i.e. when application ofdifferent rules is justified inview of the economic orlegal context. In such cases,appropriate disclosureshould be made in thenotes.

11.14 Equity method of accounting—impairment

Impairment losses may be recognized earlier, and potentially may be reversed, under

IFRS.


An investor shoulddetermine whether a lossin the fair value of aninvestment below itscarrying value is atemporary decline. If it isother than temporary, theinvestor calculates animpairment as the excessof the investment’scarrying amount over thefair value.

An investor should assesswhether impairmentindicators exist, inaccordance with IAS 39. Ifthere are indicators thatthe investment may beimpaired, the investmentis tested for impairment inaccordance with IAS 36.The concept of atemporary decline doesnot exist under IFRS.

Not addressed.

Reversals of impairmentson equity methodinvestments areprohibited.

Impairments of equitymethod investments canbe reversed in accordancewith IAS 36.

Consolidation


11.15 Equity method of accounting—losses inexcess of an investor’s interest

Losses may be recognized earlier under US GAAP.


Even without a legal orconstructive obligation tofund losses, a loss inexcess of the investmentamount (i.e., a negative orliability investmentbalance) should berecognized when theimminent return toprofitable operations by aninvestee appears to beassured.

Unless an entity hasincurred a legal orconstructive obligation,losses in excess of theinvestment are notrecognized. The concept ofan imminent return toprofitable operations doesnot exist under IFRS.

Not addressed.

11.16 Equity method of accounting—loss ofsignificant influence or joint control

The potential for greater earnings volatility exists under IFRS.


Upon the loss ofsignificant influence orjoint control, any retainedinterest is measured at thecarrying amount of theinvestment at the date ofthe change in status.

If an entity losessignificant influence orjoint control over an equitymethod investment andthe retained interest is afinancial asset, the entityshould measure theretained interest at fairvalue. The resultant gainor loss is recognized in theincome statement.

In contrast, if aninvestment in an associatebecomes an investment ina joint venture, or viceversa, such that the equitymethod of accountingcontinues to apply, no gainor loss is recognized in theincome statement.

Not addressed.

Consolidation


11.17 Accounting for investments in qualifiedaffordable housing projects

US GAAP permits reporting entities to make an accounting policy election to account

for their investments in qualified affordable housing projects using the proportional

amortization method if certain conditions are met.


An investor that owns apassive investment inlimited liability entitiesthat manage or invest inqualified affordablehousing projects can usethe proportionalamortization method ifcertain conditions are met.

Under the proportionalamortization method, theinitial cost of theinvestment is amortized inproportion to the taxbenefits received over theperiod that the investorexpects to receive the taxcredits and other benefits.

IFRS does not contain anyguidance specific toaccounting forinvestments in qualifiedaffordable housingprojects.

Not addressed.

Both the amortizationexpense determined underthe proportionalamortization method andthe tax benefits receivedwill be recognized as acomponent of incometaxes.

Use of the proportionalamortization method forinvestments that meet therequisite conditions is anaccounting policy election.Once elected, theproportional amortizationmethod should be appliedto all qualifyinginvestments.

Consolidation


D isclosure

11.18 Disclosures

US GAAP and IFRS both require extensive disclosure about an entity’s involvement in

VIEs/structured entities, including those that are not consolidated.


Guidance applies to bothnonpublic and publicenterprises.

The principal objectives ofVIE disclosures are toprovide financialstatement users with anunderstanding of thefollowing:

□ Significant judgmentsand assumptionsmade by an enterprisein determiningwhether it mustconsolidate a VIEand/or discloseinformation about itsinvolvement in a VIE.

□ The nature ofrestrictions on aconsolidated VIE’sassets and on thesettlement of itsliabilities reported byan enterprise in itsstatement of financialposition, including thecarrying amounts ofsuch assets andliabilities.

□ The nature of, andchanges in, the risksassociated with anenterprise’sinvolvement with theVIE.

□ How an enterprise’sinvolvement with theVIE affects theenterprise’s financialposition, financialperformance, and cashflows.

The level of disclosure to

IFRS has disclosurerequirements for interestsin subsidiaries, jointarrangements, associates,and unconsolidatedstructured entities whichinclude the following:

□ Significant judgmentsand assumptions indetermining if aninvestor has control orjoint control overanother entity, and thetype of jointarrangement.

□ The composition of thegroup and intereststhat non-controllinginterests have in thegroup’s activities andcash flows.

□ The nature and extentof any significantrestrictions on theability of the investorto access or use assets,and settle liabilities.

□ The nature and extentof an investor’s interestin unconsolidatedstructured entities.

□ The nature of, andchanges in, the risksassociated with aninvestor’s interest inconsolidated andunconsolidatedstructured entities.

□ The nature, extent andfinancial effects of aninvestors’ interests injoint arrangementsand associates, and thenature of the risks

Under BE GAAP no suchextensive disclosures forinterests in subsidiaries,joint ventures andassociates are required.

Consolidation



achieve these objectivesmay depend on the factsand circumstancessurrounding the VIE andthe enterprise’s interest inthat entity.

Additional detaileddisclosure guidance isprovided for meeting theobjectives describedabove.

Specific disclosures arerequired for (1) a primarybeneficiary of a VIE and(2) an entity that holds avariable interest in a VIE(but is not the primarybeneficiary).

associated with thoseinterests.

□ The consequences ofchanges in ownershipinterest of a subsidiarythat do not result inloss of control.

□ The consequences of aloss of control of asubsidiary during theperiod.

An entity is required toconsider the level of detailnecessary to satisfy thedisclosure objectives ofenabling users to evaluatethe nature and associatedrisks of its interests, andthe effects of thoseinterests on its financialstatements.

Additional detaileddisclosure guidance isprovided for meeting theobjectives describedabove.

If control of a subsidiary islost, the parent shalldisclose the gain or loss, ifany, and:

□ Portion of that gain orloss attributable torecognizing anyinvestment retained informer subsidiary atits fair value at datewhen control is lost.

□ Line item(s) in thestatement ofcomprehensiveincome in which thegain or loss isrecognized (if notpresented separatelyin the statement ofcomprehensiveincome).

Additional disclosures arerequired in instances whenseparate financialstatements are preparedfor a parent that elects not

Consolidation



to prepare consolidatedfinancial statements, orwhen a parent, venturerwith an interest in a jointlycontrolled entity, orinvestor in an associateprepares separate financialstatements.


11.19.1 FASB Accounting Standards Update No. 2015-02, Consolidation

(Topic 810): Amendments to the Consolidation Analysis

In February 2015, the FASB issued guidance that makes targeted amendments to the

current consolidation guidance and ends the deferral granted to investment

companies from applying the variable interest entity (VIE) guidance. This new

guidance applies to entities in all industries and provides a new scope exception to

registered money market funds and similar unregistered money market funds. Some

of the more notable amendments are summarized below.

11.19.1.1 Determining whether an entity is a variable interest entity (VIE)

The standard does not add or remove any of the five characteristics that determine if

an entity is a VIE. However, it does change the manner in which a reporting entity

assesses one of the characteristics. In particular, when decision-making over the

entity’s most significant activities has been outsourced, the standard changes how a

reporting entity assesses if the equity holders at risk lack decision making rights. The

new guidance requires that the reporting entity first consider the rights of all of the

equity holders at risk. If the equity holders have certain rights that are deemed to give

them the power to direct the entity’s most significant activities, then the entity does

not have this VIE characteristic.

The new guidance also introduces a separate analysis specific to limited partnerships

and similar entities for assessing if the equity holders at risk lack decision making

rights. Limited partnerships and similar entities will be VIEs unless the limited

partners hold substantive kick-out rights or participating rights. In order for such

rights to be substantive, they must be exercisable by a simple majority vote (or less) of

all of the partners (exclusive of the general partner and its related parties).

The guidance for limited partnerships under the voting model has been eliminated in

conjunction with the introduction of this separate analysis, including the rebuttable

presumption that a general partner unilaterally controls a limited partnership and

should therefore consolidate it. A limited partner with a controlling financial interest

obtained through substantive kick out rights would consolidate a limited partnership.

Consolidation


11.19.1.2 Fees paid to a decision maker or a service provider

A precondition to assessing whether an entity needs to be consolidated is that the

reporting entity must have a variable interest in the entity. For an outsourced decision

maker or service provider, current GAAP provides six criteria that must be met for a

fee arrangement to not be a variable interest. The new guidance eliminates three of

the six criteria, and as a result, focuses on whether the fees are “market-based” and

“commensurate” with the services provided.

Under the VIE model, the primary beneficiary is defined as the party that has both the

power to direct the most significant activities (the “power” test) and the potential for

significant economic exposure (the “economics” test). A decision maker fee that is

both market-based and commensurate would be excluded when applying the

economics test to determine the primary beneficiary.

11.19.1.3 Related parties

Under the new guidance, a reporting entity that meets the power test will also include

“indirect interests” − interests held through related parties – on a proportionate basis

to determine whether it meets the economics test and is the primary beneficiary on a

standalone basis.

In addition to incorporating related party interests earlier in the analysis for a party

with power, the new guidance reduces situations where the “related party tiebreaker”

test is performed. The new guidance limits the application of the tiebreaker test to

when (1) power is shared among related parties, or (2) the power test is met by a

single party and related parties that are under common control meet the economics

test. The new guidance also requires that if a single party meets the power test, but

substantially all of the VIE’s activities are being conducted on behalf of one party in

the related party group, then that party would consolidate.

11.19.1.4 What’s next?

The standard is effective for public business entities for annual periods beginning

after December 15, 2015. Nonpublic business entities are required to apply the

standard for annual periods beginning after December 15, 2016. Early adoption is

allowed, including in any interim period.

11.19.2 FASB Accounting Standards Update No. 2014-13, Consolidation

(Topic 810): Measuring the Financial Assets and the Financial Liabilities

of a Consolidated Collateralized Financing Entity

In August 2014, the FASB issued guidance that provides an alternative for measuring

the financial assets and financial liabilities of a collateralized financing entity (CFE)

that is consolidated by a reporting entity.

Under current GAAP, if a reporting entity elects the fair value option, financial assets

and financial liabilities of the CFE must be measured separately at their fair values. As

a result, the aggregate fair value of the financial assets may differ from the aggregate

fair value of the financial liabilities. This guidance allows the use of the more

Consolidation


observable of the fair value of the financial assets or the fair value of the financial

liabilities of the CFE to measure both. This guidance eliminates the measurement

difference that may exist when the financial assets and the financial liabilities are

measured independently at fair value.

For those reporting entities that apply the fair value option and do not adopt this

measurement alternative, this guidance also clarifies how to account for the

differences between the fair values of the financial assets and liabilities of

consolidated CFEs.

This guidance will be effective in 2016 for calendar year-end public business entities

and 2017 for all other calendar year-end entities. Early adoption is permitted as of the

beginning of an annual period.

11.19.3 FASB Accounting Standards Update No. 2014-10, Development Stage

Entities (Topic 915): Elimination of Certain Financial Reporting

Requirements, Including an Amendment to Variable Interest Entities

Guidance in Topic 810, Consolidation

In June 2014, the FASB issued guidance that eliminates the concept of a development

stage entity (DSE) in its entirety from current accounting guidance. Amendments to

the consolidation guidance may result in more DSEs being considered variable

interest entities (VIEs).

This guidance eliminates the following:

□ Current incremental reporting requirements for a DSE, including inception-to-

date information.

□ The relief provided to DSEs when evaluating the sufficiency of equity at risk

criterion in the VIE consolidation model.

By eliminating the relief in the current consolidation guidance, reporting entities that

invest in DSEs would need to consider whether a DSE has sufficient equity at risk to

fund its current and ongoing activities. This will likely result in more entities being

deemed to be VIEs and may change previous consolidation conclusions.

The amendment to the consolidation guidance is effective for public business entities

for annual reporting periods beginning after December 15, 2015, and interim periods

therein. For all other entities, the amendment is effective for annual reporting periods

beginning after December 15, 2016, and interim reporting periods beginning after

December 15, 2017. The changes are to be applied to existing investments as of the

date of adoption. Retrospective application is required and early adoption is

permitted.

11.19.4 IASB amendments to IAS 27, Separate Financial Statements: Equity

Method in Separate Financial Statements

In August 2014, the IASB issued an amendment allowing entities to account for their

investments in subsidiaries, joint ventures and associates under the equity method of

Consolidation


accounting in separate (parent only) financial statements. Today, these investments

are required to be accounted for at cost or under IFRS 9, Financial Instruments in an

entity’s separate financial statements. The standard should be applied retrospectively

for annual periods beginning on or after January 1, 2016. Early application is allowed.

11.19.5 IASB amendments to IFRS 10, Consolidated Financial Statements; IFRS

12, Disclosure of Interests in Other Entities; and IAS 28, Investments in

Associates and Joint Ventures: Investment Entities: Applying the

Consolidation Exception

In December 2014, the IASB issued an amendment to IFRS 10 and IAS 28 to clarify

the application of the consolidation exception for investment entities and their

subsidiaries.

The amendments to IFRS 10 clarify that:

□ The exception from preparing consolidated financial statements is available to

intermediate parent entities which are subsidiaries of investment entities. The

exception is available when the investment entity parent measures its subsidiaries

at fair value.

□ An investment entity should consolidate a subsidiary which is not an investment

entity and whose main purpose and activity is to provide services in support of the

investment entity’s activities. However, the amendments confirm that if the

subsidiary is itself an investment entity, the investment entity parent should

measure its investment in the subsidiary at fair value through profit or loss. This

approach is required regardless of whether the subsidiary provides investment

related services to the parent or to third parties.

The amendments to IAS 28 allow an entity which is not an investment entity, but has

an interest in an associate or joint venture which is an investment entity, a policy

choice when applying the equity method of accounting. The entity may choose to

retain the fair value measurement applied by the investment entity associate or joint

venture, or to unwind the fair value measurement and instead perform a

consolidation at the level of the investment entity associate or joint venture.

The amendments to IFRS 10 and IAS 28 are effective from January 1, 2016. Earlier

application is permitted.

11.19.6 IASB amendments to IFRS 10, Consolidated Financial Statements and

IAS 28, Investments in Associates and Joint Ventures: Sale or

Contribution of Assets between an Investor and its Associate or Joint

Venture

In September 2014, the IASB issued an amendment to IFRS 10 and IAS 28 to clarify

the accounting treatment for sales or contribution of assets between an investor and

its associates or joint ventures.

Consolidation


The amendments resolve a current inconsistency between IFRS 10 and IAS 28. The

accounting treatment depends on whether the nonmonetary assets sold or contributed

to an associate or joint venture constitute a ‘business.’

Full gain or loss will be recognized by the investor when the nonmonetary assets

constitute a ‘business.’ If the assets do not meet the definition of a business, the gain

or loss is recognized by the investor to the extent of the other investors’ interests.

The amendments to IFRS 10 and IAS 28 are prospective and are effective from

January 1, 2016. Earlier application is permitted. If an entity applies these

amendments earlier, it should disclose that fact.

11.19.7 IASB proposed amendments to IFRS 10, Consolidated Financial

Statements; IFRS 12, Disclosure of Interests in Other Entities; IAS 27,

Separate Financial Statements; IAS 28, Investments in Associates and

Joint Ventures; IAS 36, Impairment of Assets; and Illustrative Examples

for IFRS 13, Fair Value Measurements: Measuring Quoted Investments

in Subsidiaries, Joint Ventures, and Associates at Fair Value

In September 2014, the IASB issued an exposure draft to address questions received

on the unit of account for investments in subsidiaries, joint ventures, and associates

and on their fair value measurement when those investments are quoted in an active

market (quoted investments). The IASB also addressed questions on the measurement

of the recoverable amount of cash-generating units (CGUs) on the basis of fair value

less costs of disposal when they correspond to entities that are quoted in an active

market (quoted CGUs).

The proposed amendments clarify that an entity should measure the fair value of

quoted investments and quoted CGUs as the product of the quoted price for the

individual financial instruments that make up the investments held by the entity and

the quantity of financial instruments.

Comments on the exposure draft were due on January 1, 2015 and the IASB is

currently in redeliberations.

11.19.8 IASB amendments to IFRS 11, Joint Arrangements: Accounting for

Acquisitions of Interests in Joint Operations

In May 2014, the IASB issued an amendment to IFRS 11 to address the accounting for

the acquisition of an interest in a joint operation that constitutes a business. The

amendment requires that acquirers of such interests apply the relevant principles on

business combination accounting contained in IFRS 3, Business Combinations, and

other standards, and disclose the related information required under those standards.

A joint operator that increases its interest in a joint operation that constitutes a

business should not remeasure previously held interests in the joint operation when

joint control is retained. The standard should be applied prospectively for annual

periods beginning on or after January 1, 2016. Early application is allowed.

PwC 1-1

Chapter 12:Business combinations

Business combinations


12.1 Business combinations

IFRS and US GAAP are largely converged in this area. The business combinations

standards under US GAAP and IFRS are close in principles and language. However,

some differences remain between US GAAP and IFRS pertaining to (1) the definition

of control, (2) recognition of certain assets and liabilities based on the reliably

measurable criterion, (3) accounting for contingencies, and (4) accounting for

noncontrolling interests. Significant differences also continue to exist in subsequent

accounting. Different requirements for impairment testing and accounting for

deferred taxes (e.g., the recognition of a valuation allowance) are among the most

significant.

Under BE GAAP, the term ‘business combinations’ is not used but BE GAAPdistinguishes taxable and tax-free reorganizations. For taxable reorganizations, assetsand liabilities contributed (and shares issued) are recorded at the higher of their agreedvalue or fair value. For tax-free reorganizations, assets and liabilities contributed (andshares issued) are recorded at their book value.


US GA A P

ASC 205-20, ASC 350-10, ASC 350-20, ASC 350-30, ASC 360-10, ASC 805,

ASC 810

IFRS

IAS 12, IAS 38, IAS 39, IFRS 2, IFRS 3, IFRS 10, IFRS 13

B E GA A P


CBN/CNC 2012/9, CBN/CNC 2012/11, CBN/CNC 2013/3

P w C Guide

B usin esscom bin ation san d n on con trollin gin terests,2 0 1 4 globaledition

Note



this area.



Determining whether the acquisition method should beapplied

12.2 Definition of control

Determining whether the acquisition method applies to a transaction begins with

understanding whether the transaction involves the acquisition of one or more

businesses and whether it is a business combination within the scope of the business

combinations guidance.

The business combinations guidance states that for a business combination to occur,

an acquirer must obtain control over a business. US GAAP and IFRS define control

differently. Consequently, the same transaction may be accounted for as a business

combination under US GAAP, but not under IFRS, or vice versa. The table below

highlights various considerations in determining control under US GAAP and IFRS.


Consolidation decisionsare evaluated first underthe variable interest entitymodel.

□ Qualitatively assess ifthe variable interestmeets both criteria:o Power to direct

activities thatmost significantlyimpact economicperformance.

o Potential toreceive significantbenefits or absorbsignificant losses.

All other entities areevaluated under the votinginterest model.

See SD 12 for furtherinformation on theconcept of control and theconsolidation model underUS GAAP.

An investor has controlover an investee when allof the following elementsare present:

□ Power over theinvestee.

□ Exposure, or rights, tovariable returns fromits involvement withthe investee.

□ Ability to use power toaffect the returns.

See SD 12 for furtherinformation on theconcept of control and theconsolidation model underIFRS.

Control (de facto and dejure) is derived from:

□ Voting rights.□ Right to appoint the

members of theboards.

□ Possibility to influencemanagementdecisions.

□ Agreements with theother shareholders.



Acquired assets and liabilities

12.3 Acquired contingencies

There are significant differences related to the recognition of contingent liabilities and

contingent assets.


Acquired assets andliabilities subject tocontingencies arerecognized at fair value iffair value can bedetermined during themeasurement period. Iffair value cannot bedetermined, companiesshould typically accountfor the acquiredcontingencies usingexisting guidance. Ifrecognized at fair value onacquisition, an acquirershould develop asystematic and rationalbasis for subsequentlymeasuring and accountingfor assets and liabilitiesarising from contingenciesdepending on their nature.

The acquiree’s contingentliabilities are recognized atthe acquisition dateprovided their fair valuescan be measured reliably.The contingent liability ismeasured subsequently atthe higher of the amountinitially recognized less, ifappropriate, cumulativeamortization recognizedunder the revenueguidance (IAS 18) or thebest estimate of theamount required to settle(under the provisionsguidance—IAS 37).

Contingent assets are notrecognized.

Contingent liabilities arenot recognized onacquisition.

12.4 Assignment/allocation and impairmentof goodwill

The definition of the levels at which goodwill is assigned/allocated and tested for

impairment varies between different frameworks and might not be the same.

Additional differences in the impairment testing methodologies could create further

variability in the timing and extent of recognized impairment losses.


Goodwill is assigned to anentity’s reporting units, asdefined within theguidance.

Goodwill is tested forimpairment at least on an

Goodwill is allocated to acash-generating unit(CGU) or group of CGUs,as defined within theguidance.

Goodwill is tested for

Goodwill is recognizedseparately as an intangibleasset for the differencebetween the acquisitioncost and the acquirer’sshare of the corresponding




annual basis and betweenannual tests if an eventoccurs or circumstanceschange that may indicatean impairment.

When performing thegoodwill impairment test,an entity may first assessqualitative factors todetermine whether thetwo-step goodwillimpairment test isnecessary. If the entitydetermines, based on thequalitative assessment,that it is more likely thannot that the fair value of areporting unit is below itscarrying amount, the two-step impairment test isperformed. An entity canbypass the qualitativeassessment for anyreporting unit in anyperiod and proceeddirectly to Step 1 of thetwo-step goodwillimpairment test:

□ In Step 1, the fairvalue and thecarrying amountof the reportingunit, includinggoodwill, arecompared. If thefair value of thereporting unit isless than thecarrying amount,Step 2 iscompleted todetermine theamount of thegoodwillimpairment loss, ifany.

□ Goodwillimpairment ismeasured as theexcess of thecarrying amountof goodwill over itsimplied fair value.

impairment at least on anannual basis and betweenannual tests if an eventoccurs or circumstanceschange that may indicatean impairment.

Goodwill impairmenttesting is performed usinga one-step approach:

The recoverable amount ofthe CGU or group of CGUs(i.e., the higher of its fairvalue less costs of disposaland its value in use) iscompared with its carryingamount.

Any impairment loss isrecognized in operatingresults as the excess of thecarrying amount over therecoverable amount.

The impairment loss isallocated first to goodwilland then on a pro ratabasis to the other assets ofthe CGU or group of CGUsto the extent that theimpairment loss exceedsthe carrying value ofgoodwill.

book value of the netassets acquired (afterhaving allocated up to amaximum this differenceto the fair values ofacquired assets andliabilities).

Goodwill should be subjectto extraordinaryamortization where, as aresult of changes ineconomic or technologicaldevelopments, this iseconomically justified.Subsequent reversal ofimpairment write-downs isrequired when the write-down is no longereconomically justified.

Goodwill is tested forimpairment at least on anannual basis and betweenannual tests if an eventoccurs or circumstanceschange that may indicatean impairment.

The accountingtreatment of “stepacquisitions”

Two types of “stepacquisitions” are discussedin the CBN/CNC advice2013/3:

1) Increase in interest inan associated companythat still remains anassociate after thetransaction;

2) Increase in interest inan associated companythat becomes a fullyconsolidated subsidiaryafter the transaction.

In the first case, the stepacquisitions are accountedfor as consecutive separatetransactions. Eventualgoodwill or badwill is




The implied fairvalue of goodwill—calculated in thesame manner thatgoodwill isdetermined in abusinesscombination—isthe differencebetween the fairvalue of thereporting unit andthe fair value ofthe various assetsand liabilitiesincluded in thereporting unit.

Any loss recognized is notpermitted to exceed thecarrying amount ofgoodwill. The impairmentcharge is included inoperating income.

determined transaction bytransaction.

In the second case, thetransition from anassociate to a fullyconsolidated subsidiaryresults in the transitionfrom the equity accountingmethod to the fullconsolidation method. Inthis case the allocation ofthe consolidationdifference to theunderlying assets andliabilities that resultedfrom the first acquisitionneeds to be reassessed.

S ource: C B N / C N C 2 0 1 3 / 3

For reporting units withzero or negative carryingamounts, Step 1 of thetwo-step impairment testis always qualitative. Anentity must first determinewhether it is more likelythan not that a goodwillimpairment exists. Anentity is required toperform Step 2 of thegoodwill impairment test ifit is more likely than notthat goodwill impairmentexists.

In January 2014, the FASBissued new guidance forprivate companies. Privatecompanies will have theoption to amortizegoodwill on a straight-linebasis over a period of up toten years, and apply atrigger-based, single-stepimpairment test at eitherthe entity level or thereporting unit level at thecompany’s election. Thesingle-step impairmenttest compares the fair




value of the entity (orreporting unit) to itscarrying amount.

12.5 Contingent consideration—seller accounting

Entities that sell a business that includes contingent consideration might encounter

significant differences in the manner in which such contingent considerations are

recorded.


Under US GAAP, the sellershould determine whetherthe arrangement meets thedefinition of a derivative.If the arrangement meetsthe definition of aderivative, thearrangement should berecorded at fair value. Ifthe arrangement does notmeet the definition of aderivative, the sellershould make anaccounting policy electionto record the arrangementat either fair value atinception or at thesettlement amount whenthe consideration isrealized or is realizable,whichever is earlier.

Under IFRS, a contract toreceive contingentconsideration that givesthe seller the right toreceive cash or otherfinancial assets when thecontingency is resolvedmeets the definition of afinancial asset. When acontract for contingentconsideration meets thedefinition of a financialasset, it is measured usingone of the measurementcategories specified in thefinancial instrumentsguidance.

Not addressed.

However advice CBN/CNC2012/9 provides guidanceon contingentconsideration accountingby the buyer. TheCBN/CNC has concludedthat a conditionalobligation does require theaccounting of the liability.The liability is onlyrecognized when thecondition is met in thefuture.

Accounting for thecontingent part of the priceof an asset (participation)will depend on theassessment of the characterof the payment.

Expenses may only becapitalized when they havean investment character(generate future economicbenefits).

S ource: C B N / C N C 2 0 1 2 / 9



Other

12.6 Noncontrolling interests

Noncontrolling interests are measured at full fair value under US GAAP whereas IFRSprovides two valuation options, which could result in differences in the carryingvalues of noncontrolling interests.


Noncontrolling interestsare measured at fair value.

Entities have an option, ona transaction-by-transaction basis, tomeasure noncontrollinginterests at theirproportion of the fair valueof the identifiable netassets or at full fair value.This option applies only toinstruments that representpresent ownershipinterests and entitle theirholders to a proportionateshare of the net assets inthe event of liquidation.All other components ofnoncontrolling interest aremeasured at fair valueunless anothermeasurement basis isrequired by IFRS. The useof the full fair value optionresults in full goodwillbeing recorded on both thecontrolling andnoncontrolling interest.

The minority interest(which is the portion ofequity and resultsattributable to shares heldby parties other thanentities included in theconsolidation) includes itsshare of any fair-valueadjustment made to thenet assets acquired.

12.7 Combinations involving entities undercommon control

Under US GAAP, there are specific rules for common-control transactions.


Combinations of entitiesunder common control aregenerally recorded atpredecessor cost,reflecting the transferor’scarrying amount of the

IFRS does not specificallyaddress such transactions.In practice, entitiesdevelop and consistentlyapply an accountingpolicy; management can

BE GAAP does notspecifically addresscommon controltransactions. However,predecessor accountingmethod (“principle of




assets and liabilitiestransferred.

elect to apply theacquisition method ofaccounting or thepredecessor value methodto a business combinationinvolving entities undercommon control. Theaccounting policy can bechanged only when criteriafor a change in anaccounting policy are metin the applicable guidancein IAS 8 (i.e., it providesmore reliable and morerelevant information).

continuity”) is required inthe following cases: formergers, (partial)demergers andcontributions in kind of abranch of activity (asdefined in BelgianCompany law),predecessor accountingmethod is required.

S ources:

C B N / C N C 2 0 0 9 / 6C B N / C N C 2 0 0 9 / 1 5

Belgian GAAP providesspecific accountingguidance for some types ofmerger and demergertransactions without fairvalue step-up.

S ources:

C B N / C N C 2 0 0 9 / 8

C B N / C N C 2 0 0 9 / 1 1

C B N / C N C 2 0 1 2 / 1 1

12.8 Identifying the acquirer

Different entities might be determined to be the acquirer when applying purchase

accounting.

Impacted entities should refer to the Consolidation chapter for a more detailed

discussion of differences related to the consolidation models between the frameworks

that might create significant differences in this area.


The acquirer is determinedby reference to ASC 810–10, under which generallythe party that holdsgreater than 50 percent ofthe voting shares hascontrol, unless theacquirer is the primarybeneficiary of a variableinterest entity inaccordance with ASC 810.

The acquirer is determinedby reference to theconsolidation guidance,under which generally theparty that holds greaterthan 50 percent of thevoting rights has control.In addition, control mightexist when less than 50percent of the voting rightsare held, if the acquirerhas the power to most

The acquirer must alwaysbe the legal parentcompany.




significantly affect thevariable returns of theentity in accordance withIFRS 10.

12.9 Push-down accounting

The lack of push-down accounting under IFRS can lead to significant differences in

instances where push down accounting was utilized under US GAAP.


Companies have theoption to apply pushdownaccounting in theirseparate financialstatements upon a change-in-control event. Theelection is available to theacquired company, as wellas to any direct or indirectsubsidiaries of theacquired company.

If an acquired companyelects to apply pushdownaccounting, the acquiredcompany should reflect thenew basis of accountingestablished by the parentfor the individual assetsand liabilities of theacquired company arisingfrom the acquisition in itsstandalone financialstatements.

There is no discussion ofpushdown accountingunder IFRS. There may besituations in whichtransactions, such ascapital reorganizations,common controltransactions, etc., mayresult in an accountingoutcome that is similar topushdown accountingwhere the new basis ofaccounting established bythe parent, includinggoodwill and purchaseprice adjustments, isreflected in the company’sstandalone financialstatements.

Not addressed.

Goodwill should becalculated and recognizedconsistent with businesscombination accounting.Bargain purchase gains,however, should not berecognized in the incomestatement of the acquiredcompany that appliespushdown accounting.Instead, they should berecognized in additionalpaid-in capital withinequity.

Debt (including




acquisition related debt)and any other liabilities ofthe acquirer should berecognized by the acquiredcompany only if theyrepresent an obligation ofthe acquired companypursuant to otherapplicable guidance in USGAAP.

12.10 Employee benefit arrangements andincome tax

Accounting for share-based payments and income taxes in accordance with separate

standards not at fair value might result in different results being recorded as part of

purchase accounting under US GAAP and IFRS.


12.11.1 IASB amendment to IFRS 11, Joint Arrangements: Accounting for

Acquisitions of Interests in Joint Operations

In May 2014, the IASB issued an amendment to IFRS 11 to address the accounting for

the acquisition of an interest in a joint operation that constitutes a business. The

amendment requires that acquirers of such interests apply the relevant principles on

business combination accounting contained in IFRS 3, B usin essC om bin ation s,and

other standards, and disclose the related information required under those standards.

A joint operator that increases its interest in a joint operation that constitutes a

business should not remeasure previously held interests in the joint operation when

joint control is retained. The standard should be applied prospectively for annual

periods beginning on or after January 1, 2016. Early application is allowed.

PwC 1-1

Chapter 13:Other accounting andreporting topics

Other accounting and reporting topics


13.1 Other accounting and reporting topics

In addition to areas previously discussed, differences exist in a multitude of other

standards, including translation of foreign currency transactions, calculation of

earnings per share, disclosures regarding operating segments, and discontinued

operations treatment. Differences also exist in the presentation and disclosure of

annual and interim financial statements; however, each of the boards has several

projects in progress which may impact some of these differences.


US GAAP

ASC 205, ASC 205-20, ASC 230, ASC 260, ASC 280, ASC 360-10, ASC 830, ASC 830-

30-40-2 through 40-4, ASC 850, ASC 853

IFRS

IAS 1, IAS 8, IAS 21, IAS 23, IAS 24, IAS 29, IAS 33, IFRS 5, IFRS 8, IFRIC 12

BE GAAP



CBN/CNC 2014/4, CBN/CNC 2014/5,

Note



this area.

Fin an cialstatem en ts

13.2 Balance sheet—offsetting assets andliabilities

Differences in the guidance covering the offsetting of assets and liabilities under

master netting arrangements, repurchase and reverse-repurchase arrangements, and

the number of parties involved in the offset arrangement could change the balance

sheet presentation of items currently shown net (or gross) under US GAAP.


The guidance states that“it is a general principle ofaccounting that theoffsetting of assets andliabilities in the balance

Under the guidance, aright of setoff is a debtor’slegal right, by contract orotherwise, to settle orotherwise eliminate all or a

Offsetting between assets,liabilities, rights andcommitments or incomeand charges is notpermitted, except for




sheet is improper exceptwhere a right of setoffexists.” A right of setoff is adebtor’s legal right, bycontract or otherwise, todischarge all or a portionof the debt owed toanother party by applyingagainst the debt anamount that the otherparty owes to the debtor. Adebtor having a valid rightof setoff may offset therelated asset and liabilityand report the net amount.A right of setoff existswhen all of the followingconditions are met:

□ Each of two partiesowes the otherdeterminableamounts.

□ The reporting partyhas the right to set offthe amount owed withthe amount owed bythe other party.

□ The reporting partyintends to set off.

□ The right of setoff isenforceable by law.

Repurchase agreementsand reverse-repurchaseagreements that meetcertain conditions arepermitted, but notrequired, to be offset in thebalance sheet.

The guidance provides anexception to the previouslydescribed intent conditionfor derivative instrumentsexecuted with the samecounterparty under amaster nettingarrangement. An entitymay offset (1) fair valueamounts recognized forderivative instruments and(2) fair value amounts (oramounts that approximatefair value) recognized forthe right to reclaim cash

portion of an amount dueto a creditor by applyingagainst that amount anamount due from thecreditor. Two conditionsmust exist for an entity tooffset a financial asset anda financial liability (andthus present the netamount on the balancesheet). The entity mustboth:

□ Currently have alegally enforceableright to set off.

□ Intend either to settleon a net basis or torealize the asset andsettle the liabilitysimultaneously.

In unusual circumstances,a debtor may have a legalright to apply an amountdue from a third partyagainst the amount due toa creditor, provided thatthere is an agreementamong the three partiesthat clearly establishes thedebtor’s right of setoff.

Master nettingarrangements do notprovide a basis foroffsetting unless both ofthe criteria describedearlier have been satisfied.If both criteria are met,offsetting is required.

accumulated depreciationand amounts written downand unless there is a legalright of set-off (where areceivable and a debttowards the same counter-party exist and both aredue).




collateral (a receivable) orthe obligation to returncash collateral (a payable)arising from derivativeinstruments recognized atfair value. Entities mustadopt an accounting policyto offset fair valueamounts under thisguidance and apply thatpolicy consistently.

13.3 Balance sheet—disclosures for offsettingassets and liabilities

While differences exist between IFRS and US GAAP in the offsetting requirements,

the boards were able to reach a converged solution on the nature of the disclosure

requirements.


The balance sheetoffsetting disclosures arelimited to derivatives,repurchase agreements,and securities lendingtransactions to the extentthat they are(1) offset in the financialstatements or (2) subjectto an enforceable masternetting arrangement orsimilar agreement.

The disclosurerequirements areapplicable for (1) allrecognized financialinstruments that are set offin the financial statementsand (2) all recognizedfinancial instruments thatare subject to anenforceable master nettingarrangement or similaragreement, irrespective ofwhether they are set off inthe financial statements.

Not addressed.

13.4 Balance sheet: classification—post-balancesheet refinancing agreements

Under IFRS, the classification of debt does not consider post-balance sheet

refinancing agreements. As such, more debt is classified as current under IFRS.


Entities may classify debtinstruments due withinthe next 12 months asnoncurrent at the balance

If completed after thebalance sheet date, neitheran agreement to refinanceor reschedule payments on

Similar to IFRS.




sheet date, provided thatagreements to refinance orto reschedule payments ona long-term basis(including waivers forcertain debt covenants) getcompleted before thefinancial statements areissued.

SEC registrants subject toS-X Article 5 forcommercial and industrialcompanies are required topresent a classifiedbalance sheet, but no otherArticles within S-X containthis requirement. ASC210-10-05-4 notes thatmost reporting entitiespresent a classifiedbalance sheet.

a long-term basis nor thenegotiation of a debtcovenant waiver wouldresult in noncurrentclassification of debt, evenif executed before thefinancial statements areissued.

The presentation of aclassified balance sheet isrequired, except when aliquidity presentation ismore reliable and morerelevant.

13.5 Balance sheet: classification—refinancingcounterparty

Differences in the guidance for accounting for certain refinancing arrangements may

result in more debt classified as current under IFRS.


A short-term obligationmay be excluded fromcurrent liabilities if theentity intends to refinancethe obligation on a long-term basis and the intentto refinance on a long-term basis is supported byan ability to consummatethe refinancing asdemonstrated by meetingcertain requirements. Therefinancing does notnecessarily need to be withthe same counterparty.

If an entity expects andhas the discretion torefinance or roll over anobligation for at least 12months after the reportingperiod under an existingloan financing, it classifiesthe obligation asnoncurrent, even if itwould otherwise be duewithin a shorter period. Inorder for refinancingarrangements to beclassified as noncurrent,the arrangement should bewith the samecounterparty.

Similar to IFRS.

Roll-over credit lines canbe classified as non-current liabilities if thefollowing conditions aresatisfied:

□ the company intendsto refinance or toextend the obligationunder the existingcredit facility for aperiod of at least 12months;

□ the company itself candecide uponrefinancing orextending the existingobligation and noadditional approvalfrom the lender is




required; and□ the terms and

conditions of thefacility do not change.


13.6 Income statement and statement ofcomprehensive income

The most significant difference between the frameworks is that under IFRS an entity

can present expenses based on their nature or their function.


The income statement maybe presented in either (1) asingle-step format,whereby all expenses areclassified by function andthen deducted from totalincome to arrive at incomebefore tax, or (2) amultiple-step formatseparating operating andnonoperating activitiesbefore presenting incomebefore tax.

SEC regulations require allregistrants to categorizeexpenses in the incomestatement by theirfunction. However,depreciation expense maybe presented as a separateincome statement lineitem. In such instances,the caption “cost of sales”should be accompanied bythe phrase “exclusive ofdepreciation” shown belowand presentation of a grossmargin subtotal isprecluded.

Although US GAAP doesnot use the term“exceptional items,”significant unusual orinfrequently occurringitems are reported as

Expenses may bepresented either byfunction or by nature,whichever providesinformation that is reliableand more relevantdepending on historicaland industry factors andthe nature of the entity.Additional disclosure ofexpenses by nature,including depreciation andamortization expense andemployee benefit expense,is required in the notes tothe financial statements iffunctional presentation isused on the face of theincome statement.

While certain minimumline items are required, noprescribed statement ofcomprehensive incomeformat exists.

Entities that disclose anoperating result shouldinclude all items of anoperating nature,including those that occurirregularly or infrequentlyor are unusual in amount,within that caption.

Entities should not mixfunctional and nature

The presentation formatfor financial statements,including the incomestatement, is strictlyprescribed by the Belgianaccounting legislation.

A standard format ofincome statement isprescribed by BE GAAP. Itrequires separatepresentation of operatingresults; financial results;results from ordinaryactivities before taxes;extraordinary results;results before taxes;deferred taxes; currenttaxes; results for theperiod; transfer to/fromuntaxed reserves; resultsavailable forappropriation. Inconsolidated accounts,minority interests and thegroup’s share in the resultof associates should beseparately presented.




components of incomeseparate from continuingoperations—either on theface of the incomestatement or in the notes tothe financial statements.

classifications of expensesby excluding certainexpenses from thefunctional classificationsto which they relate.

“Extraordinary items” aredefined as being bothinfrequent and unusualand are rare in practice.

Entities may present itemsof net income and othercomprehensive incomeeither in one singlestatement ofcomprehensive income orin two separate, butconsecutive, statements.

Components ofaccumulated othercomprehensive incomecannot be presented on theface of the statement ofchanges in equity but haveto be presented in thefootnotes.

All items included in othercomprehensive income aresubject to recycling.

The term “exceptionalitems” is not used ordefined. However, theseparate disclosure isrequired (either on theface of thecomprehensive/separateincome statement or in thenotes) of items of incomeand expense that are ofsuch size, nature, orincidence that theirseparate disclosure isnecessary to explain theperformance of the entityfor the period.

“Extraordinary items” areprohibited.

Entities are permitted topresent items of netincome and othercomprehensive incomeeither in one singlestatement of profit or lossand other comprehensiveincome or in two separate,but consecutive,statements.

Extraordinary items underBE GAAP are all revenuesand costs that do notresult from the usualactivities of the entity.Furthermore, the standardpresentation of Belgianfinancial statements leadsto the reporting of itemsas extraordinary thatwould be included inordinary operations underIFRS.

In February 2013, theFASB issued ASU 2013-02,Reporting of AmountsReclassified Out ofAccumulated OtherComprehensive Income,which require entities topresent eitherparenthetically on the faceof the financial statementsor in the notes, significantamounts reclassified fromeach component ofaccumulated othercomprehensive incomeand the income statementline items affected by thereclassification.

IAS 1, Presentation ofFinancial Statements,requires items included inother comprehensiveincome that may bereclassified into profit orloss in future periods to bepresented separately fromthose that will not bereclassified. Entities thatelect to show items inother comprehensiveincome before tax arerequired to allocate the taxbetween the tax on itemsthat might be reclassifiedsubsequently to profit orloss and tax on items that




will not be reclassifiedsubsequently. The amountof income tax relating toeach item of othercomprehensive incomeshould be disclosed eitherin the statement of profitor loss and othercomprehensive income orin the footnotes.

Under IFRS, entities havethe option to show theimpact of items of othercomprehensive income oneach component of equityeither on the face of thestatement of changes inequity or in the footnotes.

13.7 Statements of equity

IFRS requires a statement of changes in equity to be presented as a primary statement

for all entities.


Permits the statement ofchanges in shareholders’equity to be presentedeither as a primarystatement or within thenotes to the financialstatements.

A statement of changes inequity is presented as aprimary statement for allentities.

A statement (in the notes)showing the appropriationof results and changes inthe share capital ispresented in the standardformat of the entityfinancial statements. Theformat for consolidatedfinancial statementsincludes a statementshowing changes inconsolidation reserves.

The company thatdistributes a dividend orprofit share prepares itsfinancial statements afterresult appropriation i.e. bydebiting the account 694Remuneration of capital or695 Directors or Managersand crediting the account47 Debts out of profitappropriation for the




amount of the dividend orprofit share to be approvedby the generalshareholders’ meeting.


13.8 Statement of cash flows

Differences exist between the US GAAP and IFRS for the presentation of thestatement of cash flows that could result in differences in the actual amount shown ascash and cash equivalents in the statement of cash flows as well as changes to each ofthe operating, investing, and financing sections of the statement of cash flows.


Bank overdrafts are notincluded in cash and cashequivalents; changes in thebalances of bankoverdrafts are classified asfinancing cash flows.

There is no requirementfor expenditures to berecognized as an asset inorder to be classified asinvesting activities.

The guidance is specific onthe cash flow classificationof certain items, requiringdividends paid to beclassified in the financingsection of the cash flowstatement and requiringinterest paid (andexpensed), interestreceived, and dividendsreceived to be classified ascash flows fromoperations. Interestcapitalized relating toborrowings that aredirectly attributable toproperty, plant, andequipment is classified ascash flows from investingactivities. If the indirectmethod is used, amountsof interest paid (net ofamounts capitalized)

Cash and cash equivalentsmay also include bankoverdrafts repayable ondemand that form anintegral part of an entity’scash management. Short-term bank borrowings arenot included in cash orcash equivalents and areconsidered to be financingcash flows.

Only expenditures thatresult in a recognized assetare eligible forclassification as investingactivities.

Interest and dividendsreceived should beclassified in eitheroperating or investingactivities. Interest anddividends paid should beclassified in eitheroperating or financingcash flows. IFRS does notspecify where interestcapitalized under IAS 23 isclassified. The totalamount of interest paidduring a period, whetherexpensed or capitalized, isdisclosed in the statementof cash flows.

Not required.




during the period must bedisclosed.

Taxes paid are generallyclassified as operating cashflows; specific rules existregarding the classificationof the tax benefitassociated with share-based compensationarrangements. If theindirect method is used,amounts of taxes paidduring the period must bedisclosed.

Taxes paid should beclassified within operatingcash flows unless specificidentification with afinancing or investingactivity exists. Once anaccounting policy electionis made, it should befollowed consistently.

13.9 Disclosure of critical accounting policies andsignificant estimates

An increased prominence exists in the disclosure of an entity’s critical accounting

policies and disclosures of significant accounting estimates under IFRS in comparison

to the requirements of US GAAP.


For SEC registrants,disclosure of theapplication of criticalaccounting policies andsignificant estimates isnormally made in theManagement’s Discussionand Analysis section ofForm 10-K.

Financial statementsprepared under US GAAPinclude a summary ofsignificant accountingpolicies used within thenotes to the financialstatements.

Within the notes to thefinancial statements,entities are required todisclose both:

□ The judgments thatmanagement hasmade in the process ofapplying itsaccounting policiesthat have the mostsignificant effect onthe amountsrecognized in thosefinancial statements.

□ Information about thekey assumptionsconcerning the future-and other key sourcesof estimationuncertainty at thebalance sheet date—that have significantrisk of causing amaterial adjustment tothe carrying amountsof assets and liabilities

The notes are an integralpart of the financialstatements. Notes provideadditional information tothe amounts disclosed inthe primary statements.Under BE GAAP, astandard format isprescribed. Additionaldisclosures are permitted.




within the nextfinancial year.

13.10 Capital management disclosures

Entities applying IFRS are required to disclose information that will enable users of its

financial statements to evaluate the entity’s objectives, policies, and processes for

managing capital.


There are no specificrequirements of capitalmanagement disclosuresunder US GAAP.

For SEC registrants,disclosure of capitalresources is normallymade in theManagement’s Discussionand Analysis section ofForm 10-K.

Entities are required todisclose the following:

□ Qualitativeinformation abouttheir objectives,policies, and processesfor managing capital.

□ Summary quantitativedata about what theymanage as capital.

□ Changes in the abovefrom the previousperiod.

□ Whether during theperiod they compliedwith any externallyimposed capitalrequirements to whichthey are subject and, ifnot, the consequencesof such non-compliance.

The above disclosureshould be based oninformation providedinternally to keymanagement personnel.

Not addressed.



13.11 Comparative financial information

IFRS specifies the periods for which comparative financial information is required,which differs from both US GAAP and SEC requirements.


Comparative financialstatements are notrequired; however, SECrequirements specify thatmost registrants providetwo years of comparativesfor all statements exceptfor the balance sheet,which requires only onecomparative year.

One year of comparativesis required for allnumerical information inthe financial statements,with limited exceptions indisclosures. In limitednote disclosures and thestatement of equity (wherea reconciliation of openingand closing positions arerequired), more than oneyear of comparativeinformation is required.

A third statement offinancial position at thebeginning of precedingperiod is required for first-time adopters of IFRS andin situations where aretrospective applicationof an accounting policy,retrospective restatementor reclassification having amaterial effect on theinformation in thestatement of financialposition at the beginningof the preceding periodhave occurred.Restatements orreclassifications in thiscontext are in relation toerrors, or changes inpresentation of previouslyissued financialstatements.

Requires one year ofcomparatives for allnumerical information in thefinancial statements.

The AccountingCommission considersthat a variable closing datemay be acceptable ifcertain conditionsdescribed in the adviceCBN/CNC 2014/5 are met.

The use of a variableclosing date may result insometechnical/administrativeissues (e.g. a company canonly use a fixed date toregister with the CentralEnterprise Databank).


Under BE GAAP, therectification of thefinancial statements isspecifically addressed inthe advice CBN/CNC2014/4.




Earn in gspersh are

13.12 Diluted earnings-per-share calculation—year-to-date period calculation

Differences in the calculation methodology could result in different denominators

being utilized in the diluted earnings-per-share (EPS) year-to-date period calculation.


In computing diluted EPS,the treasury stock methodis applied to instrumentssuch as options andwarrants. This requiresthat the number ofincremental sharesapplicable to the contractbe included in the EPSdenominator bycomputing a year-to-dateweighted-average numberof incremental shares byusing the incrementalshares from each quarterlydiluted EPS computation.

The guidance states thatdilutive potential commonshares shall be determinedindependently for eachperiod presented, not aweighted average of thedilutive potential commonshares included in eachinterim computation.

Not addressed.

13.13 Diluted earnings-per-share calculation—contracts that may be settled in stock or cash(at the issuer’s election)

Differences in the treatment of convertible debt securities may result in lower diluted

EPS under IFRS.


Certain convertible debtsecurities give the issuer achoice of either cash orshare settlement. Thesecontracts would typicallyfollow the if-convertedmethod, as US GAAPcontains the presumptionthat contracts that may besettled in common sharesor in cash at the election ofthe entity will be settled incommon shares. However,

Contracts that can besettled in either commonshares or cash at theelection of the issuer arealways presumed to besettled in common sharesand are included in dilutedEPS if the effect is dilutive;that presumption may notbe rebutted.

Not addressed.




that presumption may beovercome if pastexperience or a statedpolicy provides areasonable basis to believeit is probable that thecontract will be paid incash.

13.14 Diluted earnings-per-share calculation

The treatment of contingency features in the dilutive EPS calculation may result in

higher diluted EPS under IFRS.


Contingently convertibledebt securities with amarket price trigger (e.g.,debt instruments thatcontain a conversionfeature that is triggeredupon an entity’s stockprice reaching apredetermined price)should always be includedin diluted EPScomputations if dilutive—regardless of whether themarket price trigger hasbeen met. That is, thecontingency feature shouldbe ignored.

The potential commonshares arising fromcontingently convertibledebt securities would beincluded in the dilutiveEPS computation only ifthe contingency conditionwas met as of the reportingdate.

Not addressed.

13.15 Diluted EPS calculation—application oftreasury stock method to share-basedpayments—windfall tax benefits

Differences in the deferred tax accounting for share-based payments under US GAAP

and IFRS could impact the theoretical proceeds that are assumed to have been used to

repurchase the entity’s common shares. As a consequence, a different number of

potential shares would be included in the denominator for purposes of the diluted

EPS.

Refer to the Expenses recognition—share-based payments section for a broader

discussion of income tax effects associated with share-based payments.




ASC 260 requires theamount of windfall taxbenefits to be received byan entity upon exercise ofstock options to beincluded in the theoreticalproceeds from the exercisefor purposes of computingdiluted EPS under thetreasury stock method.This is calculated as theamount of tax benefits(both current anddeferred), if any, that willbe credited to additionalpaid-in-capital.

The treatment is the sameas for vested options (i.e.,windfall tax benefitsincluded in the theoreticalproceeds).

Tax benefits for vestedoptions are alreadyrecorded in the financialstatements because IAS 12,Income Taxes, requires thedeductible temporarydifferences to be based onthe entity’s share price atthe end of the period. As aresult, no adjustment tothe proceeds is neededunder the treasury stockmethod for EPS purposes.

Not addressed.

However, it is not clearwhether the amount of taxbenefit attributable tounvested stock options(which has not yet beenrecognized in the financialstatements) should beadded to the proceeds. Aspart of the IASB’sdeliberations on amendingIAS 33 in May 2008, theIASB stated that it did notintend for IAS 33 toexclude those tax benefitsand, therefore, this wouldbe clarified when IAS 33 isamended. Eithertreatment would currentlybe acceptable.

Foreign curren cy tran slation

13.16 Trigger to release amounts recorded in thecurrency translation account

Different recognition triggers for amounts captured in the currency translation

account (CTA) could result in more instances where amounts included in CTA are

released through the income statement under IFRS compared with US GAAP.




CTA is released throughthe income statement inthe following situationswhere a parent sells itsinterest, sells the assets ofits foreign operation, or itsinterest is diluted via theforeign operation’s shareissuance:

□ When control of aforeign entity, asdefined, is lost, theentire CTA balance isreleased.

□ Complete orsubstantially completeliquidation of a foreignentity, as defined,results in full releaseof CTA.

□ When a portion of anequity methodinvestment which isitself a foreign entity,as defined, is sold butsignificant influence isretained, a portion ofCTA is released, on aproportionate basis.

□ When significantinfluence over anequity methodinvestee is lost, aproportionate amountof CTA is released intothe income statement(through the level atwhich significantinfluence is lost) andthe remaining CTAbalance becomes partof the cost basis of theinvestment retained.

When a reporting entityhas an investment in aforeign entity accountedfor by the equity method,and the reporting entityincreases its stake in thesubject foreign entity suchthat control is acquired, allCTA is released. It is

The triggers for sale anddilution noted in the USGAAP column apply forIFRS, except whensignificant influence orjoint control is lost, theentire CTA balance isreleased into the incomestatement.

When there is a sale of asecond-tier subsidiary, anentity has an accountingpolicy choice with regardto the release of CTAassociated with thatsecond-tier subsidiaryeven though ownership inthe first-tier subsidiary hasnot been affected.

Not addressed.




treated as if the equitymethod investment weresold, and used to purchasea controlling interest inthe foreign entity.

13.17 Translation in consolidated financialstatements

IFRS does not require equity accounts to be translated at historical rates.


Equity is required to betranslated at historicalrates.

IFRS does not specify howto translate equity items.Management has a policychoice to use either thehistorical rate or theclosing rate. The chosenpolicy should be appliedconsistently. If the closingrate is used, the resultingexchange differences arerecognized in equity andthus the policy choice hasno impact on the amountof total equity.

The translation of thefinancial statements offoreign entities forconsolidation purposes isdone on the basis of twoacceptable methods: themonetary/non-monetarymethod or the closing ratemethod. The consolidationlaw prescribes when eachmethod has to be applied.

13.18 Determination of functional currency

Under US GAAP there is no hierarchy of indicators to determine the functional

currency of an entity, whereas a hierarchy exists under IFRS.


There is no hierarchy ofindicators to determinethe functional currency ofan entity. In thoseinstances in which theindicators are mixed andthe functional currency isnot obvious,management’s judgment isrequired so as todetermine the currencythat most faithfullyportrays the primaryeconomic environment of

Primary and secondaryindicators should beconsidered in thedetermination of thefunctional currency of anentity. If indicators aremixed and the functionalcurrency is not obvious,management should useits judgment to determinethe functional currencythat most faithfullyrepresents the economicresults of the entity’s

EUR is the defaultreporting currency,although other currenciesare allowed in certain rarecircumstances and if anexemption is given by theMinister of EconomicAffairs. In those cases, thefunctional andpresentation currenciesshould be the same.

Belgian companies butalso Belgian branches of




the entity’s operations. operations by focusing onthe currency of theeconomy that determinesthe pricing of transactions(not the currency in whichtransactions aredenominated).

foreign companies areobliged to preparefinancial statements ineuro.

An exception to the rule asmentioned above may begranted if the managementof the branch can motivatethat the functionalcurrency of the branch isnot the euro. For moreinformation aboutdetermining the functionalcurrency we refer toCBN/CNC advice 117/3.

Such an exception can onlybe requested before theclosing date of theaccounting year for whichthe exception is requestedand an exception can onlybe granted for 3consecutive years.

Financial entities offoreign groups registeredin Belgium can use foreigncurrency as theirfunctional currency if theyexercise their economicactivities predominantlyoutside the Eurozone.

Sources:

CBN/CNC 117-3,

CBN/CNC 2013/10,

CBN/CNC 2009/10.

13.19 Hyperinflation

Basis of accounting in the case of hyperinflationary economies are different under US

GAAP and IFRS.


Under US GAAP inflation-adjusted financialstatements are notpermitted. Instead, the

IFRS require financialstatements prepared in thecurrency of a hyper-inflationary economy to be

Not addressed.




financial statements of aforeign entity in a highlyinflationary economy shallbe remeasured as if thefunctional currency were thereporting currency.

stated in terms of themeasuring unit current atthe end of the reportingperiod.

Prior year comparativesmust be restated in terms ofthe measuring unit currentat the end of the latestreporting period.

O th er

13.20 Interim financial reporting—allocation ofcosts in interim periods

IFRS requires entities to account for interim financial statements via the discrete-

period method. The spreading of costs that affect the full year is not appropriate. This

could result in increased volatility in interim financial statements.

The tax charge in both IFRS and US GAAP is based on an estimate of the annual

effective tax rate applied to the interim results plus the inclusion of discrete income

tax-related events during the quarter in which they occur.


US GAAP views interimperiods primarily asintegral parts of an annualcycle. As such, it allowsentities to allocate amongthe interim periods certaincosts that benefit morethan one of those periods.

Interim financialstatements are preparedvia the discrete-periodapproach, wherein theinterim period is viewed asa separate and distinctaccounting period, ratherthan as part of an annualcycle.

Company law stipulatesthat directors shouldprovide statutory auditorswith interim financialstatements, at least everysix months, comprising abalance sheet and incomestatement. In addition,companies listed on theBelgian Stock Exchangemust publish a half-yearlyreport relating to theiractivities during the firstsix months of the yearincluding at leastcondensed financialstatements, a half-yearlydirectors’ report, aresponsibility statementand an indication ofwhether this informationhas been independentlyaudited or reviewed. If the




company preparesconsolidated financialstatements, the half-yearlyreport is published basedon consolidated figures.

13.21 Definition of discontinued operations

The definitions of discontinued operations under IFRS and US GAAP focus on similar

principles and apply to a component of an entity that has either been disposed of or is

classified as held for sale. Under US GAAP, to qualify as a discontinued operation, a

disposal must result in a strategic shift that has a major effect on an entity’s

operations and financial results. While this concept may be implicit in the IFRS

definition, the significance of the line of business or geographical area of operations

will determine whether the disposal qualifies for discontinued operations presentation

under US GAAP. US GAAP also includes several examples that provide guidance on

how to interpret the definition of discontinued operations. IFRS does not contain

similar examples. The definitions under IFRS and US GAAP are summarized in the

table below.


A disposal of a componentof an entity or a group ofcomponents of an entityshall be reported indiscontinued operations ifthe disposal represents(a) a strategic shift thathas (or will have) a majoreffect on an entity’soperations and financialresults or (b) a businessthat on acquisition meetsthe criteria to be classifiedas held for sale.

A discontinued operationis a component of an entitythat either has beendisposed of or is classifiedas held for sale and (a)represents a separatemajor line of business orgeographic area ofoperations, (b) is part of asingle coordinated plan todispose of a separatemajor line of business orgeographical area ofoperations, or (c) is asubsidiary acquiredexclusively with a view toresale.

BE GAAP does not provideany definition ofdiscontinued operations.However, specificaccounting principlesapply to entities,subdivisions and businesssegments that can nolonger be considered as a“going concern”.

Furthermore there isspecific guidance relatingto the accountingtreatment of “stepdisposals”:

Two types of “stepdisposals” are discussed inthe advice CBN/CNC2013/4:

1) Reduction of an interestin a fully consolidatedsubsidiary that stillremains a fullyconsolidated subsidiaryafter the reduction.




2) Reduction of an interestin a fully consolidatedsubsidiary that becomesan associate after thereduction.

In the first case, thesubsidiary is stillconsolidated applying thefull consolidation methodbut some technicalconsolidation adjustmentswill need to be applied.The initial goodwill needsto be recalculated takinginto account the change ininterest and thedepreciation sinceacquisition date. In thesecond case, the subsidiarybecomes an associate, andneeds to be accounted forusing the equity methodinstead of the fullconsolidation method.Minority interests need tobe eliminated and thegoodwill also needs to berecalculated taking intoaccount the depreciationsince acquisition date.


13.22 Discontinued operations—unit of accountupon which to perform a discontinuedoperations assessment

IFRS and US GAAP both refer to a component of an entity when describing those

operations that may qualify for discontinued operations reporting; however, the

definition of “component of an entity” for purposes of applying the discontinued

operations guidance differs under IFRS and US GAAP. In practice, this difference

generally does not result in different conclusions regarding whether or not a

component of an entity that either has been disposed of, or is classified as held for

sale, qualifies for discontinued operations reporting.




A component of an entitycomprises operations andcash flows that can beclearly distinguished,operationally and forfinancial reportingpurposes, from the rest ofthe entity. A component ofan entity may be areportable segment or anoperating segment, areporting unit, asubsidiary, or an assetgroup.

A component of an entitycomprises operations andcash flows that can beclearly distinguished,operationally and forfinancial reportingpurposes, from the rest ofthe entity. In other words,a component of an entitywill have been a cash-generating unit or a groupof cash-generating unitswhile being held for use.


13.23 Related parties—disclosure of commitments

Disclosures of related party transactions under IFRS should include commitments to

related parties.


There is no specificrequirement to disclosecommitments to relatedparties under US GAAP.

Disclosure of related partytransactions includescommitments if aparticular event occurs ordoes not occur in thefuture, includingrecognized andunrecognized executorycontracts. Commitmentsto members of keymanagement personnelwould also need to bedisclosed.

The CBN/CNC defined inits advice 2010/1 thedisclosure requirementsapplicable to related partynon-market basedtransactions.

13.24 Related parties—disclosure of managementcompensation

Under IFRS, a financial statement requirement exists to disclose the compensation of

key management personnel.


Disclosure of thecompensation of keymanagement personnel isnot required within the

The compensation of keymanagement personnel isdisclosed within thefinancial statements intotal and by category of

Whereas the scope of IFRSdisclosure requirements islimited to associates,based on ownership of




financial statements.

SEC regulations requirekey managementcompensation to bedisclosed outside theprimary financialstatements.

compensation. Othertransactions with keymanagement personnelalso must be disclosed.

20% or more of votingrights, Belgianrequirements extend tocompanies in which thereporting entity holds 10%or more of the votingrights.

Under IFRS, keymanagement personneland individuals owningsignificant voting rightsare considered as relatedparties and, consequently,full disclosurerequirements apply. InBelgium, disclosurerequirements arerestricted toremuneration, loans andguarantees granted todirectors or individualscontrolling the reportingentity, and tocommitments made by theentity in their favor (e.g.guarantees).

13.25 Related parties—disclosure of transactionswith the government and government-related entities

There are exemptions from certain related party disclosure requirements under IFRS

that do not exist under US GAAP.


There are no exemptionsavailable to reportingentities from thedisclosure requirementsfor related partytransactions withgovernments and/orgovernment-relatedentities.

A partial exemption isavailable to reportingentities from thedisclosure requirementsfor related partytransactions andoutstanding balances withboth:

□ A government that hascontrol, joint control,or significant influenceover the reportingentity.

The advice CBN/CNC2013/5 summarizes thenotification obligations toBelgian Companiesrelating to significantshareholdings and crossparticipations and thepublication of thisinformation in the notes tothe financial statements.





□ Another entity that is arelated party becausethe same governmenthas control, jointcontrol, or significantinfluence over both thereporting entity andthe other entity.

13.26 Operating segments—segment reporting

A principles-based approach to the determination of operating segments in a matrix-

style organizational structure could result in entities disclosing different operating

segments.


Entities that utilize amatrix form oforganizational structureare required to determinetheir operating segmentson the basis of products orservices offered, ratherthan geography or othermetrics.

Entities that utilize amatrix form oforganizational structureare required to determinetheir operating segmentsby reference to the coreprinciple (i.e., an entityshall disclose informationto enable users of itsfinancial statements toevaluate the nature andfinancial effects of thebusiness activities inwhich it engages and theeconomic environments inwhich it operates).

Not specifically addressedin BE GAAP. The onlyrequirement is fordisclosure of salesanalyzed by significantlydifferent types of activityand geographical markets.

13.27 Service concession arrangements

Service concession arrangements may be in the scope of ASC 853, Service ConcessionArrangements, for US GAAP or IFRIC 12, Service Concession Arrangements, forIFRS if they meet certain criteria. The above authoritative literature provides guidanceon the accounting by private entity operators for public-to-private service concessionarrangements (for example, airports, roads, and bridges) that are controlled by thepublic sector entity grantor. The operator also may provide construction, upgrading,or maintenance services in addition to operations. Under both US GAAP and IFRS,the infrastructure used in these arrangements should not be recognized as property,plant, and equipment by the operator. ASC 853 does not specify how an operatorshould account for the various aspects of a service concession arrangement other thanto refer the operator to follow other applicable US GAAP. IFRIC 12 requires theoperator to follow specific existing IFRS for various aspects of a service concessionarrangement and provides additional guidance for other aspects.




The operator should notaccount for thesearrangements as leases.

For the operator’s revenueand costs relating to theconstruction, upgrade, oroperation services, thestandard refers theoperator to ASC 605 onrevenue recognition.

If there are multipleservices in thearrangement, the operatorshould consider themultiple element revenueguidance, includingdetermining if the servicesare separate units ofaccount and performingthe revenue allocationbased on their relativeselling price. Refer to SD3.4 for further informationon this difference.

The multiple elementrevenue guidance includesthe concept of notrecognizing any amountsof contingent revenue,which differs from IFRS.Refer to SD 3.4.1 forfurther information on thisdifference.

In the absence of specificguidance, the operatorneeds to determine if it isable to recognize an assetfor the consideration to bereceived by the operator inexchange for constructionand upgrade services,and/or defer the costsassociated with suchservices. An intangibleasset would not berecognized as theconsideration received forconstruction services.

Additionally, in some ofthese arrangements theoperator will pay the

Generally, the operatorwould not account forthese arrangements asleases, unless the operatorhas a right to use somephysically separable,independent, and cashgenerating portion of theinfrastructure, or if thefacilities are used toprovide purely ancillaryunregulated services. Inthese cases, there may insubstance be a lease fromthe grantor to theoperator, which should beaccounted for inaccordance with IAS 17.

The operator will accountfor revenue and costs forconstruction or upgradeservices in accordancewith IAS 11 and foroperation services inaccordance with IAS 18.

IFRIC 12 includesguidance that if theoperator performs morethan one service under thearrangement,consideration received orreceivable shall beallocated by reference tothe relative fair values ofthe services delivered,when the amounts areseparately identifiable.

The consideration to bereceived by the operator inexchange for constructionor upgrade services mayresult in the recognition ofa financial asset, anintangible asset or acombination of both. It isnecessary to account foreach componentseparately.

The operator recognizes afinancial asset to theextent that it has anunconditional right to

Not addressed.




grantor to enter into anoperating agreement,which would generally beconsidered considerationpayable to a customerunder US GAAP, if thegrantor is determined tobe the customer. This mayresult in an asset that willbe amortized againstrevenue over the term ofthe operating agreement.

receive a specified ordeterminable amount ofcash or other financialassets for the constructionservices.

The operator recognizes anintangible asset to theextent that it has a right tocharge fees to users of thepublic services.

The operator may have acontractual obligation tomaintain or restore theinfrastructure to aspecified condition beforeit is returned to thegrantor at the end of thearrangement, whichshould be recognized andmeasured in accordancewith IAS 37.


13.28.1 IASB Exposure Draft, Classification of Liabilities (Proposed amendments

to IAS 1)

In February 2015, the IASB issued an exposure draft to amend IAS 1. The proposed

amendments attempt to clarify that the classification of a liability as either current or

noncurrent is based on the entity’s rights at the end of the reporting period, and make

a clear link between the settlement of the liability and the outflow of resources from

the entity. The FASB has a similar topic on their technical agenda that is in the initial

deliberations phase called Simplifying the Balance Sheet Classification of Debt.

13.28.2 FASB Accounting Standards Update No. 2015-01, Income Statement –

Extraordinary and Unusual Items

On January 9, 2015, the FASB issued Accounting Standards Update 2015-01, Income

Statement—Extraordinary and Unusual Items, to simplify income statement

classification by removing the concept of extraordinary items from U.S. GAAP.

Under the existing guidance, an entity is required to separately disclose extraordinary

items, net of tax, in the income statement after income from continuing operations if

an event or transaction is of an unusual nature and occurs infrequently. This separate,

net-of-tax presentation (and corresponding earnings per share impact) will no longer

be allowed.



The existing requirement to separately present items that are of an unusual nature or

occur infrequently on a pre-tax basis within income from continuing operations has

been retained. The new guidance also requires similar separate presentation of items

that are both unusual and infrequent.

The standard is effective for both public and private companies for periods beginning

after December 15, 2015. Early adoption is permitted, but only as of the beginning of

the fiscal year of adoption. Upon adoption, a reporting entity may elect prospective or

retrospective application. If adopted prospectively, both the nature and amount of any

subsequent adjustments to previously reported extraordinary items must be disclosed.

For further help you can contact:

Patrice SchumeschGlobal Accounting Consulting Services PartnerTel: +32 2 710 40 28E-mail: [email protected]

Elena ShibkovaGlobal Accounting Consulting Services DirectorTel: +32 2 710 96 44E-mail: [email protected]

Herwig OpsomerGlobal Accounting Consulting Services DirectorTel: +32 9 268 82 23E-mail: [email protected]

Sebastian HarushimanaGlobal Accounting Consulting Services DirectorTel: +32 2 710 45 44E-mail: [email protected]

Alexis Van BavelAudit PartnerTel: +32 2 710 72 46E-mail: [email protected]

Jeroen BockaertGlobal Accounting Consulting Services DirectorTel: +32 2 710 71 95E-mail: [email protected]

PwC AntwerpGeneraal Lemanstraat 672018 AntwerpTel: +32 3 259 30 11

PwC BrusselsWoluwegarden, Woluwedal 181932 Sint-Stevens-WoluweTel: +32 2 710 42 11

PwC GhentSluisweg 19000 GentTel: +32 9 268 82 11

PwC LiègeRue Visé - Voie 81 ABC4000 LiègeTel: +32 4 220 62 11

PwC HasseltCorda CampusKempische Steenweg 311/2.023500 HasseltTel: +32 11 375 385

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