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In February 2010, the Securities and Exchange
Commission (SEC) published a statement o continued
support or a single set o high quality global accounting
standards and acknowledged that International Financial
Reporting Standards (IFRS) is best positioned to serve
that role. In May 2011, the SEC published a sta paper
exploring one possible method to incorporate IFRS into
the United States (U.S.) nancial reporting system. The
sta paper discussed a potential transition method, the
role o the SEC and Financial Accounting Standards
Board (FASB), and the perceived benets and risks o the
possible method. It did not discuss an option to voluntarily
adopt ull IFRS into the U.S. nancial reporting system.
On July 13, 2012, the SEC released a nal sta report
providing a thorough discussion o the issues related
to IFRS in the U.S., noting that a wholesale switch to
IFRS would strain the resources o U.S. companies
and that a stepped transition has more public support.
The report purposely omits any recommended action
plan. It is expected that the sta will, however, make
a recommendation to the commission at some later,
undetermined date. That means theres no timetable
whatsoever on an SEC decision on IFRS. However, the
continued convergence o IFRS and U.S. GAAP requires
a state o readiness by companies to adopt standards
that are increasingly similar to IFRS.
Currently, a number o new accounting standards are under
development that will urther the eorts o convergence o
U.S. generally accepted accounting principles (U.S. GAAP)
and IFRS. Convergence will have an eect on areas such
as nancial instruments, revenue and leasing.
The table below summarizes the IASB and FASB joint
projects and expected time lines.
In this publication we provide a high level overview o key
dierences between U.S. GAAP and IFRS. While this
publication does not cover every dierence between IFRS
and U.S. GAAP, it ocuses on those dierences generally
considered to be the most signicant or most common.
In addition to providing an overview o key dierences
between U.S. GAAP and IFRS, this publication highlights
some o the issues that U.S. companies will need to
consider on convergence or adoption o IFRS and a
suggested conversion methodology to help U.S. companies
understand the processes that should be considered and
to plan or convergence or adoption o IFRS.
Joint Projects H1 2012 H2 2012
Financial instruments classication & measurement Redeliberations Final standard expected
Financial instruments - impairment Redeliberations Final standard expected
Financial instruments - hedging Redeliberations Redeliberations
Revenue recognition Redeliberations Final standard expected
Leases Redeliberations Final standard expected
Introduction
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contents
How will it aect your company?We highlight some o the issues that companies will need toconsider on convergence or adoption o IFRS
What are the key dierencesbetween U.S. GAAP and IFRS?We provide an overview o the most signifcant dierencesbetween U.S. GAAP and the proposed IFRS standards
What action should be taken?We outline PKFIs suggested conversion methodology to helpcompanies plan or convergence
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How will it aectyour company?
We highlight some o the issues that companies willneed to consider on convergence or adoption o IFRS
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Balance sheet osetting assets and liabilities
IFRS U.S. GAAP
A right o seto is a debtors legal right, by contract or
otherwise, to settle or otherwise eliminate all or a portion
o an amount due to a creditor by applying against that
amount an amount due rom the creditor. Two conditions
must exist or an entity to oset a nancial asset and a
nancial liability (and thus present the net amount on the
balance sheet). The entity must both:
Currently have a legally enorceable right to set o the
recognized amounts
Intend either to settle on a net basis or to realize the
asset and settle the liability simultaneously.
In unusual circumstances, a debtor may have a legalright to apply an amount due rom a third party against
the amount due to a creditor, provided that there is
an agreement among the three parties that clearly
establishes the debtors right o seto.
Master netting arrangements do not provide a basis
or osetting unless both o the criteria described earlier
have been satised. I both criteria are met, osetting is
required.
It is a general principle o accounting that the osetting
o assets and liabilities in the balance sheet is improper
except where a right o oset exists. A right o oset is a
debtors legal right, by contract or otherwise, to discharge
all or a portion o the debt owed to another party by
applying against the debt an amount that the other party
owes to the debtor. A debtor having a valid right o oset
may oset the related asset and liability and report the net
amount. A right o oset exists when all o the ollowing
conditions are met:
Each o two parties owes the other determinable
amounts
The reporting party has the right to oset the amount
owed with the amount owed by the other party
The reporting party intends to oset
The right o oset is enorceable by law.
Repurchase agreements and reverse-repurchase
agreements that meet certain conditions are permitted,
but not required, to be oset in the balance sheet.
There is an exception to the previously described intent
condition or derivative instruments executed with the
same counterparty under a master netting arrangement.
An entity may oset:
1) Fair value amounts recognized or derivative
instruments; and
2) Fair value amounts recognized or the right to reclaim
cash collateral or the obligation to return cash collateral
arising rom derivative instruments recognized at air
value. Entities must adopt an accounting policy to
oset air value amounts under this guidance and apply
that policy consistently
Financial Statement Presentation (continued)
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Balance sheet classied balance sheets
IFRS U.S. GAAP
The presentation o a classied balance sheet is required,
except when a liquidity presentation is more relevant.
The presentation o a classied balance sheet is required,
with the exception o certain industries such as real estate.
Balance sheet classication post balance sheet renancing agreements
IFRS U.S. GAAP
I completed ater the balance sheet date, neither an
agreement to renance or reschedule payments on a long
term basis nor the negotiation o a debt covenant waiver
would result in non-current classication o debt, even i
executed beore the nancial statements are issued.
Entities may classiy debt instruments due within the next
12 months as non-current at the balance sheet date
provided that agreements to renance or to reschedule
payments on a long term basis are completed beore the
nancial statements are issued.
The reporting entity may be able to classiy the obligationas long-term i a private entity is out o compliance with its
debt covenants as at the end o its reporting period and
the violation is waived/resolved by the creditor prior to the
nancial statements being issued or available to be issued.
Balance sheet classication renancing counterparty
IFRS U.S. GAAP
I an entity expects and has the discretion to renance or
roll an obligation or at least 12 months ater the reporting
period under an existing loan nancing, it classies the
obligation as non-current, even i it would otherwise be
due within a shorter period.
The renancing should be with the same counterparty.
A short term obligation may be excluded rom current liabilities
i the entity intends to renance the obligation on a long term
basis and the intent to renance on a long term basis is
supported by an ability to consummate the renancing as
demonstrated by meeting certain requirements.
The renancing does not need to be with the same
counterparty.
Statements o changes in equity
IFRS U.S. GAAP
A statement o changes in equity is presented as a
primary statement or all entities.
Statement o changes in shareholders equity are
presented either as a primary statement or within the
notes to the nancial statements.
Financial Statement Presentation (continued)
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Consolidated nancial statements
IFRS U.S. GAAP
These are generally required i criteria under IAS 27 are
met and, rom 1 January 2013, criteria under IFRS 10 will
be required to be met.
Parent entities prepare consolidated nancial statements
that include all subsidiaries. An exemption applies to a
parent entity when all o the ollowing conditions apply:
It is wholly owned or the owners o the minority interests
have been inormed about and do not object to the
parent not presenting consolidated nancial statements
The parents debt or equity securities are not publicly
traded and the parent is not in the process o issuing
securities in public securities marketsThe immediate or ultimate parent publishes consolidated
nancial statements that comply with IFRS.
The guidance applies to legal structures.
Industry-specic guidance precludes consolidation o
controlled entities by certain types o organizations such
as registered investment companies or broker/dealers.
Consolidated nancial statements are presumed to be
more meaningul and are required or SEC registrants.
There are no exemptions or consolidating subsidiaries in
general purpose nancial statements.
Consolidation model
IFRS U.S. GAAP
This ocuses on the concept o control in determining
whether a parent-subsidiary relationship exists. Control is
the parents ability to govern the nancial and operating
policies o a subsidiary to obtain benets. Control is
presumed to exist when a parent owns, directly or
indirectly, more than 50 per cent o an entitys voting
power. Control also exists when a parent owns hal orless o the voting power but has legal or contractual rights
to control either the majority o the entitys voting power
or the board o directors. Control may exist even in cases
where an entity owns little or none o a special purpose
entitys (SPE) equity. In each case, the application o the
control concept requires judgement in the context o all
relevant actors.
All consolidation decisions are evaluated rst under the
variable interest entities (VIE) model. This requires an entity
with a variable interest in a VIE to qualitatively assess the
determination o the primary beneciary o the VIE.
In applying the qualitative model, an entity is deemed to
have a controlling nancial interest i it meets both o the
ollowing criteria:
Power to direct activities o the VIE that most
signicantly aect the VIEs economic perormance
(power criterion
Obligation to absorb losses rom or right to receive
benets o the VIE that could potentially be signicant
to the VIE (losses/benets criterion).
Consolidations & Joint Venture Accounting
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Consolidation model continued
IFRS U.S. GAAP
When control o an SPE is not apparent, IFRS
requires evaluation o the entity, based on the entitys
characteristics as a whole, to determine the controlling
party. The concept o having rights to the majority o the
economic benets and residual risks is just one part o the
analysis. Other actors considered in the evaluation are
whether the activities o the SPE are being conducted on
behal o the entity. I the entity has decision-making powers
to obtain the majority o the SPEs benets or has delegated
its decision making, the substance o the arrangement
would be considered in order to decide the controlling
party or IFRS purposes.
(The dierences here do not incorporate the new
standard IFRS 10 Consolidated Financial Statements.)
In assessing whether an enterprise has a controlling
nancial interest in an entity, it should consider the entitys
purpose and design, including the risks that the entity
was designed to create and pass through to its variable
interest holders.
Only one enterprise, i any, is expected to be identied as
the primary beneciary o a VIE. Although more than one
enterprise could meet the losses/benets criterion, only
one enterprise, i any, will have the power to direct the
activities o a VIE that most signicantly aects the entitys
economic perormance.
Equity method investments
IFRS U.S. GAAP
IAS 28 Investments in Associates requires investors (other
than venture capital organizations, mutual unds, unit
trusts and similar entities) to use the equity method o
accounting in the consolidated nancial statements.
For separate nancial statements, investments in
subsidiaries and associates can be accounted or either
at cost or air value.
ASC 825-10Financial Instruments gives entities the
option to account or equity-method investments at air
value.
For equity-method investment which management
does not use the air value option, the equity method o
accounting is required.
Consolidations & Joint Venture Accounting(continued)
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Business combinations
Measurement o non-controlling interest
IFRS U.S. GAAP
Non-controlling interest is measured either at air value,
including goodwill, or its proportionate share o the air
value o the acquirees identiable net assets, exclusive
o goodwill.
Non-controlling interest is measured at air value which
includes the non-controlling interests share o goodwill.
Assets and liabilities arising rom contingencies
IFRS U.S. GAAP
Initial Recognition
Contingent liabilities are recognized as o the acquisition
date i there is a present obligation that arises rom
past events and its air value can be measured reliably.Contingent assets are not recognized.
Subsequent Measurement
Contingent liabilities are subsequently easured at the
higher o its acquisition date air value less, i appropriate,
cumulative amortization recognized in accordance with
IAS 18,Revenue, or the amount that would be recognized
i applying IAS 37,Provisions, Contingent Liabilities and
Contingent Assets.
Initial Recognition
Assets and liabilities arising rom contingencies are
recognized at air value in accordance with ASC 820
Fair Value Measurement and Disclosures (ormerlyFAS 157) i the air value can be determined during the
measurement period. I the air value o a contingent asset
or liability cannot be determined during the measurement
period, that asset or liability should be recognized
at the acquisition date in accordance with ASC 450
Contingencies (ormerly FAS 5 and FIN 14) i it meets the
criteria or recognition in that guidance. Contingentassets
and liabilities that do not meet the recognition criteria
at the acquisition date are subsequently accounted or
pursuant to other literature, including ASC 450. (See
Provisions and Contingencies or dierences between
ASC 450 and IAS 37.)
Subsequent Measurement
I contingent assets and liabilities are initially recognized at
air value, an acquirer should develop a systematic and
rational basis or subsequently measuring and accounting
or assets and liabilities arising rom contingencies
depending on their nature.
I amounts are initially recognized and measured under
the contingencies guidance in ASC 450, the subsequent
accounting and measurement should be based on the
same guidance.
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Business combinations (continued)
Acquiree operating leases
IFRS U.S. GAAP
Separate recognition o an intangible asset or liability is
required only i the acquiree is a lessee. I the acquiree
is a lessor, the terms o lease are taken into account in
estimating the air value o the asset subject to the lease.
I the terms o an acquiree operating lease are avourable
or unavourable relative to market terms, the acquirer
recognizes an intangible asset or liability, respectively,
regardless o whether the acquiree is the lessor or
the lessee.
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Impairment o Property, Plant & Equipment(PPE), Goodwill and Intangible AssetsMethod o determining impairment or PPE
IFRS U.S. GAAP
One-step approach requires that impairment testing be
perormed i impairment indicators exist.
Two-step approach requires that a recoverability test be
perormed rst (carrying amount o the asset is compared
to the sum o uture undiscounted cash fows generated
through use and eventual disposition). I it is determined
that the asset is not recoverable, impairment testing must
be perormed.
Impairment loss calculation or PPE
IFRS U.S. GAAP
This is the amount by which the carrying amount o the
asset exceeds its recoverable amount. The recoverable
amount is the higher o: (1) air value less costs to sell,
and (2) value in use (the present value o uture cash fows
in use including disposal value).
This is the amount by which the carrying amount o the
asset exceeds its air value, as calculated in accordance
with ASC 820 (ormerly FAS 157).
Allocation o goodwill
IFRS U.S. GAAP
Goodwill is allocated to a cash-generating unit (CGU)
or group o CGUs which represents the lowest level
within the entity at which the goodwill is monitored or
internal management purposes and cannot be larger than
an operating segment as dened in IFRS 8 Operating
Segments.
Goodwill is allocated to a reporting unit which is an
operating segment or one level below an operating
segment (component).
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Method o determining impairment or goodwill
IFRS U.S. GAAP
One-step approach requires that an impairment test be
done at the CGU level by comparing the CGUs carrying
amount, including goodwill, with its recoverable amount.
A reporting entity may rst assess qualitative actors
to determine i it is necessary to perorm the two step
impairment test (as detailed below). The two step test is
necessary i it is likely that the air value o the reporting
unit is less than its carrying amount.
The two-step approach requires a recoverability test to be
perormed rst at the reporting unit level (carrying amount
o the reporting unit is compared to the reporting unit air
value). I the carrying amount o the reporting unit exceeds
its air value, then impairment testing must be perormed.
Impairment loss calculation or goodwill
IFRS U.S. GAAP
Impairment loss on the CGU (amount by which the
CGUs carrying amount, including goodwill, exceeds its
recoverable amount) is allocated rst to reduce goodwill
to zero. Then, subject to certain limitations, the carrying
amount o other assets in the CGU are reduced pro rata,
based on the carrying amount o each asset.
This is the amount by which the carrying amount o
goodwill exceeds the implied air value o the goodwill
within its reporting unit.
Impairment loss calculation or indenite lived intangible assets
IFRS U.S. GAAP
This is the amount by which the carrying value o the
asset exceeds its recoverable amount.
This is the amount by which the carrying value o the
asset exceeds its air value.
Reversal o impairment loss
IFRS U.S. GAAP
This is prohibited or goodwill. PPE must be reviewed
annually or reversal indicators. I appropriate, loss may be
reversed up to the newly estimated recoverable amount,
not to exceed the initial carrying amount adjusted or
depreciation.
This is prohibited or all assets to be held and used.
Impairment o Property, Plant & Equipment (PPE),Goodwill and Intangible Assets (continued)
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Tax basis
IFRS U.S. GAAP
Tax basis is generally the amount deductible or taxable
or tax purposes. The manner in which management
intends to settle or recover the carrying amount aects the
determination o tax basis.
Tax basis is a question o act under the tax law. There
is no dispute on this amount or most assets and
liabilities but, when uncertainty exists, it is determined in
accordance with ASC 740-10-25 (ormerly FIN 48).
Uncertain tax positions
IFRS U.S. GAAP
IFRS does not include specic guidance. IAS 12 Income
Taxes indicates that tax assets and liabilities should be
measured at the amount expected to be paid. Some adopt
a one-step approach which recognizes all uncertain tax
positions at an expected value. Others adopt a two-
step approach which recognizes only those uncertain
tax positions that are considered more likely than not
to result in a cash outfow. Practice varies regarding the
consideration o detection risk in the analysis.
ASC 740-10-25 requires a two-step process, separating
recognition rom measurement. A benet is recognized
when it is more likely than not to be sustained based on
the technical merits o the position. The amount o benet
to be recognized is based on the largest amount o tax
benet that is greater than 50% likely o being realized
upon ultimate settlement. Detection risk is precluded rom
being considered in the analysis.
Initial recognition exemption
IFRS U.S. GAAP
Deerred tax eects arising rom the initial recognition o an
asset or liability are not recognized when (1) the amounts did
not arise rom a business combination and (2) the transaction
aects neither accounting nor taxable prot (or example,
acquisition o non-deductible assets) upon occurrence.
This does not include an exemption like that under IFRS
or non-recognition o deerred tax eects or certain
assets or liabilities.
Recognition o deerred tax assets
IFRS U.S. GAAP
Amounts are recognized only to the extent it is probable
(similar to more likely than not under U.S. GAAP) that they
will be realized.
Recognized in ull (except or certain outside basis
dierences) but valuation allowance reduces asset to
the amount that is more likely than not to be realized.
Calculation o deerred tax asset or liability
IFRS U.S. GAAP
Enacted or substantively enacted tax rates as o the
balance sheet date must be used.
Enacted tax rates must be used.
Income taxes
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Intangible Assets
Development costs
IFRS U.S. GAAP
Development costs are capitalized when technical and
economic easibility o a project can be demonstrated i
these all under the criteria highlighted.
Some o these criteria are to demonstrate technical
easibility, intention to complete the asset, and the ability
to sell the asset at a uture date.
Development costs are expensed as incurred unless these
are addressed by another standard. Development costs
related to computer sotware developed or external use
are capitalized once technological easibility is established
in accordance with the criteria under ASC 985-20.
In the case o sotware developed or internal use, only
those costs incurred during the development stage
as dened under ASC 350-40Internal Use Sotware
(ormerly SOP 98-1) may be capitalized.
Advertising costs
IFRS U.S. GAAP
Advertising and promotional costs are expensed as
incurred. A prepayment may be recognized as an asset
only when payment or the goods or services is made
in advance o the entitys having access to the goods or
receiving the services.
Advertising and promotional costs are either expensed as
incurred or expensed when the advertising takes place or
the rst time (policy choice). Direct response advertising
may be capitalized i the specic criteria in ASC 340-20
Capitalized Advertising Costs (ormerly SOP 93-7) are met.
Revaluation
IFRS U.S. GAAP
Revaluation to air value o intangible assets other than
goodwill is allowed.
Revaluation is not allowed.
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Costing methods
IFRS U.S. GAAP
LIFO is not allowed. LIFO is allowed.
Measurement
IFRS U.S. GAAP
Inventory is carried at the lower o cost or net realizable
value (best estimate o the net amounts inventories are
expected to realize). This amount may or may not equal
air value.
Inventory is carried at the lower o cost or market. Market
is dened as current replacement cost as long as market
is not greater than net realizable value (estimated selling
price less reasonable costs o completion and sale) and
is not less than net realizable value reduced by a normal
sales margin.
Reversal o inventory write-downs
IFRS U.S. GAAP
Previously recognized impairment losses are reversed up
to the amount o the original impairment loss.
Write downs o inventory to the lower o cost or
replacement cost will create a new cost basis that |
cannot be reversed.
Inventory
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Compound (hybrid) nancial instruments
IFRS U.S. GAAP
Compound (hybrid) nancial instruments need to be split
into debt and equity components and, i applicable, a
derivative component. The derivative component may be
subjected to air value accounting.
Compound (hybrid) nancial instruments (or example,
convertible bonds) are not split into debt and equity
components unless certain specic conditions are met
but they may be biurcated into debt and derivative
components, with the derivative component subjected to
air value accounting.
Impairment recognition Available-or-Sale (AFS) debt instrument
IFRS U.S. GAAP
Generally, only evidence o credit deault results in the
impairment o an AFS debt instrument.Impairment losses recognized through the income
statement or available-or-sale equity securities cannot
be reversed through the income statement or uture
recoveries. However, impairment losses or debt
instruments classied as available-or-sale may be
reversed through the income statement i the air value
o the asset increases in the subsequent period and the
increase can be objectively related to an event occurring
ater the impairment loss was recognized.
Declines in air value below cost may result in an
impairment loss being recognized in the incomestatement on an AFS debt instrument due solely to a
change in interest rates (risk-ree or otherwise) i the entity
has the intent to sell the debt instrument or it is more likely
than not that it will be required to sell the debt instrument
beore its anticipated recovery. In this circumstance,
the impairment loss is measured as the dierence
between the debt instruments amortized cost basis and
its air value.
Hedge eectiveness shortcut method or interest rate swaps
IFRS U.S. GAAP
Not permitted. Permitted.
Financial Instruments (Under IAS 39 and notIFRS 9 - eective rom 1 January 2015) - (continued)
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Foreign Currency
Translation/unctional currency o oreign operations in a hyperinfationary economy
IFRS U.S. GAAP
Financial statements (current and prior periods) in local
unctional currency are indexed by using a general price
index and then translated into the reporting currency at
the current rate.
Local unctional currency nancial statements are re-
measured as i the unctional currency was the reporting
currency (U.S. dollar in the case o a U.S. parent) with
resulting exchange dierences recognized in income.
Net investment denominated in currencies other than the unctional currencies o the entities
that are parties to the monetary items
IFRS U.S. GAAP
IFRS does not require monetary items to be denominated
in unctional currencies o the entities that are parties to the
monetary item in order or it to be accounted or as a part
o the reporting entitys net investment in those entities.
Foreign currency transactions between the entities within
same group, or which settlement is neither planned
nor likely to occur in the oreseeable uture, may be
considered a part o the net investment i the monetaryitems are denominated in the unctional currencies o the
entities that are parties to the monetary items.
Consolidation o oreign operations
IFRS U.S. GAAP
The method o consolidation is not specied and, as a
result, either the direct or the step-by-step method
is used. Under the direct method, each entity within
the consolidated group is directly consolidated into
the ultimate parent without regard to any intermediate
parent. The choice o a method could aect the
cumulative translation adjustments deerred within equityat intermediate levels and, thereore, the recycling o
such exchange rate dierences upon disposal o an
intermediate oreign operation.
A bottom-up approach is required in order to refect
the appropriate oreign currency eects and hedges in
place. As such, an entity should be consolidated by the
enterprise that controls the entity. Thereore, the step-
by-step method o consolidation is used whereby each
entity is consolidated into its immediate parent until the
ultimate parent has consolidated the nancial statementso all the entities below it.
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Share-based payments
Transactions with non-employees
IFRS U.S. GAAP
The air value o a transaction should be based on the
value o the goods or services received and only on the
air value o the equity instruments i the air value o the
goods and services cannot be reliably determined.
The measurement date is the date on which the entity
obtains the goods or the counterparty renders the
services. There is no perormance commitment concept.
Either the air value o (1) the goods or services received,
or (2) the equity instruments is used to value the
transaction, whichever is more reliable.
I using the air value o the equity instruments, ASC 505-
50Equity-Based Payments to Non-Employees (ormerly
EITF 96-18), measurement is required at the earlier o (1)
the date at which a commitment or perormance by
the counterparty is reached, or (2) the date at which the
counterpartys perormance is complete.
Measurement and recognition o expense awards with graded vesting eatures
IFRS U.S. GAAP
This must recognize compensation cost on an
accelerated basis each individual tranche must be
separately measured.
Entities make an accounting policy election to recognize
compensation cost or awards containing only service
conditions either on a straight-line basis or on an
accelerated basis, regardless o whether the air value o
the award is measured based on the award as a whole or
or each individual tranche.
Equity repurchase eatures at an employees choice
IFRS U.S. GAAP
Liability classication is required (no six month
consideration exists).
Does not require liability classication i employee bears
risks and rewards o equity ownership or at least six
months rom the date the equity is issued or vests.
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What actionshould be taken?We outline PKFIs suggested conversion methodologyto help companies plan or convergence
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