Dual Reporting for Equity and Other Comprehensive Income under IFRSs and U.S. GAAP

Francesco Bellandi

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118314302
• Edition: 1
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

Under IFRS, U.S. GAAP, and the SEC rules and regulations, business enterprises must recognise measure and disclose information regarding equity items on the face of the statement of financial position, other specific statements, or in the notes to the financial statements. However, under both IFRS and U.S. GAAP there is no all-inclusive general standard on stockholders' equity.

This book clarifies the process of reporting stockholders' equity in a manner which can be reconciled under all the relevant standards.

"Not only has the author addressed the informational needs of the players in the accounting industry, he has also drawn, based on his vast experience, practical implications of reporting under both standards." —Noraini Mohd Nasir, Journal of Financial Reporting and Accounting

1

INTRODUCTION AND SCOPE OF BOOK

1.1 NATURE OF ACCOUNTING LITERATURE AND PERTINENT PRONOUNCEMENTS

Under both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRSs) there is no all-inclusive general standard on stockholders’ equity. Instead, authoritative literature on this subject consists of concepts from the FASB and the IASB frameworks and standards that apply to specific types of transactions or events or items in financial statements that affect stockholders' equity.

The principal accounting pronouncements, under U.S. GAAP, SEC guidance, and IFRSs respectively, are listed in Worksheet 80, grouped per specific category.

Starting from July 1, 2010, the International Accounting Standards Committee Foundation (IASCF) became the IFRS Foundation. The International Financial Reporting Interpretations Committee (IFRIC) had changed its name into the IFRS Interpretations Committee. The IASB had renamed its website as IFRS.org. The Accounting Standards Executive Committee (AcSEC) recently became the Financial Reporting Executive Committee (FinREC). This Book maintains the above original names for all references.

1.2 PERSPECTIVES AND MAJOR IMPLICATIONS OF THE CONCEPT OF EQUITY

Accounting for stockholders’ equity refers to the recognition, measurement, presentation, and disclosure of equity on a company's financial statements. Along with such meaning, the Book particularly adopts the perspective of a comparative study, by means of criticism and contrast between the U.S. and the IFRSs’ pronouncements and practice.

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Comment: However, the topic of stockholders’ equity is pervasive, well beyond accounting. In fact, according to circumstances, it may be relevant under a number of management, finance, legal, tax, and business viewpoints for several stakeholders, such as company managers, CPAs, financial analysts, and, in general, preparers and users of financial statements. Some of these angles are as follows:

• Meaning, and rationale for, equity: Firstly, equity is an element of the financial statements under the FASB and the IASB conceptual frameworks. Its location within an accounting framework may follow two different approaches: the asset-liability (or balance sheet approach) or the revenue-expense views. Derivation of income, under the former, is the result of certain changes in net assets during the accounting period, as opposed to the view, under the latter concept, of income-producing activities of the enterprise as a major determinant of changes of equity.
• Definition and classification of equity: Finance theory makes a separation between financing activities and an entity's other activities. Within financing activities, accounting has traditionally developed a dichotomy between financial liabilities and equity. The corresponding classification of interest versus dividends develops from the concept of income determination (net of interest) as opposed to income distribution (to shareholders). The treatment of compound financial instruments, instruments with both characteristics of equity and financial liabilities, and share-based payments moves traditional constraints.
• Sources of capital, and assessment of “quality of equity”: Disclosure of sources of equity firstly discriminates between capital that is contributed and equity that derives from earnings (i.e., retained earnings or other comprehensive income). The use of separate paid-in capital accounts offers additional information for analysis of sources of capital and quality of equity. A specific point in this respect is whether or not a gain or loss that relates to distributions to, or contributions from, an entity's owners, should be recognized and, if yes, in which statement.
• Rationale for capital and capital disclosures: The presentation and disclosure of equity also includes the accounting for, and the classification of, specific captions and equity reserves. The definition and segregation of equity “reserves” serve the purpose of appropriation, distributability of earnings, or other forms of defense of capital, and in particular, the guarantee function of capital for an enterprise's creditors, to the extent of means that are statutorily or legally appropriated or restricted. Classification and disclosure of equity sources may also be required for taxation purposes under a specific jurisdiction.
• Management of capital: From a management viewpoint, an entity has to determine its capital structure optimization policy, the dividend policy, the objectives, policies and processes that it employs for the purpose of managing capital and, depending on the industry, how to cope with externally imposed capital requirements.
• Owners’ perspective: Each one of the owners of a company is interested in understanding whether a certain jurisdiction provides for equality of shareholders’ rights for each class of equity securities, which rights are associated with each class of equity securities, minority interest rights, and whether or not such rights are proportional to the equity interest. From an accounting perspective, this also translates into different presentations of minority interests in a partially-owned subsidiary in consolidated financial statements, as a result of adopting the entity versus the parent-company theory, and how gains or losses that are generated by capital transactions should be accounted for. Furthermore, financial reporting has produced indicators that serve information needs of the controlling interest (such as earnings per share that are attributable to ordinary equity holders of the parent entity) versus those of all owners (e.g., net income).
• Definition of financial performance and performance metrics: Shareholders are interested in understanding the return on their investment, as well as the performance of the company. A long-standing debate exists on the definition of performance: financial versus economic versus nonfinancial performance; net income versus comprehensive income; capital maintenance concepts; short- versus long-term perspective; GAAP measures versus pro forma earnings. Financial reporting has responded by in computing earnings per share and diluted earnings per share. Financial analysis has developed ROE – Return on Equity, cost of equity, economic value added (EVA), and other models of shareholders’ value and financial performance. Many financial ratios involve equity (such as debt-to-equity ratio), and specific accounting treatments may affect such ratios (such as recognition of a capital versus an operating lease). Furthermore, all this differs from market capitalization of a company, and value of equity from a stock exchange investor's viewpoint.
• Business law and regulation: Shareholders’ contributions are a basic element of their obligations as part of the articles of incorporation. Depending on jurisdiction, types and categories of equity instruments differ, as do the related rules and regulations. A certain jurisdiction may require a minimum amount of capital stock for certain company forms, allow the issue of shares with no-par value, and sometimes mandate a minimum par, or stated value, or an integer amount only. Fundamental corporate changes involving capital must follow specific rules.

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1.3 THE CONCEPT OF OTHER COMPREHENSIVE INCOME

The concepts of comprehensive income and other comprehensive income interact with the concept of equity. Comprehensive income, under a balance sheet approach, represents all the recognized changes in equity (net assets) of an entity from one reporting period date to the next that result from sources other than changes arising from investment by and distributions to owners. The balance-sheet view is discussed in Section 2.1.4 later. Other comprehensive income is a part of comprehensive income. Other comprehensive income is a component of equity. Other comprehensive income is treated in Chapter 7, including its interactions with net income in representing financial performance.

1.4 THE FINANCIAL STATEMENT PRESENTATION PROJECT

The FASB and the IASB are jointly pursuing a comprehensive and consistent approach to financial statements presentation. Stockholders’ equity also comprises presentation issues. Therefore, it is worth considering the development of this project to date and its connections to the topic of this Book.

1.4.1 Project History

The accounting and financial communities have long been discussing presentation models to enhance the relevance, quality, credibility, and usefulness of financial reporting, including whether its scope should extend to business issues, real-time disclosures, financial metrics, and even nonfinancial information.1

In 1998 the FASB decided to undertake research on business reporting, also covering disclosures that companies may decide to make even on a voluntary basis.2

The IASB and the FASB added independent projects on performance reporting, mainly focused on income statement presentation, to their agendas, in September and October 2001 respectively. Since April 2004 they have been conducting a joint project.

During their joint meeting on March 18, 2006, the FASB and the IASB finally decided to rename the project previously entitled Perform...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Preface
• About the Author
• Chapter 1: Introduction and Scope of Book
• Chapter 2: Views on Equity and Implications
• Chapter 3: Reserves
• Chapter 4: Equity Section of the Statement of Financial Position
• Chapter 5: Additional Paid-In Capital
• Chapter 6: Retained Earnings
• Chapter 7: Other Comprehensive Income
• Chapter 8: Presentation of Taxes on Equity Items
• Bibliography
• Index