SEMINARIE Inleiding tot de US GAAP-normen voorgesteld door de heer Ph. LONGERSTAEY 11 december 2002 HOTEL ABBEY, Grimbergen
Introduction to US GAAP Philippe Longerstaey
Table of contents 1. Property, plant and equipment 2. Intangible assets 3. Inventories 4. Investments in debt securities 5. Investments in equity securities 6. Equityaccounting 7. Consolidation 8. Leasing 9. Impairment 10. Restructuring costs 11. Deferred taxes 12. Convertible debt 13. Foreign. currency transactions and transiation 14. Pensions 15. Changes in accounting principle and estimate 16. Extraordinary items 17. Prior period adjustments 18. Comprehensive income 19. Cash flows statement 20. Earnings per share
Introduction Information of investors vs protection of creditors US GAAP is not tax driven Conservatism not an excuse for earnings management Full disclosure ~
1. Property, Plant, and Equipment Historical cost (:;t: market value) Capitalisation of interest cost: compulsory - Assets under construction for an enterprises' own use - Weighted average of expenditures during period x interest ra te capitalised interest cost l;: maximum actual interest cost incurred - Interest rate - incurred on specific borrowings - weighted average of interest rates included on all outstanding debt kpmbj - Interest revenue not deducted from interest cost
1. Property, Plant, and Equipment (continued) f<pmtj Exchange of non-monetary assets - Dissimilar - Fair value of asset given up - Gain or loss recognised - Similar - Fair value of asset given up - Loss situation: loss recorded - Gain situation: gain deferred Depreciation - Units or use of production - Straight-line - Decreasing charge - Sum of the years' digit - Declining balance - No depreciation taken on construction in process Change in depreciation rates - Recorded in the current and prospective periods - No "catch up" for prior periods
2. Intangible assets Specifically identifiable (i.e. other than goodwill) - Purchased intangibles: recarded at cast and capitalised - Internally created intangibles: expensed as incurred Amortisation: maximum 40 years Research & Development: expensed when incurred - Materiais, equipment and facilities: expense, unless the items have alternative future uses - Persannel: expense - Purchased intangibles: expense, unless the items have alternative uses ~ - Indirect casts: expense
2. Intangible assets (continued) Start-up costs, pre-operating losses expensed when incurred Computer software - To be sold, leased or otherwise marketed: - Costs incurred are charged to expense until technological feasibility is established - If software is purchased and has alternative uses, it may be capitalised - Developed or purchased for internal use: - Preliminary project stage: expense - Application development stage: certain costs are capitalised: - External direct costs of materials and services - Payroll costs of em ployees directly associated with the project - Interest cost - Post implementation/operation stage: expense ~
3. Inventories Full (absorption) costing Cost flow assumption - Specific identification - Average cost - Fifo - Lifo Lower of cost or market t Replacement cost Net realisable value + Net realisable value less n.ormal profit margin Capitalisation of interest cost: assets intended for sale or lease that are constructed or produced as discrete projects kpmgj
kpmgj 4. Investments in debt securities Classification - Held to maturity (HTM): Intent and ability to hold to maturity - Trading (T): Bought for sale - Available for sale (AFS): Neither held to maturity nor trading Accounting - Held to maturity - Trading - Balance sheet valuation: amortised cost - Unrealised holding gains or losses: not recognised - Balance sheet valuation: fair value - Unrealised holding gains or losses: Income - Available for sale - 8alance sheet valuation: fair value - Unrealised holding gains or losses: stockholders' equity
4. Investments in debt securities (continued) Transfers between categories - Rare - At fair value - HTM or AFS to T: Unrealised holding gains or losses: income - HTM to AFS: Unrealised holding gains or losses: stockholders' equity - AFS to HTM: Unrealised holding gains or losses amortised to income over residual term of security - T to HTM or AFS: Unrealised holding gains or losses already recognised in income and not reversed kpmgj
5. Investments in equity securities 0-20% : no or little influence: fair value 20% - 50% : significant influence: equity method 50% -100 % : control : consolidation Fair Value - Trading - When acquired, recorded at cost - Subsequently reported at fair value in the balance sheet - Unrealised holding gains or losses: income - Available for sale kpmgj - When acquired, recorded at cost - Subsequently reported at fair value in the balance sheet - Unrealised holding gains or losses: stockholders' equity
6. Equity accounting Significant influence Rebuttable presumption: 20% ownership IIOne-line consolidation" Equity piek-up is adjusted for: - Amortisation of difference between cost and the proportionate share of book value of investee - Elimination of intercompany gains and losses KPMGJ
7. Consolidation Control: 50% ownership of voting stock Exceptions - If control is likely to be tem porary - If control does not rest with the majority owner (bankruptcy, foreign exchange restrictions and controls) No exception for non-homogeneous operations No proportional consolidation kpmgj
7. Consolidation (continued) Joint ventures: equitv method Goodwill: amortised over useful life, not to exceed 40 vears (to be reduced to 20 vears) Negative goodwill - Reduction in carrying values of non-current assets acquired (except long-term investments in marketabie securities) - Deferred income amortised to income statement over a maximum of 40 years ~
8. Leasing Terminology Capital lease Operating lease Lessee BIS "* BIS Lessor "* BIS BIS A capital lease (for a lessee) is called a sales-type (or financing) lease (for the lessor) ~ Capital lease conditions - Lessee 1. Transfer of ownership 2. Bargain purchase option 3. Lease term> 75% of asset's economie life 4. Present value of minimum lease payments > 90% of fair market value of asset
- Lessor 8. Leasing (continued) 1. Same as lessee 2. Collectibility of payments is reasonably predictabie 3. No major uncertainties surround unreim bursable costs vet to be incu rred by the lessor Discount rate - Lessee's incremental borrowing rate - Lease's implicit interest ra te if - Known - Less than the lessee's incremental borrowing rate kpmgj Depreciation - If condition 1 or 2 is met, economie life of asset - Otherwise, lease term
8. Leasing (continued) Asset under capital lease: present value of minimum lease payment up to a maximum of the fair value of the asset Calculation of interest expense using the Ileffective interest method" (opening balance of obligations under capital lease times the discount factor) Sale - leaseback - Capital lease: Profit or loss deferred and amortised overthe lease term - Operating lease: - Profit deferred and amortised - Loss is recognised immediately Lease of land, real estate, land and real estate kpmgj
9. Impairment Events may indicate that the carrying amount of assets may not be recoverable - Decrease in market value - Changes in business climate or legal factors Recoverability test - Carrying amount > future net cash flows (undiscounted) from use and disposal KPMGJ
9. Impairment (continued) If recovery test is positive, impairment loss is measured - Assets held for use - Carrying amount less fair value - Market value - Present value of future net cash flows - Restoration of im pairment loss not perm itted - Depreciation based on the amount af ter impairment loss - Assets held for disposal - Carrying amount less net realised value - Restoration of im pairment loss perm itted - No depreciation taken Applied to property, plant and equipment, intangible assets, certain investment in debt and equity securities, and certain loans kpmgj
10. Restructuring costs Employee termination benefits (involuntary) A C C R when U E D - Management approves and commits the enterprise to the termination plan - Benefits are communicated to employees - The termination plan identifies the number of employees, job classifications and locations - Period of time to complete such that significant changes are unlikely KPl4GJ
10. Restructuring costs (continued) Other costs kpmtj - Not associated with activities that will be continued - Not incurred to generate revenues - Incremental to other costs and incurred as direct result ofthe exit plan or - Incurred under a contractual obligation, and will continue af ter exit plan is completed, or penalty for cancellation Slight differences for restructuring casts incurred as part of a business combination
11. Deferred Taxes Temporary differences = differences between - The book base of an asset or a liability - The tax base of an asset or a liability Temporary differences: - Future taxabie amounts y Deferred tax liabilities - Future deductible amounts y Deferred tax assets Deferred tax assets (or liabilities): temporary difference enacted tax rate Deferred tax assets arise from: X kpmgj - Future deductible amounts - Tax 1055 carry forwards
11. Deferred Taxes (continued) Deferred tax assets ~ (Valuation allowance) Probability of realisation. - Future reversals of existing taxabie temporary d iffe re n ces - Future taxabie amounts - Taxabie income in prior carry back years - Tax planning strategies Net deferred tax position in BIS at beginning of vear (Net deferred tax position in BIS at end of vear) Deferred tax expense or credit in the income statement Balance sheet classification (current or non current) is based on classification of the related asset or liabilitv One single amount for current and non current deferred taxes
12. Convertible debt At date of issuance, recorded as straight debt At date of conversion - Market value approach - Stock is recorded at its market price at issuance date - Gain or loss recorded - Book value approach - Stock is recorded at the net book value of the convertible debt at date of conversion Induced conversion - Debt conversion expense - Not an extraordinary item Retirement of convertible debt - Gain or less on retirement: extraordinary item kpmgj
13. Foreign currency transactions and translation Foreign currency transaction gains and losses - Realised - Unrealised } Income statement kpmgj Recorded in the same manner as a translation adjustment - Intercompany foreign currency transactions of a long-term investment nature - Foreign currency transactions designated as and effective as a hedge of an investment in a foreign entity
13. Foreign currency transactions and translation (continued) Foreign currency translation kpmgj Translation adjustment included in stockholders' equity - Translation of financial statements of companies in highly inflationary economies - Translation of financial statements of companies that are an extension of the parent company's operations - Assets: Y/E exchange rate - Liabilities: Y/E exchange rate - Equity: historical exchange rate - Revenues and expenses: weighted average exchange rate Non monetary assets and liabilities translated at historical exchange rate Translation adjustment included in the income statement
14. Pensions Defined benefit pension plans Defined contribution pension plans ABO: accumulated benefit obligation: present value of benefits (vested and non vested) for employees at current salaries PBO: projected benefit obligation: present value of benefits (vested and nonvested) for employees at future salaries ~
14. Pensions (continued) Pension expense - Service cast of year (increase in pension benefits because of services rendered during the year) - Interest cast (interest on pension obligation) - Return on plan assets (interest, dividends, increase or decrease in market value of plan assets) - Amortisation of u nrecog nised prior service cast (cast of providing retroactive benefits) - Gain or 1055 (differences between actual and expected return on plan assets, and changes in actuarial assumptions) kpmgj
14. Pensions (continued) Amortisation of unrecognised prior service cost: years of service amortisation method Gain or loss: corridor method Minimum liability to be recorded in the balance sheet: Accumulated benefit obligation < Plan assets at fair value > When it is necessary to record a minimum liability, the debit is an intangible asset, except where the additional liability exceeds the amount of unrecognised prior service cost: the excess is debited to stockholders' equity ~
15. Changes in accounting principle Example - Change in method of inventory pricing - Change in depreciation method Cumulative effect of change: - Retained earnings, beginning of year, as reported less - Retained earnings, beginning of year, if the new principle had been applied retroactively for all periods which would have been affected Recorded in the income statement as a separate item, af ter extraordinary items, net of taxes ~
15. Changes in accounting estimate Examples change in useful lives of depreciable assets Accounted for in the period of change and future periods, if applicable Not handled retroactively kpmgj
16. Extraordinary items Unusual and infrequent - Major casualty - Expropriation - Prohibition under a new law Gain or loss on extinguishment of debt - Reacquisition of debt - Refinancing existing debt with new debt - Extinguishment of debt at less or more than the net carrying amount - Extinguishment of debt by exchanging common or preferred stock fipl4gl
17. Prior period adjustments Corrections of errors Adjustment to the opening balance of retained earnings, net of taxes - Retained earnings, beginning of year - As previously reported - Correction of error (net of taxes) - Retained earnings, adjusted, beginning of year Comparative financial statements should be adjusted KPMGJ
18. Comprehensive income Some revenues, expenses, gains, or losses are not included in income (but in stockholders' equity) - Examples - Unrealised holding ga ins and losses on available-for-sale securities - Foreign currency translation adjustment Comprehensive income = net income + other comprehensive Income kpmgj
18. Comprehensive income (continued) 3 formats - Second income statement - "Income statement" - "Comprehensive income statement" - Combined income statement - Net income Unrealised holding gain (or translation adjustment) Comprehensive income - Statement of changes in stockholders' equity - Accumulated other comprehensive income kpmgl
19. Cash flows statement Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities + Effect of exchange rates changes on cash Net increase (decrease) in cash + Cash at beginning of year Cash at end of year Cash and cash equivalents (short-term highly liquid investments) KPMGJ
19. Cash flows statement (continued) Cash flows from operating activities - Direct method: major classes of cash receipts and payments: cash collected from customers, cash paid to employees and suppliers of goods or services, interest and dividends received, interest paid, income taxes paid - Indirect method: reconciliation between net income and cash flows from operating activities Disclosure of non cash investing and financing activities kpmbj
20. Earnings per share Simple capital structure: no securities with a potential dilutive effect (convertible debt, options and warrants) Complexcapital structure: securities with a potential dilutive effect Simple capital structure basic eps = Complex capital structure KPMGJ Net income - preferred dividends Weighted average number of shares outstanding diluted eps = basic eps + impact of - Convertible securities - Options and warrants