07 Ey - Ifas Vs Us Gaap Survey

U S C A P I TA L M A R K E T S
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Towards Convergence
A Survey of IFRS to US GAAP Differences
The authorship and compilation of this survey was primarily performed by Dave Cook,
James O’Donoghue and Purvi Domadia, members of the Capital Markets Group.
The Capital Markets Group at Ernst & Young is dedicated to serving our clients in their
cross-border finance raising transactions and activities and in their ongoing financial
reporting obligations both in the United States and Globally.
About Ernst & Young

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Contents
Overview 3
Overall analysis 8
Reported differences 18
1 Presentation of financial statements 18
2 Consolidated financial statements 19
3 Business combinations 23
4 Associates and joint ventures 28
5 Foreign currency translation 29
6 Intangible assets 30
7 Property, plant and equipment 33
8 Investment property 36
9 Impairment 36
10 Capitalisation of borrowing costs 38
11 Financial instruments: recognition and measurement 40
12 Financial instruments: shareholders’ equity 42
13 Financial instruments: derivatives and hedge accounting 43
14 Inventory and long-term contracts 47
15 Leasing 48
16 Taxation 50
17 Provisions 54
18 Revenue recognition 57
19 Government grants 58
20 Segmental reporting 58
21 Employee share option plans 59
22 Pension costs 60
23 Post-retirement benefits other than pensions 64
24 Other employee benefits 64
25 Earnings per share 66
26 Cash flow statements 66
27 Related party transactions 66
28 Post balance sheet events 66
1
C ONTENTS
First-time adoption of IFRS 67
Industry sector analysis 70
Air Transport 71
Chemicals 77
Extractive Industries 82
Financial Services 92
Pharmaceuticals 106
Telecommunications 113
Utilities and Energy 123
Appendix A – Convergence update 133
Appendix B – Form 20-F financial statement requirements 139
Appendix C – Abbreviations used 142
Appendix D – The companies surveyed 143
2 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Overview
One of our key tasks at Ernst & Young is to support our clients with their IFRS to US GAAP accounting and reporting.
This is a survey of publicly available IFRS to US GAAP reconciliation information filed by SEC foreign private issuers,
timed to coincide with the first-time adoption of IFRS across the globe. The 130 companies included in our survey are
some of the largest companies in the world markets; 42% of the companies surveyed are in the 2006 Financial Times
Global 500.
It will, in our view, be of great interest and we believe of significant value to preparers of IFRS and US GAAP financial
information and also those interested in a ‘one-time snap shot’ of the current state of convergence in the year of adoption.
We also hope that users will look to this as a useful aide memoir of reported IFRS to US GAAP differences in terms of
generally accepted disclosure and reporting practice.
Whilst both the IASB and the FASB are committed to convergence and much progress has been made, currently we have
identified almost 200 reported IFRS to US GAAP differences in this survey with companies’ reported results still
significantly impacted by differences between the two frameworks.
The SEC has made consistency of application and presentation of IFRS financial information one of the key issues
surrounding the possible elimination of the IFRS to US GAAP reconciliation requirement and we are already seeing both
a vigorous and robust cross-border and industry comparison in the comment letter process.
This survey provides an analysis of IFRS to US GAAP differences reported by companies which prepare financial
statements under IFRS with reconciliations to US GAAP. It is based on Form 20-F annual report filings for fiscal years
ended between 31 December 2005 and 31 March 2006 and filed with the SEC before 15 July 2006.
We have prepared the survey in four parts:
• an analysis of the IFRS to US GAAP differences reported;
• a compendium of extracts from Form 20-F filings illustrating reported differences between IFRS and US GAAP;
• a discussion of the IFRS first-time adoption rules; and
• an analysis of the IFRS to US GAAP differences reported for seven industry sectors.
The SEC expected the implementation of IFRS throughout the European Union (EU) in 2005 to result in a very
significant proportion of non-US companies registered with the SEC (‘foreign private issuers’ or ‘FPIs’) preparing local
financial statements in accordance with IFRS with reconciliations to US GAAP. Of approximately 1,200 FPIs, about 500
are Canadian and, prior to 2005, about 40 of the remaining 700 FPIs prepared financial statements under IFRS locally.
This number was expected to reach 300 by the end of 2005 and closer to 400 by 2007.
At the end of 2005, over 240 FPIs were incorporated in the EU. There are 112 companies from EU countries in our
sample. The remaining EU FPIs are not included in our survey as they either did not file a Form 20-F before 15 July 2006
for a fiscal year ended between 31 December 2005 and 31 March 2006 or the Form 20-F that was filed did not include
IFRS financial statements reconciled to US GAAP. The other 18 companies are incorporated in non-EU countries but file
with the SEC financial statements under IFRS, reconciled to US GAAP.
The survey includes only companies that filed financial statements under IFRS or IFRS as endorsed by the EU.
We did not include filings by companies filing local financial statements prepared in accordance with a local body of
accounting principles which incorporates IFRS, for example, companies in Australia.
3
O VERVIEW
Companies in the EU must comply with accounting standards adopted by the European Commission and it is therefore
possible that financial statements prepared by EU companies comply with IFRS as adopted by the European Commission
but will not comply with IFRS. However, the differences between IFRS and IFRS as adopted by the EU concern only a
‘carve-out’ for certain provisions on hedge accounting on the adoption of IAS 39 Financial Instruments: Recognition
and Measurement.
We did not include reconciliations for earlier years presented as, in accordance with IFRS 1 First-time Adoption of
International Financial Reporting Standards, many companies have taken advantage of a number of exemptions and
exceptions from full retrospective application of IFRS and, accordingly, the financial statements for comparative periods
may not be prepared on an entirely consistent basis.
The compendium of extracts from Form 20-F filings illustrating reported differences between IFRS and US GAAP does
not include those areas of difference that are specific to financial services (banking and insurance) companies, as many of
the transactions and accounting issues for banking and insurance companies are unique to those industries. However, the
more significant sector differences between IFRS and US GAAP as identified by the financial services companies
included in the survey are discussed in the Financial Services sector analysis.
We have not verified the propriety of the reported differences nor performed any audit procedures for the purpose of
expressing an opinion on the extracts included in this survey and, accordingly, we do not express an opinion thereon.
Although the implementation of IFRS has brought about greater consistency in accounting, recognition, measurement and
disclosure, it is evident that IFRS financial statements have retained elements of national legacy accounting, particularly
in areas where there is an absence of specific IFRS standards. For the companies in our survey, all of which have dual
IFRS and US GAAP reporting requirements, we found that in areas where there is a lack of specific IFRS guidance, many
have applied US GAAP accounting for their IFRS financial statements. However, in some cases, companies have
continued to use their previous local GAAP or industry practice under IFRS and report an IFRS to US GAAP difference.
For example, accounting for sales incentives, including loyalty programmes and long-term contract incentives, is not
specifically addressed under IFRS (although IFRIC has issued a draft Interpretation on customer loyalty programmes).
Under US GAAP, there is specific guidance for accounting for sales incentives. Our survey identified three companies,
from different industry sectors and incorporated in different countries, which apply different accounting treatments for
sales incentives and consequently report IFRS to US GAAP differences. Extracts from the Form 20-F filings for the three
companies, France Telecom, Skyepharma and TNT, describing these differences are included below.
Extract 1: France Telecom

NOTE 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
Description of US GAAP adjustments [extract]
Revenue recognition (S) [extract]
…
As described in Note 2.1.8 to these consolidated financial statements, France Telecom accounts for certain sales incentives, both
with and without renewal obligations, in accordance with the interpretation made by the French standard setter (“CNC”). Under
US GAAP, France Telecom accounts for certain sales incentives given to customers with renewal obligations in accordance with
EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (“EITF 01-9”), and thereby recognizes such sales
incentives upon the renewal of the customer. …

Extract 2: Skyepharma
37 Summary of Material Differences between IFRS and U.S. GAAP [extract]
Description of U.S. GAAP Adjustments [extract]
(8) Revenue recognition [extract]
…
Under U.S. GAAP, the Company has accounted for contingent marketing contributions as a reduction of up-front consideration
received in determining the revenue to be recognized. If the contingent marketing contributions do not reach the contractually
agreed reimbursements, the difference would be recognized as revenue at the time further marketing contributions are no longer
required. Under IFRS, marketing contributions are expensed as incurred, in line with the timing of the resulting expected
product sales. …
Extract 3: TNT
O 34 DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
Other differences [extract]
LONG TERM CONTRACT INCENTIVES
Under IFRS, expenses related to long term contract incentive payments made to induce customers to enter or renew long term
service contracts may be deferred and accounted for over the contract period. Under US GAAP such payments may not qualify
for deferral, and must be recognised fully in income in the initial period that the cost is incurred. We have paid certain long term
contract incentives totalling €6 million that did not qualify for deferral under US GAAP. As a result, under US GAAP, such
payments were recognised immediately in the income statement, while under IFRS they have been deferred and will be recognised
over the term of the contract. This difference resulted in an adjustment to the US GAAP net income and shareholders’ equity in
the current year to reflect the reversal of the related annual charge to the income statement recorded under IFRS.
Another common source of difference is the propensity for IFRS to allow alternative accounting treatments where only
one of the allowed treatments is consistent with US GAAP. Some of the areas where alternative accounting treatments
have resulted in IFRS to US GAAP differences are as follows:
• Under IAS 23 Borrowing Costs, entities have a choice of applying the benchmark treatment, which is to expense all
borrowing costs as incurred, or the allowed alternative treatment, which is to capitalise borrowing costs arising on
qualifying assets. Generally, there is no such choice under US GAAP, since FAS 34 Capitalization of Interest Cost
requires capitalisation of interest costs for qualifying assets that require a period of time to get them ready for their
intended use.
33% of the companies in our survey reported differences as a result of expensing borrowing costs under the
benchmark treatment in IAS 23.
• Under IAS 19 Employee Benefits, if actuarial gains and losses are recognised in the period in which they occur, a
company may choose to recognise them outside of profit or loss in a statement of recognised income and expense.
Recognition of actuarial gains and losses other than through the income statement generally is not permitted under
US GAAP.
32% of the companies recognised actuarial gains and losses in a statement of recognised income and expense and
reported a difference.
5
O VERVIEW
• Under IAS 31 Interests in Joint Ventures, companies are allowed to account for investments in jointly controlled
entities using either the equity method or proportionate consolidation. US GAAP generally does not permit
proportionate consolidation except for an investment in an unincorporated entity in either the construction industry or
an extractive industry where there is a longstanding practice of its use. This was intended to be a narrow exception.
To illustrate for practical purposes, an entity is in an extractive industry only if its activities are limited to the
extraction of mineral resources (eg, oil and gas exploration and production) and do not involve related activities.
15% of the companies in our survey applied proportionate consolidation for interests in joint ventures, including
companies in each of the industry sectors we analysed, except Air Transport. However, none of the oil and gas
companies reported a difference in this respect.
• Under IAS 16 Property, Plant and Equipment, companies may choose either the cost model or the revaluation model
as an accounting policy and apply the chosen policy to an entire class of property, plant and equipment. US GAAP
generally requires tangible fixed assets to be recorded at depreciated historical cost.
10% of the companies report a difference as a result of applying the revaluation model under IFRS.
Differences can also relate to local fiscal or other regulatory requirements. For example, in certain countries payroll taxes
are charged on share-based payment arrangements. IFRS 2 Share-based Payment does not specifically address the
accounting for payroll taxes relating to share-based payments, such as UK National Insurance. Generally, under IFRS,
payroll taxes relating to share-based payments are accrued systematically over the option vesting period based on the
intrinsic value at each reporting date. Under US GAAP, a liability for payroll taxes relating to a share-based payment
generally is not recognised until the option is exercised.
Our survey identified twelve companies that reported a reconciling difference in respect of payroll taxes on share options.
The twelve companies are incorporated in the United Kingdom (six), Sweden (two), Finland (two), Norway (one) and
Switzerland (one). The following extract from Inmarsat provides a description of this difference.
Extract 4: Inmarsat
34. Summary of differences between International Financial Reporting Standards and United States Generally Accepted
Accounting Principles [extract]
(g) Stock option costs [extract]
…
Under IFRS, the liability for National Insurance on stock options is accrued based on the fair value of the options on the date of
grant and adjusted for subsequent changes in the market value of the underlying shares. Under US GAAP, this expense is
recorded upon exercise of stock options.
Differences can arise even where the accounting guidance would suggest otherwise. This may be due to the application of
different transitional arrangements on adoption of directly equivalent IFRS and US GAAP standards or different dates on
which the standards are adopted. For example, 11% of the companies in the survey have adopted IFRS 2 Share-based
Payment and FAS 123(R) Share-Based Payment and have reported differences relating to the transition provisions rather
than to differences in the accounting guidance.

This difference is illustrated by the following extract from Nokia.
Extract 5: Nokia
39 Differences between International Financial Reporting Standards and US Generally Accepted Accounting
Principles [extract]
Share-based compensation [extract]
The Group maintains several share-based employee compensation plans, which are described more fully in Note 24. As of
January 1, 2005 the Group adopted IFRS 2. Prior to the adoption of IFRS 2, the Group did not recognize the financial effect of
share-based payments until such payments were settled. In accordance with the transitional provisions of IFRS 2, the Standard has
been applied retrospectively to all grants of shares, share options or other equity instruments that were granted after November 7,
2002 and that were not yet vested at the effective date of the standard.
…
Effective January 1, 2005, the Group adopted the Statement of Financial Accounting Standards No. 123 (R), Share Based Payment
(FAS 123R), using the modified prospective method. Under the modified prospective method, all new equity-based compensation
awards granted to employees and existing awards modified on or after January 1, 2005, are measured based on the fair value of the
award and are recognized in the statement of income over the required service period. Prior periods have not been revised.
The retrospective transition provision of IFRS 2 and the modified prospective transition provision of FAS 123(R) give rise to
differences in the historical income statement for share-based compensation. Further, associated differences surrounding the
effective date of application of the standards to unvested shares give rise to both current and historical income statement
differences in share-based compensation. Share issue premium reflects the cumulative difference between the amount of share
based compensation recorded under US GAAP and IFRS and the amount of deferred compensation previously recorded in
accordance with APB 25.
…
7
O VERALL A NALYSIS
Overall analysis
The survey of 130 reconciliations identified almost 200 unique IFRS to US GAAP differences from a combined total of
over 1,900 reconciling items. These almost 200 unique differences were allocated to 28 areas of accounting, or
categories. Certain of these categories have been combined to align the descriptions of differences with the
quantifications of those differences disclosed in the reconciliations.
A total of 225 differences relating to taxation were reported by 126 of the 130 companies surveyed, despite the
supposedly similar ‘full provision’ approaches to accounting for taxation under IFRS and US GAAP. This makes
taxation the third most reported category of difference, after pensions and post-retirement benefits and business
combinations. The reported differences reflect the many and often significant methodology differences that exist in the
computation of deferred tax between IFRS and US GAAP. However, the main reason for the number of reported
differences relating to taxation is that a high proportion of other IFRS to US GAAP income and equity reconciliation
adjustments have to be tax effected. Although reconciling items are shown gross and not net of tax, many companies do
not quantify the effect of taxation methodology differences separately from the deferred tax effect of other reconciliation
items. It is therefore not possible to provide a meaningful analysis of taxation differences.
Also, the survey included 102 companies that are first-time adopters of IFRS. These companies reported a total of 397
reconciling items due to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-
time Adoption of International Financial Reporting Standards. However, companies do not separately identify the impact
of first-time adoption differences in their reconciliations, so we have allocated those differences to the appropriate
underlying areas of accounting or categories.
Many companies that were not first-time adopters of IFRS report differences due to the transitional provisions on
adoption of specific accounting standards under IFRS and/or US GAAP, including standards that impact the accounting
for business combinations, share-based payments and pensions. These differences have been allocated to the appropriate
underlying categories of difference.
After these allocations, the total numbers of reconciling items allocated to each of the most significant resulting categories
are presented in the table below.

Category of differences Number of differences
Business combinations 258
Foreign currency translation 90
Intangible assets 45
Impairment 87
Capitalisation of borrowing costs 47
Financial instruments – recognition and measurement 126
Financial instruments – shareholders’ equity 41
Financial instruments – derivatives and hedge accounting 159
Leasing 61
Provisions and contingencies 125
Revenue recognition 46
Share-based payments 152
Pensions and post-retirement benefits 311
9
O VERALL A NALYSIS
Business combinations Of the 130 companies surveyed, 122 companies reported a difference relating to
business combinations.
Of the 258 differences allocated to the business combinations category, 95 (37%) relate to the
application of exemptions for first-time adoption of IFRS under IFRS 1 First-time Adoption of
International Financial Reporting Standards. Under IFRS 1, a first-time adopter may elect to
not apply IFRS 3 Business Combinations fully retrospectively to business combinations
completed in prior years.
57 (22%) of the differences relate to purchase price measurement and allocation. These
differences include purchase price measurement date differences, different recognition criteria
for contingent consideration, different accounting for in-process research and development
assets and differences in the recognition of restructuring provisions.
When the purchase consideration includes equity instruments, the date on which the value of
the consideration is measured differs between IFRS and US GAAP. Under IFRS, the date of
exchange is used while US GAAP specifies that measurement is based on a reasonable period
of time before and after the terms of the acquisition are agreed and announced. Also, IFRS
requires that if the purchase consideration includes a contingent element and payment of that
element is probable, and the amount can be reliably measured, the contingent consideration
should be recorded at the date of acquisition. Under US GAAP, contingent consideration is
usually recorded only once the contingency is resolved.
Under IFRS, purchase consideration allocated to acquired in-process research and

development projects that meet the IFRS 3 recognition criteria, should be capitalised and
amortised over their useful economic lives. Under US GAAP, a portion of the purchase price
paid in a business combination is assigned to in-process research and development, including
tangible assets to be used in research and projects that have no alternative future use, and
charged to expense at the acquisition date.
Under IFRS 3, the acquirer should not recognise liabilities for future losses or other costs
expected to be incurred as a result of the combination. US GAAP may allow the acquirer’s
intentions to be taken into account, to an extent, when measuring the liabilities acquired in a
business combination.
20 (8%) of the differences relate to the measurement of, or accounting for, minority interests,
including the acquisition of minority interests. Under IFRS, on initial acquisition of a
controlling interest in a business, any minority interest is recorded at fair value. Under
US GAAP, only the portion of the assets and liabilities acquired is recorded at fair value.
The minority interest usually represents the minority’s share of the carrying amount of the
subsidiary’s net assets. After the initial acquisition of a subsidiary, if an additional portion of
that subsidiary is subsequently acquired, under IFRS, the difference between the purchase
consideration and the consolidated amount of the net assets acquired is recorded as goodwill.
Under US GAAP, the incremental portion of the assets and liabilities is generally recorded at
fair value, with any excess being allocated to goodwill, creating a difference in the carrying
values of assets and liabilities acquired and goodwill.

19 (7%) of the differences relate to the excess of the acquirer’s interest in the fair value of the
identifiable assets, liabilities and contingent liabilities over the cost of the combination. Under
IFRS, where the acquirer’s interest in the fair value of the identifiable assets and liabilities
exceeds the cost of the combination, any excess, after a reassessment of the purchase price
allocation, is recognised immediately in profit or loss. Under US GAAP, negative goodwill
arising on a business combination should be allocated to proportionately reduce the value of
most categories of non-current, non-financial assets acquired. Any balance of negative
goodwill remaining is recognised as an extraordinary gain.
Foreign currency Differences relating to foreign currency translation were reported by 82 companies.
translation
Of the 90 differences allocated to this category, 75 (83%) relate to the application of IFRS 1
exemptions for first-time adoption of IFRS. Under IFRS 1, a first-time adopter may elect not
to apply IAS 21 The Effects of Changes in Foreign Exchange fully retrospectively. Under this
exemption, the cumulative translation difference for all foreign operations is reset to zero.
Intangible assets A total of 45 differences allocated to the intangible assets category were reported by
36 companies.
22 (49%) of the differences relate to capitalised development costs. Under IFRS, when the
technical and economic feasibility of a project can be demonstrated, and further prescribed
conditions are satisfied, project development costs must be capitalised. Under US GAAP,
development costs that are not covered by specific accounting guidance are generally expensed
as incurred.
9 (20%) of the differences relate to acquired in-process research and development. In-process
research and development projects acquired other than as part of a business combination are
capitalised under IFRS if the cost of acquiring the projects meets the definition of an intangible
asset. Under US GAAP, the costs of acquired research and development projects, or assets
used in research and development projects, that have no alternative future use, are generally
charged to expense as incurred.
7 (16%) of the differences relate to the capitalisation of software development costs. Under
IFRS, certain development costs are capitalised once technical and economic feasibility can be
demonstrated and other conditions are satisfied. Under US GAAP, although most
development costs are expensed as incurred, there is specific guidance for software
development costs that requires certain costs incurred during certain development activities to
be capitalised. However, the application of the IFRS and US GAAP guidance often results in
differences due to either the individual costs that are capitalised or the specific development
activities for which the costs are capitalised.
Impairment 62 companies reported a total of 87 differences relating to impairment. Of these 87

differences, 33 (38%) concern the reversal of previous impairment write-downs. Under IFRS,
impairment losses are reversed for an asset other than goodwill if there has been a change in
the estimates used to determine the asset’s recoverable amount since the last impairment loss
was recognised. US GAAP generally prohibits the reversal of an impairment loss, except for
long-lived assets held for sale.
11
O VERALL A NALYSIS
29 (33%) of the differences relate to the evaluation of impairment for long-lived assets, other
than goodwill. Under IFRS, impairment is both assessed and measured based on discounted
cash flows. Under US GAAP, an undiscounted cash flow evaluation is first performed to
confirm impairment before any impairment is measured based on fair value. An impairment
charge reported under IFRS may be reversed under US GAAP as a result of the undiscounted
cash flow evaluation.
23 (26%) of the differences are the result of goodwill impairment. Under IFRS, impairment
evaluations are based on cash generating units, which are the smallest identifiable groups of
assets whose cash flows are independent of other asset groups. Under US GAAP, impairment
evaluations are based on reporting units, which are operating segments as defined for
segmental reporting purposes or one level below an operating segment. Impairment
assessments at different levels under IFRS and US GAAP are a common source of
reconciling items.
Financial instruments – Differences relating to the recognition and measurement of financial instruments were reported
recognition and by 70 companies.
measurement
Of the 126 differences allocated to this category, 26 (20%) relate to the presentation of
deferred costs, including finance fees. Under IFRS, debt issue costs are usually shown as a
reduction of the liability and amortised over the life of the debt. Under US GAAP, such costs
are sometimes capitalised as a separate asset and amortised over the life of the debt.
23 (18%) of the differences relate to the measurement of investments in non-exchange listed or

privately held companies. Under IFRS, investments in equity securities should be measured at
fair value unless the fair value cannot be reliably measured. Under US GAAP, in most
situations, investments in non-listed equity securities are accounted for based on historical
cost, as fair value measurement is only available where there are readily determinable fair
values and fair values are readily determinable only if sales prices are currently available on a
recognised securities exchange.
12 (10%) of the differences relate to insurance, assurance and related investment contracts.
IFRS currently permits companies to account for assets and liabilities of insurance and
investment contracts with discretionary participation features and their related deferred
acquisition costs under a company’s previous GAAP. As most companies in the Financial
Services sector elected to apply their previous GAAP, the differences reported do not reflect
consistent IFRS to US GAAP differences.
13 (10%) of the differences relate to assets designated as held at fair value through profit and
loss. Under IFRS, financial assets may be classified into four categories: held at fair value
through profit and loss; held to maturity investments; loans and receivables; and available-for-
sale. Under US GAAP, the categories are trading securities, held-to-maturity (debt) securities,
and available-for-sale securities.

8 (6%) of the differences relate to securitisation transactions. Under US GAAP, a
securitisation can only be recognised as a sale and achieve off-balance sheet treatment if the
transaction meets the derecognition criteria and the other party in the securitisation is either a
qualifying special purpose entity (‘QSPE’) or is otherwise not required to be consolidated.
IFRS has similar requirements for off-balance sheet treatment of securitisations but does not
have an equivalent of the QSPE concept.
Financial instruments – A total of 41 differences relating to shareholders’ equity were reported by 38 companies.
shareholders’ equity
Of these 41 differences, 26 (63%) relate to convertible debentures/bonds. Where a financial
instrument (eg, convertible debt) comprises both debt and equity elements, IFRS requires, on
initial recognition, its carrying value to be allocated between the debt and equity components,
each of which is accounted for separately as debt or equity. This allocation is made by
calculating the fair value of the debt component of the instrument and allocating the remainder
of the fair value of the instrument as a whole to the equity component. Once this allocation is
made, it is not changed. US GAAP normally does not permit an allocation of part of the
proceeds to the conversion feature. However, if the conversion feature is ‘in the money’ at the
commitment date, then the intrinsic value of the conversion feature is allocated to additional
paid in capital.
10 (24%) of the differences relate to the treatment of preference shares. Under IFRS, the
issuer must determine whether the preferred shares are a liability or a form of equity based on
the rights associated with the shares. When distributions to holders of the preference shares,
whether cumulative or non-cumulative, are non discretionary the shares are a liability. Under
US GAAP often these preference shares are treated as temporary equity.
Financial instruments – 85 companies reported differences relating to derivatives and hedge accounting.
derivatives and hedge
Of the 159 differences allocated to this category, 64 (40%) are due to the exemptions available
accounting
to first-time adopters. Many companies applied hedge accounting under their previous GAAP,
but did not designate hedges under FAS 133 Accounting for Derivative Instruments and
Hedging Activities. Under the IFRS 1 and IAS 39 transition exemptions, transactions
accounted for as hedges under previous GAAP may continue to receive hedge accounting
treatment if hedge documentation (including effectiveness testing) was prepared under IFRS
no later than the date of transition (or the beginning of the first IFRS reporting period, if
comparatives are not restated). Alternatively, previously hedged transactions are accounted for
as discontinued hedges under IFRS if no hedge documentation was prepared. For transactions
that did not meet the US GAAP hedge criteria in the comparative period, including the
designation and documentation requirements, differences will arise, whether or not hedge
accounting continues under IFRS.
32 (20%) of the differences are due to hedge relationships under IFRS not meeting the
designation and documentation requirement under US GAAP. This is usually not because
there are any substantive differences between the IFRS and US GAAP requirements, but rather
because companies elect not to designate and document the hedge relationships under
US GAAP.
13
O VERALL A NALYSIS
Leasing A total of 61 differences relating to leasing transactions were reported by 49 companies.
Of these differences, 38 (62%) relate to deferred gains on sale and operating leaseback
arrangements. Under IFRS, IAS 17 Leases requires the gain on a sale and operating leaseback
transaction to be recognised immediately where the sale price is established at fair value. If the
sales price is below fair value, any profit or loss is recognised immediately, except where the
loss is compensated for by below-market future lease payments, in which case the loss is
deferred and amortised in proportion to the lease payments over the period of expected use. If
the sale price is above fair value the difference between the sale price and fair value should be
deferred and amortised over the period for which the asset is expected to be used. Under
US GAAP, FAS 28 Accounting for Sales with Leasebacks (an amendment of FASB Statement
No. 13) generally requires any gain arising on a sale and operating leaseback to be deferred
and recognised in proportion to the gross rental charged to expense over the lease term.
4 (7%) of the differences relate to leases involving real estate. Under IFRS, leases involving
land and buildings are accounted for using the same principles as for other types of asset, but
the land and buildings elements are considered separately for the purposes of lease
classification. Under IAS 40 Investment Property, a property interest held under an operating
lease that otherwise satisfies the definition of an investment property may be classified as an
investment property (carried under the fair value model) and accounted for as if it were a
finance lease. US GAAP contains specific rules on accounting for leases involving real estate
and, unless the lease transfers ownership to the lessee by the end of the lease term or there is a
bargain purchase option, a leasehold interest in land should be accounted for as an
operating lease.
4 (7%) of the differences relate to deferred gains on sale and operating leaseback arrangements
when the seller has a continuing involvement in the assets. IFRS does not contain special rules
on such transactions. Under US GAAP, a seller generally would not recognise a sale where
the sale and leaseback transaction allows for some continuing involvement by the seller in
the property.
Provisions and A total of 125 differences relating to provisions and contingencies were reported by
contingencies 74 companies.
Of these 125 differences, 45 (36%) relate to costs associated with restructurings or other
employee terminations and early retirement, as the recognition criteria for certain provisions or
elements of provisions are different under IFRS and US GAAP.
19 (15%) of the differences are due to discounting of provisions. Under IFRS, IAS 37
Provisions, Contingent Liabilities and Contingent Assets requires the time value of money to
be taken into account when making a provision. Under US GAAP, discounting generally is
only possible where both the amount of the liability and the timing of payments are either fixed
or reliably determinable.
18 (14%) of the differences relate to asset retirement obligations. Although the rules on asset
retirement obligations are similar, it remains possible for a measurement difference to occur
(1) when the liability does not arise from a legal obligation or (2) when there are changes in
cost estimates or discount rates.

17 (14%) of the differences are in connection with provisioning for onerous contracts, mostly
leases. Under IFRS, a provision should be recognised when a contract is considered onerous.
Under US GAAP, onerous contract losses generally can be recognised only when legal notice
of termination has been given or an agreement to terminate has been made or, for onerous
leases, when the leased premises have been vacated.
Provisions for major overhaul, guarantees and contingencies make up the remaining
differences in this category.
Revenue recognition 35 companies reported a total of 46 differences relating to revenue recognition.
Of these differences, 12 (26%) relate to up-front fees. IFRS does not provide specific
guidance for accounting for up-front fees, so the general rules on revenue recognition apply.
Under US GAAP, up-front fees, even if non-refundable, are earned as the products and or
services are delivered or performed over the term of the arrangement or the expected period
of performance.
10 (22%) of the differences relate to multiple element arrangements and long-term service
arrangements. IFRS does not provide any specific guidance for multiple element
arrangements. US GAAP provides specific guidance which states that multiple deliverables
within a revenue arrangement should be divided into separate units of accounting if certain
criteria are met at the inception of the arrangement and as each item is delivered. Deferral of
revenue recognition often occurs when deliverables in a multiple element arrangement cannot
be treated as separate units of accounting.
5 (11%) of the differences in the revenue recognition category relate to regulated pricing.
Under FAS 71 Accounting for the Effects of Certain Types of Regulation, an entity accounts
for the effects of regulation by recognising a ‘regulatory’ asset (or liability) that reflects the
increase (or decrease) in future prices approved by the regulator. Under IFRS, there is no
specific guidance which addresses this issue.
4 (9%) of the differences relate to sales incentives offered to vendors. Under IFRS, certain
sales incentives given to customers with renewal obligations are accrued for. Under
US GAAP, sales incentives generally are recognised upon the renewal of the contract.
Share-based payments A total of 152 differences relating to share-based payments were reported by 74 companies.
Of these differences, 50 (33%) relate to the application of IFRS 1 exemptions for first-time
adoption of IFRS. Under IFRS 1, a first-time adopter is not required to apply IFRS 2 Share-
Based Payment to equity instruments granted on or before 7 November 2002 or granted after
7 November 2002 but vested before the later of (1) the date of transition to IFRS and (2)
1 January 2005.
15
O VERALL A NALYSIS
48 (32%) of the differences relate to the adoption of the fair value model for accounting for
share-based payments under IFRS compared to the application of the intrinsic value model
under US GAAP or as a result of the transition provisions on adoption of IFRS 2 and
FAS 123(R) Share-Based Payment. Under US GAAP, many companies were still accounting
for share-based payments under the intrinsic value method in accordance with APB 25
Accounting for Stock Issued to Employees. FAS 123(R), which requires the application of a
fair value model, is effective for most public companies no later than the first fiscal year
beginning after 15 June 2005.
12 (8%) of the differences are in connection with payroll taxes on share-based payments.
Under IFRS, in most instances, payroll taxes should be recognised over the same period as the
related share-based payment expense. Under US GAAP, payroll taxes generally are
recognised only on the exercise of the stock options.
Pensions and post- Differences relating to pensions and post-retirement benefits were reported by 100 companies.
retirement benefits
Of the 311 differences allocated to pensions and post-retirement benefits, 86 (28%) relate to
the recognition of a minimum pension liability under US GAAP. IFRS does not have any
similar requirement. Recognition of a minimum pension liability may have little impact on
equity for a first-time adopter of IFRS as the full pension liability recognised under the IFRS 1
exemptions against shareholders’ equity may be greater than the pension liability, including an
additional minimum liability, under US GAAP.
75 (24%) of the differences are due to the application of exemptions on first-time adoption of
IFRS. Under the IFRS 1 transitional exemptions, companies can take a one-time charge for
past service cost directly to shareholders’ equity. Under US GAAP, prior service costs
generally are recognised in income over the expected remaining service lives of the employees.
42 (14%) of the differences relate to the recognition of current period actuarial gains and losses
through the statement of recognised income and expense or net income under IFRS. Under
IAS 19 Employee Benefits, an entity may choose to recognise actuarial gains or losses in the
period in which they occur, but outside profit and loss in a statement of recognised income and
expense. Under US GAAP, actuarial gains and losses generally should be recognised in
income over the future service lives of relevant employees.
37 (12%) of the differences are in connection with plan amendments and past service costs.
Under IFRS, past service cost are recognised immediately if the benefits are fully vested;
otherwise the costs are recognised on a straight-line basis over the remaining vesting period.
Under US GAAP, prior service costs generally are recognised in income over the expected
remaining service lives of the employees.

Other Other accounting areas or items for which differences are reported include proportionate
consolidation, consolidation of special purpose entities and taxation.
Proportionate consolidation: Under IFRS, an entity may choose to account for a jointly
controlled entity using the equity method or, alternatively to apply proportionate consolidation.
Under US GAAP, an entity generally should apply the equity method, because US GAAP does
not permit proportionate consolidation except where the investee is in either the construction
industry or an extractive industry where there is a longstanding practice of its use. This was
intended to be a narrow exception. To illustrate for practical purposes, an entity is in an
extractive industry only if its activities are limited to the extraction of mineral resources (eg,
oil and gas exploration and production) and do not involve related activities.
Special purpose entity consolidation: Under IFRS, SIC–12 Consolidation – Special Purpose
Entities requires that a special purpose entity (‘SPE’) is consolidated when the substance of the
relationship between an entity and the SPE indicates that the SPE is controlled by the entity.
Under US GAAP, the variable interest model introduced by FIN 46(R) Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51
determines control (and consolidation) of a variable interest entity (‘VIE’). Differences occur
where entities that are considered to be VIEs under US GAAP are not SPEs under IFRS and
vice versa.
Taxation: The differences identified in respect of income taxes are due in part to certain
methodology differences between IFRS and US GAAP but primarily reflect the tax effects of
the other reconciling differences. Many companies disclose income tax differences as a single
reconciliation item and it is therefore impossible to quantify the impact of methodology
differences, if any.
17
P RINCIPAL D IFFERENCES
Reported differences
Differences between IFRS and US GAAP may be categorised broadly into those arising from differences in recognition
and measurement requirements and those relating to differences in disclosure requirements. This section focuses on the
major recognition and measurement differences, but also includes some disclosure differences.
The differences presented are those that relate to IFRS and US GAAP requirements applicable for reporting periods ended
between December 2005 and March 2006.
We have not verified the propriety of the reported differences nor performed any audit procedures for the purpose of
expressing an opinion on the extracts included in this survey and, accordingly, we do not express an opinion thereon.
1 Presentation of financial statements

1.1 Discontinued operations
The measurement and presentation requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations are similar to the US rules on reporting discontinued operations under FAS 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. However, differences can occur in practice.
The following extracts from Royal Ahold and Electrolux illustrate differences arising due to differences in the definitions
of discontinued operations and groups of assets held for sale.
Extract 6: Royal Ahold

Note 37
a. Reconciliation of net income (loss) and shareholders’ equity from IFRS to US GAAP [extract]
9. Non-current assets held for sale and discontinued operations [extract]
Classification as held for sale and discontinued operations [extract]
The criteria for recognizing non-current assets or disposal groups as assets held for sale are similar under IFRS and US GAAP.
However certain divestments and planned divestments meet the definition of a discontinued operation under US GAAP, but not
under IFRS. Under IFRS, the divestment must represent a separate major line of business or geographical area of operations,
whereas under US GAAP, a component of an entity can be classified as a discontinued operation.
…
Furthermore, equity investees such as investments in joint ventures and associates cannot qualify as assets held for sale or
discontinued operations under US GAAP. Under IFRS, investments in joint ventures and associates accounted for under the equity
method can qualify as assets held for sale and discontinued operations. In 2005 Ahold completed the sale of its 50% interest in
Paiz Ahold to Wal-Mart Stores Inc. Paiz Ahold is accounted for as a discontinued operation under IFRS in 2005 (with
retrospective reclassification of results of operations in the comparative figures), but not under US GAAP.
The reclassification of line items in the consolidated statements of operations related to discontinued operations is retrospective
under both IFRS and US GAAP. Until 2004, Ahold reclassified non-current assets (and disposal groups) held for sale
retrospectively under US GAAP, as permitted under SFAS No. 144 “Accounting for the impairment or disposal of long-lived
assets.” Since IFRS does not permit such retrospective reclassification of non-current assets (and disposal groups) held for sale, the
Company decided to change its accounting policy in this respect as from 2005. As a result, non-current assets (and disposal
groups) held for sale are reclassified prospectively as from 2005 under US GAAP.

Extract 7: Electrolux
Note 29 US GAAP information [extract]
Discontinued Operations [extract]
…
The divestment of the Indian operation on July 7, 2005, is classified as discontinued operations under US GAAP. However, as the
transaction does not represent a major line of business, it has not been classified as discontinuing operations under IFRS.
…
2 Consolidated financial statements

The principal standard for consolidated financial statements under IFRS is IAS 27 Consolidated and Separate Financial
Statements and the principal guidance under US GAAP is ARB 51 Consolidated Financial Statements and FAS 94
Consolidation of all Majority-Owned Subsidiaries. Guidance for the consolidation of controlled special purpose entities
(SPEs) is primarily provided under IFRS by SIC-12 Consolidation – Special Purpose Entities and under US GAAP by
FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and FIN 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51.
Differences between consolidated financial statements under IFRS and under US GAAP can arise in practice as a result of
differences in the specific guidance in various areas, including, but not limited to:
• the definition of a subsidiary;
• different reporting dates;
• the carrying amount and presentation of minority interests;
• the purchase of a non-controlling interest; and
• the consolidation of special purpose entities.
The FASB issued an exposure draft on consolidated financial statements in June 2005. It is targeted that a final statement
will be issued in mid-2007 which will eliminate many of the differences relating to the accounting and reporting of
minority interests.
Certain of the differences in consolidated financial statements under IFRS and US GAAP are illustrated by the following
extracts from Form 20-F filings.
19
2.1 Definition of a subsidiary

The definitions of a subsidiary under IFRS and US GAAP may result in reported GAAP differences as illustrated by
China Petroleum & Chemical in the following extract.
Extract 8: China Petroleum & Chemical

39. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
(i) Companies included in consolidation [extract]
Under IFRS, the Group consolidates less than majority owned entities in which the Group has the power, directly or indirectly, to
govern the financial and operating policies of an entity so as to obtain benefits from its activities, and proportionately consolidates
jointly controlled entities in which the Group has joint control with other venturers. However, US GAAP requires that any entity
of which the Group does not have a controlling financial interest not be consolidated nor proportionately consolidated, but rather
be accounted for under the equity method. Accordingly, certain of the Group's subsidiaries, of which the Group owns between
40.72% to 50% of the outstanding voting stock, and the Group's jointly controlled entities are not consolidated nor proportionately
consolidated under US GAAP and instead accounted for under the equity method. This exclusion does not affect the profit
attributable to equity shareholders of the Company or the total equity attributable to the equity shareholders of the Company
reconciliations between IFRS and US GAAP.
…
2.2 Minority interests
2.2.1 Carrying amount of minority interests

The balance sheet measurement of a minority interest in an acquired subsidiary may differ between IFRS and US GAAP
as reported by Lafarge in the extract below.
Extract 9: Lafarge
Note 36- Summary of Differences Between Accounting Principles Followed by the Group and U.S. GAAP [extract]
1. Differences in accounting for business combinations under IFRS and U.S. GAAP [extract]
(b) Fair value adjustments related to minority interests [extract]
Under both Previous GAAP and IFRS, when the Group initially acquires a controlling interest in a business, any portion of the
assets and liabilities considered retained by minority shareholders is recorded at fair value. Under U.S. GAAP, only the portion of
the assets and liabilities acquired by the Group is recorded at fair value. This gives rise to two differences:
(i) Operating income was different between Previous GAAP and U.S. GAAP, and continues to be different under IFRS because of
the difference in basis of assets that are amortized. This difference is offset entirely by a difference in the minority interest’s
participation in the income of the subsidiary.
…

2.2.2 Presentation of minority interests
The following extract illustrates a difference in balance sheet presentation of minority interests following the revision of
IAS 1 Presentation of Financial Statements, effective for accounting periods beginning on or after January 1, 2005.
Extract 10: Reuters

Summary of differences between IFRS (as adopted by the EU) and US GAAP [extract]
Material differences between IFRS (as adopted by the EU) and US GAAP [extract]
n. Reclassification of minority interest
IFRS requires the presentation of minority interest within equity on the face of the balance sheet. Under US GAAP, minority
interest is presented as a separate item on the face of the balance sheet outside of equity.
2.3 Purchase of a non-controlling interest

Lafarge reports a difference on the acquisition of an additional portion of a consolidated subsidiary.
Extract 11: Lafarge

1. Differences in accounting for business combinations under IFRS and U.S. GAAP [extract]
(b) Fair value adjustments related to minority interests
(ii) After an initial acquisition of a subsidiary, if an additional portion of that subsidiary was subsequently acquired, under both
Previous GAAP and IFRS, the purchase consideration in excess of the net assets acquired was recorded as goodwill. Under
U.S. GAAP, the incremental portion of the assets and liabilities was recorded at fair value, with any excess being allocated to
goodwill, thus creating a difference in the carrying value of both assets and goodwill.
2.4 Special Purpose Entities

Accounting for special purpose entities (SPEs) has been addressed by the Standing Interpretations Committee (SIC) in
SIC-12 under IFRS and by both the FASB in FAS 140 and the SEC in FIN 46 under US GAAP. However, there are still
differences between the IFRS and US GAAP approaches to identifying the relationship between the reporting entity and
its SPE or variable interest entity (VIE). It is therefore possible that an SPE or VIE consolidated under US GAAP may
not require consolidation as an SPE under IFRS, and vice versa.
The following extract provides an example of a VIE that is consolidated under US GAAP but not under IFRS.
Extract 12: Telenor

38. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP) [extract]
(13) Consolidation of variable interest entities [extract]

…
At the end of 2004, Telenor sold a 51% stake in Kjedehuset (previously wholly owned) to independent third parties and at the
same time entered into certain franchise and service agreements with these parties. Kjedehuset is a trade association for
independent mobile phone dealers in Norway and acts as a conduit for marketing support and receives a bonus from Telenor.
Telenor concluded that Kjedehuset is a VIE and that it was the primary beneficiary. Hence Telenor consolidated the company in
2004 and 2005.
Under IFRS, consolidation is based on the concept of control and the concept of FIN 46R does not apply. Therefore entities
consolidated based on variable interest under FIN 46R will generally not be consolidated under IFRS.
21
As described in the following extracts from Endesa and International Power, it is also possible for a consolidated
subsidiary under IFRS to be deconsolidated under US GAAP when the subsidiary is a VIE and the group is not the
primary beneficiary.
Extract 13: Endesa

29. Differences Between IFRS and United States Generally Accepted Accounting Principles [extract]
16. Classification differences between IFRS and U.S. GAAP [extract]
16.3 Deconsolidation of Endesa Capital Finance, LLC [extract]
…
In March 2003, Endesa Group created a variable interest entity (“VIE”), Endesa Capital Finance, LLC (“Endesa Capital
Finance”) to issue €1,500 million of preference shares. The Financial Accounting Standards Board (“FASB”) released
Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46R”), which requires that all primary beneficiaries of
variable interest entities consolidate that entity. FIN 46R is effective immediately for VIEs created after January 31, 2003 and to
VIEs in which an enterprise obtains an interest after that date. According to this Interpretation, Endesa Capital Finance is a VIE
and Endesa Group is not the primary beneficiary. Accordingly, under U.S. GAAP, Endesa Group should not consolidate Endesa
Capital Finance. Consequently, the loan payable to Endesa Capital Finance remains outstanding on the U.S. GAAP consolidated
financial statements.
…
Extract 14: International Power

44 Financial information prepared under US Generally Accepted Accounting Principles (US GAAP) [extract]
Significant differences between Adopted IFRSs and US GAAP [extract]
l) Deconsolidation of variable interest entities
Under IFRS, the Group consolidates 100% of the assets and liabilities of entities over which it exercises control and excludes
any minority share from total equity attributable to equity holders of the parent.
Control is achieved where the Group has the power to govern the financial and operating policies of the entity so as to obtain
benefit from its activities.
In December 2003, the US Financial Accounting Standards Board issued FIN 46R (Consolidation of Variable Interest
Entities). This statement is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
addresses the consolidation of variable interest entities (VIEs). FIN 46R requires the consolidation of a VIE by the primary
beneficiary if the majority of the expected losses are absorbed and/or a majority of the entity’s expected residual returns are
received by the primary beneficiary.
An entity is a VIE if the total equity investment at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support or as a group the holders of the equity investment at risk lack the characteristics of a
controlling financial interest, such as the ability through voting rights to make decisions about an entity’s activities, the obligation
to absorb the expected losses of the entity and the right to receive the expected residual returns of the entity.
Under the provisions of FIN 46R the Group has deconsolidated three entities:
%
Subsidiary Ownership Region
Al Kamil Power Company SAOG ................................................................. 65% Middle East
Perth Power Partnership................................................................................. 70% Australia
Thai National Power Company Limited ........................................................ 100% Asia
Each of the deconsolidated entities holds power generation assets with long-term sales contracts. An analysis of the sales
contracts identified that the Group does not absorb the majority of the expected losses and expected residual returns of these
entities and therefore cannot be the primary beneficiary as defined by FIN 46R.
…

3 Business combinations
The primary standards for business combinations are IFRS 3 Business Combinations and FAS 141 Business
Combinations. Business combinations within the scope of the relevant standards under both US GAAP and IFRS
generally are accounted for using the purchase method. However, although the basic principles of purchase accounting in
FAS 141 and IFRS 3 are comparable, there are various differences that can cause measurement and disclosure differences
in practice.
Differences relating to goodwill and other intangible assets are discussed in section 6.
Differences between IFRS and US GAAP can arise as a result of differences in the application of the purchase method of
accounting for business combinations, including, but not limited to those relating to:
• the measurement date for the cost of the acquired entity;
• accounting for contingent consideration;
• step acquisitions;
• accounting for acquired in-process research and development;
• provisions for post acquisition reorganisation costs;
• deferred taxation;
• minority interests;
• the measurement of the fair value of goodwill and other intangible assets;
• accounting for goodwill and negative goodwill; and

• transactions between entities under common control.
Under a joint project, both the IASB and the FASB issued exposure drafts on business combinations in June 2005. It is
targeted that final statements will be issued in mid-2007 which will eliminate many of the differences arising from
subsequent business combinations.
Certain of the differences in accounting for business combinations under IFRS and US GAAP are illustrated by the
following extracts from Form 20-F filings.
23
3.1 The cost of the acquired entity

A The date at which the fair value of consideration is measured
Where the purchase consideration includes equity instruments that have been issued by the acquirer, the measurement of
the instruments issued may be different under IFRS and US GAAP.
France Telecom reports a difference in this respect.

Note 38.1 - SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

Other business combinations (B) [extract]
2004 and 2003 Acquisition of Orange SA minority interest [extract]
…
Different measurement dates were used in valuing the securities issued in accounting for the acquisition of the minority interest in
Orange SA by France Telecom between IFRS and US GAAP resulted in an adjustment of €0 million and €328 million to the
consolidated net income and shareholders’ equity, respectively, for the year ended December 31, 2005 and 2004.
Under IFRS, as was also allowed under French GAAP, securities issued as consideration are measured at their fair value at the date of
exchange. Under US GAAP, securities issued as consideration are measured at their fair value over a reasonable period of time
around the transaction announcement date.
…
B Contingent consideration
The accounting for contingent consideration is reported as a difference by WPP.
Extract 16: WPP

Notes to the Reconciliation to US Accounting Principles [extract]
1 Significant differences between IFRS and US Generally Accepted Accounting Principles [extract]
(b ) Contingent consideration [extract]
Under IFRS, the Group provides for contingent consideration as a liability when it considers the likelihood of payment as
probable. Under US GAAP, contingent consideration is not recognised until the underlying contingency is resolved and
consideration is issued or becomes issuable. At 31 December 2005, the Group’s liabilities for vendor payments under IFRS
totalled £220.0 million (2004: £298.6 million), of which £180.6 million (2004: £244.2 million) is dependent on the future
performance of the interests acquired. As these liabilities are represented by goodwill arising on acquisitions, there is no net effect
on equity share owners’ funds. Under US GAAP, however, a balance sheet classification difference arises such that liabilities and
goodwill would each be reduced by the amount indicated as of each year end. This difference represents a continuing difference
between IFRS and US GAAP.
…

3.2 Determining the fair value of identifiable assets acquired and liabilities assumed
The principal areas where differences can occur are discussed below.
A Step-acquisitions
UBS describes differences in accounting for the acquisition of a subsidiary in a series of transactions on a step-by-step
basis in the following extract.
Extract 17: UBS

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally Accepted
Accounting Principles (US GAAP) [extract]
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP [extract]
c. Purchase accounting under IFRS 3 and FAS 141
With the adoption of IFRS 3 on 31 March 2004, the accounting for business combinations generally converged with US GAAP with
the exception of the measurement of minority interests and the recognition of a revaluation reserve in the case of a step acquisition.
Under IFRS, minority interests are recognized at the percentage of fair value of identifiable net assets acquired at the acquisition
date whereas under US GAAP they are recognized at the percentage of book value of identifiable net assets acquired at the acquisition
date. In most cases, minority interests would tend to have a higher measurement value under IFRS than under US GAAP.
Furthermore, IFRS requires that in a step acquisition the existing ownership interest in an entity be revalued to the new valuation
basis established at the time of acquisition. The increase in value is recorded directly in equity as a revaluation reserve. Under
US GAAP, the existing ownership interest remains at its original valuation.
B In-process research and development

Bayer reports a difference in respect of acquired in-process research and development.
Extract 18: Bayer

[44] U.S. GAAP information [extract]
c. In-process research and development
IFRS does not consider that in-process research and development (“IPR&D”) is an intangible asset that can be separated from
goodwill, unless both the definition and the criteria for the recognition of an intangible asset are met.
Under U.S. GAAP IPR&D is considered to be a separate asset that needs to be written-off immediately following an acquisition
when the feasibility of the acquired research and development has not been fully tested and the technology has no alternative
future use.
During 2002, IPR&D has been identified for U.S. GAAP purposes in connection with the Aventis CropScience and Visible
Genetics acquisitions. Fair value determinations were used to establish €138 million of IPR&D related to both acquisitions, which
was expensed immediately for U.S. GAAP purposes. The independent appraisers used a discounted cash flow income approach
and relied upon information provided by the Group management. The discounted cash flow income approach uses the expected
future net cash flows, discounted to their present value, to determine an asset’s current fair value.
As a whole, the reversal of the amortization of IPR&D recorded under IFRS as a component of other operating expense and selling
expense amounted to €3 million, €21 million and €12 million, in 2005, 2004 and 2003, respectively. Amortization expense
recorded under IFRS decreased in 2005 as compared to prior periods as only IPR&D capitalized separately from goodwill
continues to be amortized due to the adoption of IFRS 3 and IAS 38 (revised).
Furthermore, the adjustments in 2004 and 2005 reflect the sale of IPR&D, related to the Triticonazole and Crop Improvement
business, that was capitalized under IFRS as a result of the Aventis CropScience acquisition. The adjustments amount to
€5 million and €17 million in 2005 and 2004, respectively, and represent the residual book value under IFRS at the time of sale.
25
C Provisions for reorganisations and future losses

A difference relating to provisions for subsequent reorganisations is reported by Reuters in the following extract.
Extract 19: Reuters

h. Restructuring [extract]
…
Under IFRS, liabilities for terminating or reducing the activities of an acquired company are only recognised as part of allocating the
cost of a combination if they exist at the date of acquisition and meet certain recognition criteria. Provisions for future losses or other
costs expected to be incurred as a result of a business combination are not recognised.
Under US GAAP, the Group applies the provisions of EITF 95-3 ‘Recognition of liabilities in connection with a purchase
combination’, which requires recognition of certain costs incurred in respect of exit activities and integration if specified conditions are
met, as part of purchase accounting.
D Deferred taxation
Lafarge reports a difference related to tax contingencies.
Extract 20: Lafarge

Note 36 - Summary of Differences Between Accounting Principles Followed by the Group and U.S. GAAP [extract]
3. Income taxes [extract]
(d) Accounting for tax contingencies in business combinations
Under IAS 12, if tax contingencies of the acquiree, which were not recognized at the time of the combination are subsequently
recognized, the resulting debit is taken to income for the period. Under U.S. GAAP, the Group adjusts goodwill to reflect revisions
in estimates and/or the ultimate disposition of these contingencies with the provisions of SFAS No. 109 “Accounting for Income
Taxes” and EITF 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination”.
E Minority interests
France Telecom reports a difference in respect of minority interests.

Note 38.1 - SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

2005 Acquisition of Amena [extract]
…
(4) Under IFRS, as France Telecom acquired less than 100% of Amena, the minority interest is stated at the minority’s proportion
of the net fair value of acquired assets and liabilities assumed. However, under US GAAP, fair values are assigned only to the
share of the net assets acquired by France Telecom.
…

3.3 Negative goodwill
Trinity Biotech reports a difference related to negative goodwill in the following extract.
Extract 22: Trinity Biotech

35. DIFFERENCES BETWEEN IFRS AS ADOPTED BY THE EU AND ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES [extract]
(a) Goodwill: [extract]
…
Negative goodwill arises when the net amounts assigned to assets acquired and liabilities assumed exceed the cost of an acquired
entity. Under IFRS as adopted by the EU, if the acquirer's interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities exceeds the cost of the business combination, the acquirer shall (a) reassess the identification and
measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the
combination and (b) recognise immediately in profit or loss any excess remaining after that reassessment.
Under US GAAP, goodwill is not amortised, but is instead subject to impairment tests annually, or more frequently if indicators of
impairment are present. On December 31, 2004 and December 31, 2005, the Group performed its annual impairment tests of
goodwill and indefinite-lived intangible assets, and concluded that there was no impairment in the carrying value of goodwill at
those dates.
Negative goodwill is allocated to reduce proportionately the values assigned to the acquired non-current assets, any excess is
recognised in income as an extraordinary gain.
…
3.4 Entities under common control

The definition of a business combination in FAS 141 and the scope of IFRS 3 both exclude transfers of net assets or
exchanges of equity interests between entities under common control.
An example of a difference related to a common-control transaction is provided by TDC in the following extract.
Extract 23: TDC

Note 33 Reconciliation to United States Generally Accepted Accounting Principles (US GAAP) [extract]
b) Formation of the Group
In accordance with IFRS, certain items of property, plant and equipment acquired upon the formation of the Group were
restated at fair value, whereas goodwill and rights were capitalized. The capitalized excess values are amortized over the useful
lives of the assets. Under US GAAP, the transfer of assets between parties under joint control was accounted for using the pooling-
of-interests method. Accordingly, restatement of property, plant and equipment to fair value and any capitalization of goodwill and
rights related to the formation of the Group were eliminated in the Consolidated Financial Statements.
27
The China Southern Airlines extract below describes a similar accounting difference for a transaction between two
government-controlled entities.
Extract 24: China Southern Airlines

51. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract]
(a) CNA/XJA Acquisitions
As disclosed in Note 1 to the consolidated financial statements prepared under IFRSs, the Group acquired the airline operations
and certain related assets and liabilities of CNA and XJA with effect from December 31, 2004. Under IFRSs, the purchase method
of accounting was applied to such business combination such that at December 31, 2004 only the acquired assets and assumed
liabilities are included in the consolidated financial statements of the Group. The results of the acquired operations and their
related cash flows were included in the consolidated financial statement of the Group beginning January 1, 2005.
Under U.S. GAAP, such transaction is considered to be “a combination of entities under common control”. A combination of
entities under common control is accounted for in a manner similar to a “pooling-of-interests”. Consequently, the assets and
liabilities of CNA and XJA are reflected at their historical net asset carrying values and the U.S. GAAP consolidated financial
statements of the Group are restated to include the historical carrying values of assets and liabilities of CNA and XJA, and their
results of operations and cash flows for all the periods presented.
4 Associates and joint ventures

The principal guidance for accounting for associates and joint ventures under IFRS is IAS 28 Investments in Associates
and IAS 31 Interests in Joint Ventures and under US GAAP is APB 18 The Equity Method of Accounting for Investments
in Common Stock.
Both IFRS and US GAAP generally require investments over which an entity has significant influence, but not control, to
be accounted for using the equity method. The application of the equity method under IAS 28 will in many cases not be
different from the accounting treatment required by APB 18. However, there may be a presentational difference between
IFRS and US GAAP in the treatment of joint ventures.
Differences between IFRS and US GAAP can arise as a result of differences in the specific guidance for accounting for
associates and joint ventures in various areas, including, but not limited to:
• the scopes of the respective standards;
• the definition of an associate;
• accounting for joint ventures;
• different reporting dates;
• different accounting policies;
• impairment; and
• the commencement of equity method accounting.
Certain of the differences in accounting for associates and joint ventures under IFRS and US GAAP are illustrated by the
4.1 Joint ventures

IAS 31 Interests in Joint Ventures allows entities to account for investments in jointly controlled entities using either the
equity method or proportionate consolidation. US GAAP generally does not permit proportionate consolidation.

Bayer reports a difference in accounting for joint ventures in the following extract.
Extract 25: Bayer

Additional U.S. GAAP disclosures [extract]
Proportional consolidation [extract]
The Group accounts for its investment in 5 joint ventures in 2005 using the proportional consolidation method, which is the
benchmark treatment specified under IAS 31. Under U.S. GAAP, investments in joint ventures generally are accounted for under
the equity method. The differences in accounting treatment between proportionate consolidation and the equity method of
accounting have no impact on the Group’s consolidated stockholders’ equity or net income. Rather, they relate solely to matters of
classification and display. The SEC permits the omission of such differences in classification and display in the reconciliation to
U.S. GAAP provided certain criteria have been met.
…
5 Foreign currency translation

The principal standards on foreign currency translation are IAS 21 The Effects of Changes in Foreign Exchange Rates
under IFRS and FAS 52 Foreign Currency Translation under US GAAP. Although IAS 21 and FAS 52 have similar
fundamental approaches, there may be differences between the two standards in practice. Also, accounting for
hyperinflationary economies under IAS 29 Financial Reporting in Hyperinflationary Economies may be different from
the US GAAP approach (see 5.1 below).
Differences between IFRS and US GAAP can arise as a result of foreign currency translation differences, including, but
not limited to those relating to:
• hyperinflation;
• the impairment of a foreign operation; and

• the disposal of a foreign operation.
Certain of the differences in accounting for foreign currency translation under IFRS and US GAAP are illustrated by the
5.1 Hyperinflation
TeliaSonera reports a difference in accounting for associated companies in hyperinflationary economies in the
following extract.
Extract 26: TeliaSonera

36 U.S. GAAP [extract]
Differences in principles [extract]
Associated companies in hyperinflationary economies
Under IFRS, when the functional currency for a subsidiary or an associated company is the currency of a hyper-inflationary
economy, the reported non-monetary assets and liabilities, and equity are restated in terms of the measuring unit current at the
balance sheet date. The restated financial statements are translated into SEK at the closing rate. The restating effects are
recognized as financial revenue or expense and in income from associated companies, respectively.
Under U.S. GAAP, the temporal method should be used to translate the financial statements of subsidiaries and equity
accounted investees where they are denominated in currencies of highly-inflationary economies. The remeasurement of the
financial statements is done as if the reporting currency of the parent had been the functional currency.
29
5.2 Impairment of a foreign operation

A difference resulting from the inclusion of accumulated foreign currency translation differences as part of the carrying
amount of the net investment in a foreign operation that is held for sale when evaluating impairment under US GAAP is
described by Royal Ahold in the following extract.

Note 37
9 Non-current assets held for sale and discontinued operations [extract]
Impairment of assets held for sale
Differences in the impairment of assets held for sale result from differences in the carrying value of these assets between IFRS and
US GAAP. The majority of these differences are related to goodwill and the cumulative currency translation adjustment, which is
included in the carrying value tested for impairment under US GAAP when the Company has committed to a plan to dispose of
assets that will cause the cumulative translation adjustment to be included in net income. The Company recorded an additional
impairment loss under US GAAP of EUR 158 in 2004 (2005: nil) as these assets or disposal groups had a higher carrying value
under US GAAP compared to IFRS. Unrealized cumulative translation adjustments of EUR 185 (2005: nil) respectively have been
taken into account in determining the carrying amount while performing the impairment test of non-current assets or disposal
groups held for sale under US GAAP in 2005 and 2004, respectively. The difference in impairment causes a difference in the
result on divestment as stated in the next section.
5.3 Disposal of a foreign operation

Unilever disclosed a difference related to cumulative translation differences on a partial disposal in the extract below.
Extract 28:Unilever
Additional information for US investors [extract]
Currency Recycling
Under IFRSs, the gain from cumulative translation differences arising from the partial repayment of capital of a subsidiary is
recognised within the income statement. Under US GAAP, currency translation gains and losses are only recycled to the income
statement on the sale or upon the complete or substantially complete liquidation of the investment.
6 Intangible Assets
The principal standard under IFRS for intangible assets is IAS 38 Intangible Assets. The principal US GAAP standard for
the initial measurement of intangible fixed assets acquired as part of a business combination is FAS 141 Business
Combinations. FAS 142 Goodwill and Other Intangible Assets addresses the accounting and reporting for intangible
assets acquired individually or with a group of other assets (but not those acquired in a business combination) at
acquisition and the accounting and reporting for intangible assets (including those acquired in a business combination)
subsequent to their acquisition. Internally generated intangible assets are covered by a number of other standards under
US GAAP, including, but not limited to FAS 2 Accounting for Research and Development, FAS 71 Accounting for the
Effects of Certain Types of Regulation and FAS 86 Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed.

Differences between IFRS and US GAAP in accounting for intangible assets can arise in practice as result of differences
in the specific guidance in various areas, including, but not limited to:
• initial recognition, when acquired separately or as part of a business combination;
• subsequent measurement;
• regulatory assets;
• emission rights;
• general research and development;
• computer software development;

• start-up costs; and
• amortisation.
Certain of the differences in accounting for intangible assets under IFRS and US GAAP are illustrated by the following
6.1 Initial recognition and measurement

Differences in the application of the IFRS and US GAAP guidance can result in classification differences between
tangible and intangible assets. For example, both mineral rights and computer software for internal use may be intangible
assets under IFRS but tangible assets under US GAAP, a difference disclosed by Lafarge in the extract below.
Extract 29: Lafarge

6. Items affecting the presentation of consolidated financial statements [extract]
d) Intangible assets
Under IFRS, mineral rights are classified as “Intangible assets”. In accordance with EITF 04-2, “Whether Mineral Rights Are
Tangible or Intangible Assets”, mineral rights should also be reclassified to quarries, within tangible assets, for purposes of
U.S. GAAP.
6.2 Regulatory assets

Scottish Power reports a difference in respect of regulatory assets for which guidance is provided under US GAAP by
FAS 71 Accounting for the Effects of Certain Types of Regulation.
Extract 30: Scottish Power

44 Summary of differences between IFRS and US Generally Accepted Accounting Principles (‘GAAP’) [extract]
(c) Description on US GAAP adjustments [extract]
(ii) US regulatory net assets [extract]
FAS 71 ‘Accounting for the Effects of Certain Types of Regulation’ establishes US GAAP for utilities in the US whose regulators
have the power to approve and/or regulate rates that may be charged to customers. FAS 71 provides that regulatory assets may be
capitalised if it is probable that future revenue in an amount at least equal to the capitalised costs will result from the inclusion of
that cost in allowable costs for ratemaking purposes. Due to the different regulatory environment, no equivalent GAAP applies
under IFRS.
Under IFRS, no regulatory assets are recognised. …
31
6.3 Emission rights

Endesa reports a difference related to CO2 emission allowances for which guidance under IFRS is provided by IFRIC 3
Emission Rights.
Extract 31: Endesa

16 Classification differences between IFRS and U.S. GAAP [extract]
16.1 CO2 emission allowances [extract]
Under IFRS as indicated in Note 3.d the Group is recording CO2 Emission allowances received as an intangible asset and
deferred income by their fair value at date they are granted by each respective Government. Such intangible assets are not
subsequently revalued and are excluded when delivered to each respective Government.
As indicated in Note 3.k, under IFRS Endesa records a provision against earnings considering the same cost of the respective
intangible asset for those amounts that the Group has been granted. In this respect the Company recorded in earnings a part of
Endesa’s deferred income for the same amount of emission rights used.
In addition, any shortfall of emissions allowance after consideration of amounts granted is recorded as a provision at fair
value against earning for the amount considered necessary to buy such allowances. Such provision is reviewed and recorded in
every period at its fair value with any change recorded in earnings.
Under U.S. GAAP the Group has eliminated from Endesa’s balance sheet all intangible asset, deferred income, provision for
emission granted and all respective income and expenses from Endesa’s income statement since the Company is not recording any
accounting effect for emissions granted or used under the granted amount. In addition in U.S. GAAP the Group has maintained the
provision at fair value through earnings for those rights that Endesa will need to buy.
…
6.4 General research and development

IAS 38 requires some development costs to be capitalised, whereas FAS 2 Accounting for Research and Development
Costs generally requires development costs to be expensed as incurred. The treatment of computer software development
costs is discussed in section 6.5.
FIAT reports a difference related to research and development costs that do not relate to internally developed computer
software for internal use.
Extract 32: FIAT

(38) Significant differences between IFRS and United States generally accepted accounting principles (US GAAP) [extract]
Description of reconciling items [extract]

(b) Expensing of development costs recognized as intangible assets, net [extract]
Under IFRS, costs relating to development projects are recognized as intangible assets when certain criteria are met as indicated in
note “Significant accounting policies”. Under US GAAP, capitalization of development costs is prohibited, unless such costs pertain
to specific elements of internally developed computer software capitalized in accordance with SOP 81-1 – Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. As a result, all costs incurred related to development projects that do not
relate to internally developed computer software and that have been capitalized under IFRS are expensed as incurred under
US GAAP. Amortization expenses, net result on disposal and impairment charges of previously capitalized development costs
recorded under IFRS have been reversed under US GAAP. …

6.5 Computer software development
The treatment of certain computer software development costs under US GAAP is addressed by FAS 86 Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed and SOP 98-1 Accounting for the costs to
develop or obtain software for internal use.
GlaxoSmithKline reports a difference related to accounting for costs of developing software for internal use in the
following extract.
Extract 33: GlaxoSmithKline

38 Reconciliation to US accounting principles [extract]
Summary of material differences between IFRS and US GAAP [extract]
Other
• computer software - under IFRS, the Group capitalises costs incurred in acquiring and developing computer software for
internal use where the software supports a significant business system and the expenditure leads to the creation of a durable
asset. For US GAAP, the Group applies SOP 98-1, ‘Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use’, which restricts the categories of costs which can be capitalised.
6.6 Accounting for start-up costs

Under IFRS, IAS 11 Construction Contracts allows direct costs incurred in the securing of a contract to be capitalised.
Under US GAAP, SOP 98-5 Reporting on the Costs of Start-up Activities generally requires the costs of start-up activities
to be expensed as incurred. The following extract from Swisscom provides an example of this difference.
Extract 34: Swisscom

44. Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting
j) Outsourcing contracts
As described in Note 2.16, start-up and integration costs are accrued and recorded as expense over the contract period.
Furthermore, at the end of each period, Swisscom establishes a provision for the excess of the direct attributable costs over the
expected benefits for the entire contract life. Under U.S. GAAP, Swisscom recognizes start-up and integration costs as incurred
and does not record a provision for future losses, to the extent applicable, on such contracts; rather, the losses are recognized in the
period in which they are incurred. Under IFRS, Swisscom capitalized CHF 18 million of start-up and integration costs and
recorded a provision of CHF 34 million for future losses at December 31, 2005. Accordingly under U.S. GAAP the net amount of
CHF 16 million was reversed. No amounts were recorded in prior years.
7 Property, plant and equipment

The principal standard for accounting for property, plant and equipment under IFRS is IAS 16 Property, Plant and
Equipment. Under US GAAP, there is no single comprehensive standard that deals with all aspects of accounting for
property, plant and equipment or tangible fixed assets. Instead, there are many standards and interpretations that deal with
elements of accounting for specific categories of property, plant and equipment.
Differences between IFRS and US GAAP can arise as a result of differences in the guidance on accounting for property,
plant and equipment in various areas, including, but not limited to:
• impairment measurement (see section 9);
• the scope of IAS 16;
• the definition of costs to be capitalised;
• capitalisation of interest costs;
33
• decommissioning costs;
• subsequent expenditure;
• revaluation of property, plant and equipment;
• depreciation methods;
• changes in depreciation method and useful economic life; and
• major inspection or overhaul costs.
Certain of the differences in accounting for property, plant and equipment under IFRS and US GAAP are illustrated by
the following extracts from Form 20-F filings.
7.1 Scope
Differences in the scopes of the guidance for property, plant and equipment under IFRS and US GAAP can result in
accounting differences, as illustrated by the following disclosure by Stora Enso related to biological assets.
Extract 35: Stora Enso

Note 32- Summary of differences between International Financial Reporting Standards and Generally Accepted
Accounting Principles in the United States of America [extract]
k) Biological assets
Under IFRS, Stora Enso’s forest assets in the form of standing trees are recorded at fair value on the balance sheet with
changes in the fair values recorded in the income statement. In 2003, 2004 and 2005, respectively, the pre-tax amounts of
€10.9 million, €7.1 million and (€6.7) million were recorded in the income statement (see note 13). The land on which the trees
grow is recorded at cost.
Under U.S. GAAP, timber and timberlands are recorded at cost, and reforestation cost is capitalized, less depletion for the
cost of timber harvested. Depletion is computed by the units-of-production method. As a result, the fair market values recorded
under IFRS are reversed under U.S. GAAP and cost of timber harvested, which amounted to €13.2 million during 2003,
€6.7 million during 2004 and €1.8 million during 2005, is recorded in the income statement under U.S. GAAP.
7.2 Start-up costs

SOP 98-5 Reporting on the Costs of Start-up Activities under US GAAP addresses the capitalisation of start-up costs. Rio
Tinto reports a difference where certain start-up costs are capitalised and amortised under IFRS but expensed as incurred
under US GAAP.
Extract 36: Rio Tinto

52 Reconciliation to US Accounting Principles [extract]
Start up costs
Under US GAAP, Statement of Position 98-5, ‘Reporting on the Costs of Start-up Activities’, requires that the costs of start up
activities are expensed as incurred. Under IFRS, some of these start up costs qualify for capitalisation and are depreciated over the
economic lives of the relevant assets.
7.3 Decommissioning costs

Guidance for decommissioning costs is provided under IFRS by IAS 16, IAS 37 Provisions, Contingent Liabilities and
Contingent Assets, and IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, and under
US GAAP by FAS 143 Accounting for Asset Retirement Obligations.

Royal Ahold reports a difference in respect of changes in discount rates.

Note 37
4 Provisions [extract]
Discounting [extract]
…
There is no difference between IFRS and US GAAP related to the initial recognition of asset retirement obligations. However
SFAS No. 143 “Accounting for Asset Retirement Obligations,” does not permit the Company to revalue the obligation based on
changes in the discount rate unless upward revisions are made to the original estimate of undiscounted cash flows, whereas under
IFRS, the obligation is required to be revalued based on changes in the discount rate.
7.4 Revaluation
ING reports a difference relating to the revaluation of property, plant and equipment under IFRS.
Extract 38: ING

2.4. SHAREHOLDERS’ EQUITY AND NET PROFIT ON THE BASIS OF US GAAP [extract]
2.4.1 VALUATION AND INCOME RECOGNITION DIFFERENCES BETWEEN IFRS-EU AND US GAAP [extract]
Property in own use
Under IFRS-EU, property in own use is measured at fair value with changes in fair value recognized in equity. Negative
revaluation reserves on a property-by-property basis are charged to the profit and loss account. Subsequent recoveries are
recognized as income up to the original cost. Depreciation over the fair value is charged to the profit and loss account. On disposal
any revaluation reserve remains in equity and any difference between the carrying amount of the property and the sales price is
reported in the profit and loss account. Under US GAAP, property in own use is measured at cost less depreciation and
impairment. Depreciation over the cost basis is charged to the profit and loss account. Realized results on disposal are reported in
the profit and loss account. Impairments are an adjustment to the cost basis and are not reversed on subsequent recovery.
7.5 Major inspection or overhaul

In the following extract, Steamship Company Torm describes a change in accounting policy under US GAAP to conform
to the policy adopted under IFRS and avoid a reconciling difference.
Extract 39: Steamship Company Torm

NOTE 23 - RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(U.S. GAAP) [extract]
a) Dry-docking costs [extract]
As of January 1, 2005, TORM changed its method of accounting for vessel dry-docking costs under US GAAP from the accrual
method to the deferral method. Under the accrual method, dry-docking costs had been accrued as a liability and an expense on an
estimated basis in advance of the next scheduled dry-docking. Subsequent payments for dry-docking were charged against the
accrued liability. Under the deferral method, costs incurred in replacing or renewing the separate assets that constitute the dry-
docking costs are capitalized and depreciated on a straight-line basis over the estimated period until the next dry-docking. Dry-
docking activities include, but are not limited to, inspection, service on turbocharger, replacement of shaft seals, service on boiler,
replacement of hull anodes, applying of antifouling and hull paint, steel repairs and refurbishment and replacement of other parts
of the vessel. This change was made to conform to prevailing shipping industry accounting practices and the Group's accounting
under IFRS. …
35
8 Investment properties
There is no specific US standard dealing with accounting for investment properties held directly by a reporting entity that
is not a real estate investment entity. Under IFRS, IAS 40 Investment Property gives entities the option to account for
investment property either on a fair value basis or on an historical cost basis in accordance with IAS 16.
UBS reports a change in policy to the fair value method under IFRS in the following extract.
Extract 40: UBS

Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally Accepted
Accounting Principles (US GAAP) [extract]
Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP [extract]
l. Investment properties
From 1 January 2004, UBS changed its accounting for investment properties from the cost less depreciation method to the fair
value method. Under the fair value method, changes in fair value are recognized in the income statement, and depreciation is no
longer recognized. Under US GAAP, investment properties continue to be carried at cost less accumulated depreciation.
9 Impairment
IAS 36 Impairment of Assets is the relevant standard for impairment under IFRS and should be applied to most types of
assets, with some exceptions that include inventories, deferred tax assets and financial instruments. Under US GAAP,
there are two standards; FAS 142 Goodwill and Other Intangible Assets deals with accounting for the impairment of
goodwill and other non-amortised intangible assets; and FAS 144 Accounting for the Impairment or Disposal of Long-
Lived Assets deals with accounting for impairment of other tangible and intangible fixed assets.
Despite similar overall approaches to impairment, differences can arise in practice due to differences in the IFRS and
US GAAP guidance in several areas including, but not limited to the requirement for an impairment review and the
reversal of impairment charges.
Certain of the differences in accounting for impairment under IFRS and US GAAP are illustrated by the following
9.1 Assets other than goodwill that are subject to amortisation

The extract below from Royal Dutch Shell illustrates a difference resulting from the application of the FAS 144
undiscounted cash flows recoverability test.
Extract 41: Royal Dutch Shell

Notes to the Consolidated Financial Statements [extract]
38 Information on US GAAP [extract]
Impairments
Impairments under IFRS are based on discounted cash flows. Under US GAAP, only if an asset’s estimated undiscounted future
cash flows are below its carrying amount is a determination required of the amount of any impairment based on discounted cash
flows. There is no undiscounted test under IFRS.

9.2 Goodwill and intangible assets that are not amortised
The amount of the impairment may not be the same under IFRS and US GAAP as a result of differences between cash
generating units and reporting units as illustrated by Nokia in the following extract.
Extract 42: Nokia

Impairment of goodwill [extract]
Under IFRS, goodwill is allocated to “cash generating units”, which are the smallest group of identifiable assets that include the
goodwill under review for impairment and generate cash inflows from continuing use that are largely independent of the cash
inflows from other assets. Under IFRS, the Group recorded an impairment of goodwill of EUR 151 million related to Amber
Networks in 2003 as the carrying amount of the cash generating unit exceeded the recoverable amount of the unit.
Under US GAAP, goodwill is allocated to “reporting units”, which are operating segments or one level below an operating
segment (as defined in FAS 131, Disclosures about Segments of an Enterprise and Related Information). The goodwill
impairment test under FAS 142 compares the carrying value for each reporting unit to its fair value based on discounted
cash flows.
The US GAAP impairment of goodwill adjustment reflects the cumulative reversal of impairments recorded under IFRS that do
not qualify as impairments under US GAAP.
Upon completion of the 2003 annual impairment test, the Group determined that the impairment recorded for Amber Networks
should be reversed under US GAAP as the fair value of the reporting unit in which Amber Networks resides exceeded the book
value of the reporting unit. The annual impairment tests performed subsequent to 2003 continue to support the reversal of
this impairment.
…
9.3 Reversal of impairment charges

An impairment loss may be recognised in one year under IFRS but not under US GAAP, as a result of the undiscounted
cash flows recoverability test (see section 9.1.1), and then reversed in the following year under IFRS because the asset is
no longer impaired. This difference is illustrated by China Petroleum & Chemical in the following extract.

39 SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
(e) Reversal of impairment of long-lived assets

Under IFRS, impairment charges are recognized when a long-lived asset’s carrying amount exceeds the higher of an asset’s
fair value less costs to sell and value in use, which incorporates discounting the asset’s estimated future cash flows.
Under US GAAP, determination of the recoverability of a long-lived asset held for use is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the sum of the expected future
cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for
a long-lived asset is based on the assets carrying value and the fair value of the asset.
In addition, under IFRS, a subsequent increase in the recoverable amount of an asset is reversed to the consolidated statements
of income to the extent that an impairment loss on the same asset was previously recognized as an expense when the
circumstances and events that led to the write-down or write-off cease to exist. The reversal is reduced by the amount that would
have been recognized as depreciation had the write-off not occurred. Under US GAAP, an impairment loss establishes a new cost
basis for the impaired asset and the new cost basis should not be adjusted subsequently other than for further impairment losses.
For the years presented herein, the US GAAP adjustment represents the effect of reversing the recovery of previous
impairment charges recorded under IFRS. Accordingly, the carrying amount of property, plant and equipment under IFRS was
higher than the amount under US GAAP by RMB 532 and RMB 456 as of December 31, 2004 and 2005.
37
10 Capitalisation of borrowing costs

The principal standards for the capitalisation of borrowing costs are IAS 23 Borrowing Costs under IFRS and
FAS 34 Capitalization of Interest Cost under US GAAP. Differences may arise either because borrowing costs have been
expensed in accordance with the benchmark treatment under IAS 34, or as a result of other areas of difference between
the accounting guidance for the capitalisation of borrowing costs under IFRS and US GAAP, including, but not limited to:
• the definition of qualifying assets;
• attributable borrowing costs;
• the treatment of foreign exchange differences; and
• the treatment of net investment proceeds.
Certain of the differences relating to the capitalisation of borrowing costs under IFRS and US GAAP are illustrated by the
10.1 General principles

In the following extract, Swisscom reports a difference as a result of not capitalising qualifying interest costs under IFRS.

44. Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting
a) Capitalization of interest cost
Under IFRS Swisscom expenses all interest costs as incurred. U.S. GAAP requires interest costs incurred during the construction
of property, plant and equipment to be capitalized. The U.S. GAAP reconciliation includes adjustments arising from the
application of the method prescribed by Statement of Financial Accounting Standards (SFAS) No. 34, “Capitalization of
Interest Cost”.
The effect of capitalization of interest cost, corresponding additional depreciation expense on the increased amount of property,
plant and equipment and the disposal of property would be as follows:
CHF in millions 2005 2004 2003
Interest capitalized during year 22 6 8
Depreciation expense (8) (10) (9)
Net income statement effect 14 (4) (1)
CHF in millions 2005 2004 2003

Gross amount capitalized 132 110 104
Accumulated depreciation (74) (66) (56)
Net amount capitalized 58 44 48
In 2005, the capitalization rate is higher than in prior years because debt with lower interest rates has matured and been paid off.

10.2 Qualifying assets
The definitions of qualifying assets are different under IFRS and US GAAP as illustrated in the following extracts from
Repsol and China Petroleum & Chemical.
Extract 45: Repsol

(42) DIFFERENCES BETWEEN IFRS AND GENERAL ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES OF AMERICA [extract]
17. Borrowing costs [extract]
Under IFRS, borrowing cost on specific or general-purpose financing that are directly attributable to the acquisition for assets that
necessarily take a substantial period of time to get ready for its intended use or sale are capitalized.
Under U.S. GAAP, capitalization of interest on qualifying assets (i.e. work in progress) is required. There is no mention under
U.S. GAAP for a qualifying asset to take a substantial period of time to get ready for its use.
…

(f) Capitalized interest on investment in associates

Under IFRS, an investment accounted for by the equity method is not considered a qualifying asset for which interest is
capitalized. Under US GAAP, an investment accounted for by the equity method while the investee has activities in progress
necessary to commence its planned principal operations, provided that the investee’s activities include the use of funds to acquire
qualifying assets for its operations, is a qualifying asset for which interest is initially capitalized and subsequently amortized when
the operation of the qualifying assets begin. Accordingly, the carrying amount of the investment in associates under IFRS was
lower than the amount under US GAAP by RMB 526 and RMB 486 as of December 31, 2004 and 2005.
10.3 Attributable borrowing costs

Lihir Gold, reports a difference in respect of borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset.
Extract 47: Lihir Gold

NOTE 30: RECONCILIATION TO US GAAP [extract]
(iii) Borrowing cost capitalization as part of mine properties:
Under IFRS, interest incurred on funds that are borrowed specifically for the purpose of obtaining a qualifying asset is capitalized.
Under U.S. GAAP SFAS 34 “Capitalization of Borrowing Cost”, the amount of borrowing cost to be capitalized is the portion of
borrowing cost incurred that theoretically could have been avoided if expenditures for the assets had not been made. The interest
cost need not have arisen from borrowings specifically used to acquire the asset.
39
10.4 Foreign exchange differences

A difference relating to the treatment of foreign exchange differences is reported by China Petroleum & Chemical.

(a) Foreign exchange gain and losses

In accordance with IFRS, foreign exchange differences on funds borrowed for construction are capitalized as property, plant
and equipment to the extent that they are regarded as an adjustment to interest costs during the construction period. Under
US GAAP, all foreign exchange gains and losses on foreign currency debt are included in current earnings. For the years
presented herein, the US GAAP adjustments represent the amortization effect of such originating adjustments described above.
Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by
RMB 295 and RMB 241 as of December 31, 2004 and 2005.
11 Financial instruments: recognition and measurement

The principal standards dealing with financial instruments under IFRS are IAS 32 Financial Instruments: Disclosure and
Presentation and IAS 39 Financial Instruments: Recognition and Measurement. IAS 32 and IAS 39 apply in principle to
all types of financial instruments, but exclude from their scope certain financial instruments to the extent that they are
accounted for under other standards such as, for example, IFRS 4 Insurance Contracts, IAS 17 Leases, IAS 27
Consolidated and Separate Financial Statements, IAS 28 Investments in Associates and IAS 31 Interests in
Joint Ventures.
Guidance on accounting for financial instruments under US GAAP can be found in a range of standards, including
FAS 107 Disclosures about Fair Value of Financial Instruments, FAS 114 Accounting by Creditors for Impairment of a
Loan (an amendment of FASB Statements No. 5 and 15), FAS 115 Accounting for Certain Investments in Debt and Equity
Securities, FAS 133 Accounting for Derivative Instruments and Hedging Activities and FAS 140 Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125.
The US GAAP literature is generally more detailed than the guidance under IFRS as it has been developed over a longer
period and there are differences, sometimes subtle, in the guidance under IFRS and US GAAP in various areas, including,
but not limited to:
• the normal purchase or sale exemption;
• loan commitments;
• the definition of financial instruments;
• the recognition of assets and liabilities;
• derecognition of financial assets;
• troubled debt restructurings;
• off-balance sheet transactions and accounting for the substance of transactions;
• securitised assets;
• categories of financial assets;

• measurement of financial assets;
• impairment of financial assets; and
• categories of financial liabilities.
Certain of the differences in the recognition and measurement of financial instruments under IFRS and US GAAP are
illustrated by the following extracts from Form 20-F filings.
11.1 Securitised assets

Guidance for the consolidation of a special purpose entity (SPE) is provided under IFRS by SIC-12 Consolidation –
Special Purpose Entities and under US GAAP by FAS 140.
FIAT reports a difference arising from the consolidation of an SPE under IFRS that is not consolidated under US GAAP.
Extract 49: FIAT


(g) Securitization of financial assets
Under IFRS, in accordance with SIC 12 Consolidation – Special Purpose Entities, a Special Purpose Entity (“SPE”) is
consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by the
entity. In all of the Group’s securitization transactions, the subscription of the junior asset-backed securities by the Group entails
its control in substance over the SPE, which is consequently consolidated. Under US GAAP, the Group follows SFAS No. 140 –
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”) and other related
US GAAP guidance related to the Group’s securitization of financial assets and extinguishments of liabilities. The rules in
SFAS No. 140 have a more limited scope than SIC 12 and are therefore applied only when the assets transferred are financial
assets and the SPE is a Qualifying Special Purpose Entity; in these cases, securitized portfolios are derecognized for US GAAP
purposes. This reconciling item principally includes gains arising from the securitization transactions on the retail portfolio of
receivables of financial services companies, realized under US GAAP and not yet realized under IFRS. Additionally, in accounting
periods subsequent to a securitization, the fair value of beneficial interests in securitized financial assets that are classified as
available for sale is recorded within other comprehensive income under US GAAP in accordance with SFAS No. 115 –
Accounting for Certain Investments in Debt and Equity Securities.
11.2 Measurement of investments in equity securities

Differences between IAS 39 and FAS 115 can give rise to measurement differences between IFRS and US GAAP, as
described by Electrolux and Nokia.

Securities
In accordance with IFRS (IAS 39), financial assets categorized as “available for sale” are recognized at fair value. For
Electrolux such category includes investments with a temporary disposal restriction. Under US GAAP, financial assets for which
the sale is restricted by contractual requirements are recorded at cost and subject to write down for impairment. Under US GAAP
Electrolux recognizes distributions from investments recorded at cost as dividend income or receipt.
41
Extract 51: Nokia

39. Differences between International Financial Reporting Standards and US Generally Accepted Accounting
Marketable securities and unlisted investments
Under IFRS, all available-for-sale investments, which includes all publicly listed and non-listed marketable securities, are
measured at fair value and gains and losses are recognized within shareholders’ equity until realized in the profit and loss account
upon sale or disposal.
Under US GAAP, the Group’s listed marketable securities are classified as available-for-sale and carried at aggregate fair value
with gross unrealized holding gains and losses reported as a component of other comprehensive income (loss). Investments in
equity securities that are not traded on a public market are carried at historical cost, giving rise to an adjustment between IFRS and
US GAAP.
12 Financial instruments: shareholders’ equity

Neither IFRS nor US GAAP explicitly provide rules on the recognition of equity in the balance sheet. Generally, equity
instruments are recognised when an entity recognises a corresponding asset or derecognises a corresponding liability.
In practice, there are accounting and presentational differences resulting from differences in the guidance between IFRS
and US GAAP in various areas, including, but not limited to:
• the distinction between debt and equity;
• split accounting where a financial instrument comprises a debt and equity element;
• convertible debt with a premium put; and
• treasury shares.
Certain of the differences in accounting for shareholders’ equity under IFRS and US GAAP are illustrated by the
12.1 Distinction between debt and equity

The principal standards for distinguishing between debt and equity are FAS 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity under US GAAP and IAS 32 Financial Instruments:
Disclosure and Presentation under IFRS. Differences in the definitions and requirements under these standards and other
specific IFRS and US GAAP guidance can result in the same instrument being classified differently between debt and
equity under IFRS and US GAAP.
In the following extract, Unilever describes a difference where preference shares are classified as debt under IFRS but as
equity under US GAAP.
Extract 52:Unilever
Additional information for US investors [extract]
Preference shares
Under IAS 32, Unilever recognises preference shares that provide a fixed preference dividend as borrowings with preference
dividends recognised in the income statement. Under US GAAP such preference shares are classified in shareholders’ equity with
dividends treated as a deduction to shareholder’s equity.

Conversely, it is possible for a subordinated debt instrument to be classified as debt under US GAAP but equity under
IFRS, as illustrated by Barclays in the extract below.
Extract 53: Barclays

63 Differences between IFRS and US GAAP accounting principles [extract]
Classification of debt and equity
IFRS US GAAP
From 1st January 2005, certain subordinated instruments issued The subordinated instruments issued by the Group which are
by the Group are treated as equity under IFRS where they treated as equity under IFRS are treated as debt instruments
contain no present obligation to deliver cash or another under US GAAP and are translated at the rate ruling at the
financial asset to a holder. If these are held in foreign currency, balance sheet date.
the instrument is translated into the reporting currency at the
exchange rate ruling on the date of issuance.
12.2 Split accounting

Split accounting may be applied under both IFRS and US GAAP where a financial instrument (eg, convertible debt)
comprises a debt and an equity element. However, the detailed guidance for split accounting differs between IFRS and
US GAAP.
WPP reports a difference related to debt issued with a warrant which was not issued at a significant discount.
Extract 54: WPP

Notes to the Reconciliation to US Accounting Principles [extract]
1 Significant differences between IFRS and US Generally Accepted Accounting Principles [extract]
(i ) Convertible debt [extract]
Under IFRS, convertible debt is classified into both liability and equity elements, as described in the note on accounting policies in
the financial statements. Under US GAAP, APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants, requires the issuer of a conventional convertible debt instrument issued without a substantial discount to account for the
convertible debt entirely as a liability. …
13 Financial instruments: derivatives and hedge accounting

The principal standards for derivatives and hedge accounting are IAS 39 Financial Instruments: Recognition and
Measurement under IFRS and FAS 133 Accounting for Derivative Instruments and Hedging Activities under US GAAP.
There are various areas of difference between the guidance in IAS 39 and in FAS 133 that may give rise to reconciling
differences, including, but not limited to:
• embedded derivatives;
• the presentation of certain cash flow hedges;
• designation and effectiveness of hedges;
• short-cut method of hedge effectiveness testing;
• partial term hedges;
• net hedging;
43
• portfolio hedging of interest rate risk;

• non-derivative hedging instruments;
• hedging held-to-maturity investments;
• hedging intragroup transactions and monetary items, including hedges of net investments in foreign operations;
• hedging firm commitments; and
• hedging commitments to acquire or dispose of a subsidiary, a minority interest or an equity method investee.
Certain of the differences in derivatives and hedge accounting under IFRS and US GAAP are illustrated by the following
13.1 Embedded derivatives

Although IFRS and US GAAP generally identify the same embedded derivatives, differences may arise in practice.
Rio Tinto reports one such difference in the extract below.

Mark to market of derivative contracts [extract]
…
The US standard, FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, is similar but not identical to IAS 39.
In 2005, an additional loss of US$4 million (US$1 million gain after tax and minorities) was recognised in US GAAP earnings
primarily as a result of the recognition at fair value of additional embedded derivatives for US GAAP. For IFRS, the currency
exposures in these contracts are not recognised in the balance sheet because the currency of the contract is considered to be
‘commonly used’ in the counterparty’s country of operation.
…
13.2 Cash flow hedges

In the following extract, BASF reports a difference resulting from the presentation of a cash flow hedge as a basis
adjustment against the carrying amount of the hedged item.
Extract 56: BASF

5. Reconciliation of net income and stockholders’ equity to U.S. GAAP [extract]
(c) Accounting for financial instruments

The guidelines for accounting for financial instruments according to IAS 39 “Financial Instruments: Recognition and
Measurement” and SFAS 133 “Accounting for Derivatives and Hedging Activities” are very similar in concept. The
reconciliation items relate to the differing treatment of fair value changes of derivatives within equity, which are a component of a
cash-flow hedge for a future transaction. According to IAS 39, for hedging future transactions, there is an option regarding the
accounting treatment of these fair value changes. BASF has chosen the option to net these changes in valuation against the
acquisition costs of the non-financial assets or debts. The other option allows the valuation changes to be charged to the income
statement in the same period in which the hedged transaction flows through the income statement. According to SFAS 133, only
the second method is allowed, while netting against acquisition costs is prohibited. This timing difference leads to a difference in
equity and has no impact on income.

13.3 Designation and effectiveness of hedges
Reuters reports a difference resulting from not designating derivative instruments as hedge instruments under FAS 133.
Extract 57: Reuters

i. Derivative instruments [extract]
…
Under IFRS, the Group has designated certain derivatives as hedges of foreign net investments and fair value hedges of borrowings.
For net investment hedges, fair value movements arising from these derivatives are recognised in a hedging reserve, until transferred
to the income statement on disposal or impairment of the underlying item. For fair value hedges, fair value movements are adjusted in
the carrying value of borrowings; movements in the fair value of the fair value hedges are recognised in the income statement,
together with movements in the fair value of the item being hedged. To the extent that hedges are ineffective, gains and losses are
recognised in the income statement.
Under US GAAP, the Group adopted FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ as amended by
FAS 138, on 1 January 2001. FAS 133 introduced new rules in respect of hedge accounting and the recognition of movements in fair
value through the income statement. As a result of the adoption, all derivatives and embedded derivative instruments, whether
designated in hedging relationships or not, are carried on the balance sheet at fair value. The Group has not designated any of its
derivative instruments as qualifying hedge instruments under FAS 133. Accordingly, changes in the fair value of derivative and
embedded derivative instruments have been included within the income statement under US GAAP.
…
13.4 Short-cut method

IAS 39 has no equivalent to the ‘short-cut method’ for hedge effectiveness testing under US GAAP. This difference is
reported by HSBC in the following extract.
Extract 58: HSBC

47 Differences between IFRSs and US GAAP [extract]
Derivatives and hedge accounting [extract]
US GAAP
…
The US GAAP ‘shortcut method’ permits an assumption of zero ineffectiveness in hedges of interest rate risk with an
interest rate swap provided specific criteria have been met. IAS 39 does not permit such an assumption, requiring a
measurement of actual ineffectiveness at each designated effectiveness testing date.
…
Impact
HSBC’s North American subsidiaries continue to follow the ‘shortcut method’ of hedge effectiveness testing for certain
transactions in their US GAAP reporting. Alternative hedge effectiveness testing methodologies are sought under IFRSs for
these hedging relationships.
…
45
13.5 Partial term hedges

A partial-term hedge where a portion of the cash flows or fair value of an asset or liability is designated as a hedged item
under IAS 39 may fail to meet the effectiveness testing requirements of FAS 133. The following extract from France
Telecom illustrates this difference.

Note 38.1 – SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]

Derivative Instruments and Hedging Activities (L) [extract]
…
In addition, in 2005 some derivatives were entered into, to hedge partial maturity of certain debts. Under IFRS, those derivatives
qualified for hedging, which was not allowed under US GAAP.
…
13.6 Non-derivative hedging instruments

US GAAP is more restrictive than IAS 39 in the designation of a non-derivative financial asset or financial liability as a
hedging instrument in a hedge of a foreign currency risk. The following extracts illustrate this difference as it applies to
British Airways.
Extract 60: British Airways

2 Accounting policies [extract]
Derivatives and financial instruments [extract]
Cash flow hedges [extract]
…
Certain loan repayment instalments denominated in US dollars and Japanese yen are designated as cash flow hedges of highly
probable future foreign currency revenues. Exchange differences arising from the translation of these loan repayment
instalments are taken to equity in accordance with IAS 39 requirements and subsequently reflected in the income statement
when either the future revenue impacts income or its occurrence ceases to be probable.
…

Note 36 – Differences between IFRS and United States Generally Accepted Accounting Principles [extract]
(f) Derivative instruments [extract]
…
Under US GAAP all derivative financial instruments are accounted for under SFAS 133 ‘Accounting for Derivative Instruments
and Hedging Activities’ and recorded on the balance sheet at their fair value. Similar to IAS 39, SFAS 133 requires that changes in
the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether
the instrument is designated as part of a hedge transaction. SFAS 133 does not allow debt instruments to be utilised as hedging
instruments, and therefore exchange differences arising from the retranslation of debt instruments are recorded in the income
statement in the period they arise.
…

14 Inventory and long-term contracts
The principal standards for inventory and long-term contracts are IAS 2 Inventories under IFRS and ARB 43 Chapter 4
Inventory Pricing under US GAAP. Reconciling differences may arise in practice as a result of differences between these
standards and other guidance under IFRS and US GAAP in several areas, including, but not limited to:
• costing methodology;
• impairment and reversals of impairment; and
• construction contracts.
Certain of the differences in accounting for inventory and long-term contracts under IFRS and US GAAP are illustrated
by the following extracts from Form 20-F filings.
14.1 Inventory costs

Although the principles contained in IAS 2 for determining the costs of inventory are comparable to those under
US GAAP, there may be differences in practice. For example, both IFRS and US GAAP permit the use of the first-in,
first-out and weighted average costing methods, but only US GAAP permits the last-in, first-out costing method, as
illustrated by Hanson in the following extract.
Extract 62: Hanson

33 US accounting information [extract]
a) Comparison of International and US accounting principles [extract]
Inventory valuation
Under IFRS, valuing inventory on a last-in-first-out (LIFO) basis is not permitted. However, under US GAAP, where the
inventory is valued on a LIFO basis for tax purposes in the local state, the same methodology must be used for
accounting purposes.
14.2 Reversal of impairment

Unlike IFRS, US GAAP generally does not permit an impairment to be reversed once it has been recognised. Alcatel
reports a difference in this respect.
Extract 63: Alcatel

Note 39 – Summary of differences between accounting principles followed by Alcatel and U.S. GAAP [extract]
(j) Reversal of inventory write-down
Under IAS 2 “Inventories” (“IAS 2”), inventories are written-down if cost becomes higher than net realizable value. An
assessment of the net realizable value is made at each reporting period. When there is clear evidence of an increase of the net
realizable value because of changes in economic circumstances, the amount of the write-down is reversed even if the inventories
remain unsold.
Under U.S. GAAP, ARB No 43 “Restatement and Revision of Accounting Research Bulletins” states that following a write-down
“such reduced amount is to be considered the cost for subsequent accounting purposes” and it is therefore not permitted to reverse
a former write-down before the inventory is either sold or written off.
47
15 Leasing
The principal standard for lease accounting under IFRS is IAS 17 Leases. Under US GAAP, the principal standard is
FAS 13 Accounting for Leases, but there is also specific US GAAP guidance for various categories of leases, most
notably FAS 98 Accounting for Leases for real estate transactions and FAS 28 Accounting for Sales with Leasebacks for
sale and leaseback transactions.
Although the overall approaches of IFRS and US GAAP are broadly comparable, differences may arise in practice.
The differences that may result in reconciling differences include, but are not limited to those relating to:
• leases involving real estate; and
• sale and leaseback transactions.
Certain of the differences in accounting for leases under IFRS and US GAAP are illustrated by the following extracts
from Form 20-F filings.
15.1 Leases involving real estate

Royal Ahold reports a difference in accounting for real estate leases in the following extract.

Note 37
5 Real estate [extract]
…
Other
This item mainly relates to accounting for leases with land and building components. Under IFRS, a finance lease that includes
both land and building is viewed as two separate components. The land component is classified as an operating lease unless title is
transferred or the lease contains a bargain purchase option. The building component is classified separately as a finance lease.
Under US GAAP, bifurcation of a finance lease including land and building is not required if the land component is less that 25%
of the total property value. The reconciling item represents the difference between the operating lease expenses of the land
recognised on a straight line basis under IFRS and the additional depreciation and interest expenses of the land that is capitalized
under US GAAP.

15.2 Sale and leaseback transactions
One specific area of difference relates to the treatment of sale and leaseback transactions involving real estate, as FIAT
and Nokia report in the following extracts.
Extract 65: FIAT


(h) Sale and leaseback transactions
This difference relates principally to a sale and leaseback transaction entered into during 2005. The events leading to this
transaction are described below.
In 1998, the Group entered into a real estate sale-leaseback transaction. The Group determined that the counterparty to the
transaction Corso Marconi Immobilare (“CMI”), should be considered a special purpose entity (“SPE”) and should be
consolidated under IFRS and under US GAAP because the majority owner of the SPE made only a nominal capital investment, the
activities of the SPE were virtually all on the Group’s behalf, and the substantive risks and rewards of the SPE rested with the
Group. In 2005, the Group obtained legal ownership of the underlying properties of CMI and entered into a sale and leaseback
transaction with an entity in which the Group acquired an insignificant equity interest. Under IFRS, the Group determined that the
transaction qualified as a sale and operating leaseback because substantially all risks and rewards of ownership were transferred to
the buyer and the transaction was established at fair value. Accordingly, a gain of 117 million euros was recognized under IFRS.
Under US GAAP, sale and leaseback accounting for real estate transactions is only permitted in certain limited circumstances as
described in SFAS No. 98 – Accounting for Leases. Because of the Group’s retained equity interest in the buyer, under US GAAP
this transaction has been accounted for under the finance method, whereby the sale proceeds have been reported as a financing
obligation and the properties remain on the balance sheet. The gain realized under IFRS has been deferred and the assets continue
to be depreciated.
Extract 66: Nokia

Sale and leaseback transaction
In 2005, the Group entered into a sale and leaseback transaction. Under the agreement, the Group has a potential liability related
to a pending zoning change scheduled to be final in 2006. Under IFRS, the transaction qualified as a sale and leaseback as the
potential liability related to the zoning change is considered to be remote. Accordingly, the Group recorded a gain on the sale of
the property and rental expense associated with the subsequent leaseback.
Under US GAAP, the transaction did not qualify for sale and leaseback accounting as the clause is deemed to create continuing
involvement by the Group. Accordingly, the transaction is accounted for as a capital lease until the potential obligation lapses
with the zoning change expected in 2006. Once the potential obligation lapses and continuing involvement ceases, the transaction
can be accounted for as a sale and the corresponding gain can be realized. Until that time, the amount of the asset will remain on
the US GAAP balance sheet and rental payments are recorded as a reduction of the principal amount of the obligation and as
interest expense.
The US GAAP sale and leaseback adjustment reflects the reversal of the gain on sale of the property and rental expense recorded
under IFRS net of interest expense recorded under US GAAP.
49
16 Taxation
The principal standards for accounting for taxation under IFRS and US GAAP are IAS 12 Income Taxes and FAS 109
Accounting for Income Taxes. Despite the ‘full provision’ approaches to accounting for taxation under both IAS 12 and
FAS 109, deferred taxation is one of the most common items reported in reconciliations between IFRS and US GAAP.
The principal reason for this is that a high proportion of other adjustments to net income and shareholders’ equity will
have consequential effects on the deferred tax provision. However, differences can also arise in practice as a result of
differences in the specific IFRS and US GAAP guidance in several areas, including, but not limited to:
• exceptions from the general approaches under IAS 12 and FAS 109;
• temporary differences arising from investments in subsidiaries, associates and joint ventures;
• deferred tax on elimination of intragroup profits;
• equity instrument awards to employees;
• the retranslation of non-monetary assets for tax purposes;

• applicable tax rates;
• recognition of amounts in either income or equity;
• recognition of deferred tax assets;

• deferred tax arising from business combinations;
• classification of amounts as either current of non-current assets or liabilities; and
• presentation of a reconciliation of expected and reported tax expense.

Certain of the differences in accounting for taxation under IFRS and US GAAP are illustrated by the following extracts
16.1 Exceptions from the general approach

Exceptions from the full provision approach to accounting for taxation under either IAS 12 or FAS 109 can result in
reported differences as described by Altana in the following extract.
Extract 67: Altana

(32) Reconciliation to U.S. GAAP [extract]
J) Differences in accounting for income taxes standards [extract]
…
In accordance with IAS 12, deferred taxes are not recognized for temporary differences resulting from the initial recognition of
an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither
accounting profit nor taxable profit. As described in adjustment b), EITF No. 98-11 determines that the principle outlined in
SFAS No. 109 should be used to record the assigned value of an asset in which the amount paid differs from the tax basis of
the asset.
…

16.2 Temporary differences arising from investments in subsidiaries, associates and joint ventures
In the following extract, Vodafone describes a difference relating to the recognition of a liability for the difference
between the carrying amount and the tax basis of an investment in a foreign associate.
Extract 68: Vodafone

38. US GAAP information [extract]
Summary of differences between IFRS and US GAAP [extract]
h. Income taxes [extract]
…
Under IFRS, the Group does not recognise a deferred tax liability on the outside basis differences in its investment in associates to
the extent that the Group controls the timing of the reversal of the difference and it is probable the difference will not reverse in the
foreseeable future. Under US GAAP, the Group recognises deferred tax liabilities on these differences.
16.3 Deferred tax on elimination of intragroup profits

Novo Nordisk reports a reconciling item for deferred tax on intragroup profits eliminated on consolidation.
Extract 69: Novo Nordisk

38 Reconciliation to US GAAP [extract]
(i) Tax arising from the difference between IFRS and US GAAP and differences related to deferred taxes [extract]
Impact of temporary differences related to intercompany profits
Under IFRS and US GAAP, unrealised profits resulting from intercompany transactions are eliminated from the carrying amount
of assets, such as inventories. In accordance with IFRS, the Group calculates the tax effect with reference to the local tax rate of
the company that holds the inventory (the buyer) at period-end. However, US GAAP requires that the tax effect is calculated with
reference to the local tax rate in the seller’s or manufacturer’s jurisdiction.
In prior years, the differences between the IFRS and US GAAP calculations have been immaterial; hence no reconciliation item
has been reported. Due to a significant increase in internal profits in 2005, Novo Nordisk has incorporated the difference between
IFRS and US GAAP figures amounting to DKK 466 million.
16.4 Equity instrument awards to employees

Cadbury Schweppes reports a difference relating to share-based payments.
Extract 70: Cadbury Schweppes

42. Summary of differences between IFRS and US Generally Accepted Accounting Principles [extract]
(e) Deferred taxation [extract]
…
For US GAAP, deferred tax assets for share awards are recorded based on the recorded compensation expense. Under IFRS
deferred tax assets are recognised based on the intrinsic gain at the year-end. The amount recognised in the Income Statement is
capped at the tax effected share award charge, with any excess being recognised directly through reserves.
…
51
16.5 Computation – retranslation of non-monetary assets for tax purposes

A difference between IFRS and US GAAP may arise when non-monetary assets and liabilities of an entity, which are
measured in its functional currency, have a tax base that is determined in a different currency. This difference is illustrated
by TMM in the following extract.
Extract 71: TMM

27. RECONCILIATION OF DIFFERENCES BETWEEN IFRS AND U.S. GAAP: [extract]
d. Significant differences between IFRS and U.S. GAAP: [extract]
v. Deferred taxes
As mentioned in Note 4, income tax is recorded in accordance with IAS 12 (revised), which, among other provisions,
requires the recognition of deferred taxes for non-monetary assets indexed for tax purposes. Under U.S. GAAP, the Company
follows the guidelines established in SFAS No. 109 “Accounting for Income Taxes”. This statement does not permit recognition
of deferred taxes for differences related to assets and liabilities that are remeasured from local currency into the functional
currency using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes.
For U.S. GAAP purposes the deferred tax computation on non-monetary assets and liabilities is based on current historical
pesos whereas for IFRS purposes amounts in historical US dollars are considered for book purposes. The deferred tax adjustment
included in the consolidated results and stockholders’ equity reconciliation, also include the effect of deferred taxes on the other
U.S. GAAP adjustments.
Lafarge reports a similar difference in respect of an entity operating in a hyperinflationary economy.
Extract 72: Lafarge

3. Income taxes [extract]
(a) Accounting for deferred taxes in hyperinflationary economies
IAS 12 requires us to recognize deferred tax assets and liabilities for temporary differences related to assets and liabilities that are
remeasured at each balance sheet date in accordance with the provisions of IAS 29, Financial Reporting in Hyperinflationary
Economy as described in Note 2(d).
Pursuant to SFAS 109, “Accounting for Income Tax” (“SFAS 109”), U.S. GAAP prohibits recognition of a deferred tax liability
or asset for differences related to assets and liabilities that are remeasured at each balance sheet date. Deferred taxes recorded in
entities in hyperinflationary economies have been reversed for U.S. GAAP purposes.
16.6 Computation – applicable tax rate

Cadbury Schweppes reports a difference in the tax rates applied under IFRS and US GAAP in the extract below.
Extract 73: Cadbury Schweppes

42. Summary of differences between IFRS and US Generally Accepted Accounting Principles [extract]
(e) Deferred taxation [extract]

The fundamental basis of recognising deferred taxes is the similar under both IFRS and US GAAP, however certain detailed
differences exist.
Under IFRS, deferred tax is based on tax rates and laws that have been enacted, or substantively enacted. For US GAAP, only tax
rates and laws that have been enacted are taken into account. …

16.7 Income or equity?
A difference in the recognition of deferred tax movements as either income or equity is reported by Vivendi in the
following extract.
Extract 74: Vivendi

Note 34. Supplemental disclosures required under US Generally Accepted Accounting Principles (US GAAP) and
US Securities and Exchange Commission (SEC) [extract]
34.10.3 Changes in deferred taxes originally charged or credited to equity
The tax effects of items charged or credited directly to equity during the current year are allocated directly to equity. A deferred
tax item originally recognized by a charge or credit to shareholders’ equity may change either from changes in assessments of
recovery of deferred tax assets or from changes in tax rates, laws or other measurement attributes.
— Under IFRS, consistent with the initial treatment, IAS 12 requires that the resulting change in deferred taxes be charged or
credited directly to equity.
— Under US GAAP, FAS 109 requires allocation of the resulting change in deferred taxes to continuing operations, i.e. in the
statement of earnings.
— In 2005, €48 million were credited to equity under IFRS, and to tax income under US GAAP.
— In 2004, no material reconciling difference was generated.
16.8 Deferred tax assets

The following extract from Hanson provides an example of a difference relating to the recognition of deferred tax assets.
Extract 75: Hanson

33 US accounting information [extract]
a) Comparison of International and US accounting principles [extract]
Deferred tax [extract]
… Under IFRS, deferred tax assets are recognised for future deductions and utilisations of tax carry forwards to the extent that it
is more likely than not that suitable taxable profit is expected to be available. Under US GAAP, deferred tax assets are recognised
at their full amounts and reduced by a valuation allowance to the extent it is more likely than not that suitable taxable profits will
not be available. Differences in deferred taxation may occur as a result of accounting adjustments between IFRS and US GAAP.
16.9 Deferred tax arising from business combinations

Tele2 reports a difference in respect of subsequent recognition of deferred tax assets arising from loss carry-forwards
acquired in a business combination.
Extract 76: Tele2

Note 39 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
Explanation of current differences between IFRS and US GAAP [extract]
a) Valuation of acquired loss carry-forwards
According to IFRS, an amount representing acquired loss carry-forwards, which on the date of acquisition is valued at zero, but
which in subsequent years is valued and recognized as an income tax benefit, is reported as a write down of goodwill in the
income statements after an adjustment for the remaining amortization period of the original acquisition.
According to US GAAP, acquired loss carry-forwards subsequently recognized are not reported as an income tax benefit, but
instead directly reduce goodwill related to the acquisition when a valuation allowance was recognized for the related deferred tax
asset at the acquisition date.
53
In the following extract, Sanofi-Aventis describes a difference relating to tax benefits on stock option awards in a
business combination.
Extract 77: Sanofi-Aventis

G. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract]
2-c Income taxes [extract]
Deferred tax related to acquired stock options
Under U.S. GAAP, the expected tax benefit from fully vested option awards granted to employees of an acquiree in a
purchase business combination should not result in a deferred tax asset on the business combination date. Any future deduction
resulting from the exercise of the options should be recognized as an adjustment to the purchase price of the acquired business
when realized to the extent that this deduction does not exceed the fair value of the awards at the business combination date. The
tax benefit associated with any “excess” deduction is recognized in additional paid in capital. Under IFRS, the expected tax
benefit from vested option awards results in the recognition against goodwill of a deferred tax asset on the date the business
combination is consummated. Any future deduction resulting from the exercise of the options should then be recognized directly
in equity.
16.10 Presentation
In the extract below, Lafarge describes a difference in the classification of deferred tax amounts as current or non-current
assets or liabilities.
Extract 78: Lafarge

(c) Deferred tax assets and liabilities
IFRS prohibits separate accounting for deferred taxes between current and non-current. Under IFRS, deferred tax accounts are
classified as non-current in the balance sheet.
17 Provisions
Under IFRS, IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains broad principles for accounting for
provisions and specific guidance on accounting for restructuring costs. US GAAP has no equivalent general standards on
provisions, but has several standards on specific topics, including FAS 143 Accounting for Asset Retirement Obligations
and FAS 146 Accounting for the Costs Associated with Exit or Disposal Activities. FAS 5 Accounting for Contingencies
provides guidance for evaluating whether a liability should be recognised.
The differences in accounting for provisions that may give rise to reconciling differences include, but are not limited to
those relating to:
• discounting;
• measurement when there is a range of possible outcomes;
• costs of a major inspection or overhaul;
• environmental and decommissioning costs;

• onerous executory contracts;
• vacant leasehold property; and
• restructuring costs.
Certain of the differences in accounting for provisions under IFRS and US GAAP are illustrated by the following extracts
17.1 Discounting
Differences in discounting provisions may arise in practice, as illustrated by Electrolux in the following extract.

Discounted provisions
Under IFRS and US GAAP, provisions are recognized when the Group has a present obligation as a result of a past event, and it
is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount
of the obligation. Under IFRS, where the effect of time value of money is material, the amount recognized is the present value of
the estimated expenditures. IAS 37 states that long-term provisions shall be discounted if the time value is material. According to
US GAAP discounting of provisions is allowed when the timing of cash flow is certain.
17.2 Major inspection or overhaul

The treatment of the costs of a major inspection or overhaul may differ under IFRS and US GAAP. In the following
extract, Steamship Company Torm describes a change in accounting policy under US GAAP to conform to the policy
adopted under IFRS and avoid a reconciling difference.
Extract 80: Steamship Company Torm

NOTE 23 - RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(U.S. GAAP) [extract]
a) Dry-docking costs [extract]
As of January 1, 2005, TORM changed its method of accounting for vessel dry-docking costs under US GAAP from the accrual
method to the deferral method. Under the accrual method, dry-docking costs had been accrued as a liability and an expense on an
estimated basis in advance of the next scheduled dry-docking. Subsequent payments for dry-docking were charged against the
accrued liability. Under the deferral method, costs incurred in replacing or renewing the separate assets that constitute the dry-
docking costs are capitalized and depreciated on a straight-line basis over the estimated period until the next dry-docking. Dry-
docking activities include, but are not limited to, inspection, service on turbocharger, replacement of shaft seals, service on boiler,
replacement of hull anodes, applying of antifouling and hull paint, steel repairs and refurbishment and replacement of other parts
of the vessel. This change was made to conform to prevailing shipping industry accounting practices and the Group's accounting
under IFRS. …
55
17.3 Provisions for onerous executory contracts

In the following extract, Telenor reports a difference which arises when a provision for an onerous contract under IFRS is
reversed under US GAAP.
Extract 81: Telenor

38. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP) [extract]
(18) Provisions
Under IFRS, provisions are recognised when Telenor has a minimum payment obligation from an agreement (onerous contract)
but has decided not to use the services under the agreement in future periods.
Under US GAAP, a liability cannot be recognized before the contract is terminated or Telenor stop using the benefits from
the contract.
17.4 Accounting for restructuring costs

A difference in accounting for restructuring provisions under IAS 37 and FAS 146 is reported by FIAT in the
extract below.
Extract 82: FIAT


(f) Restructuring provisions
The Group from time to time puts into effect corporate reorganization and restructuring plans. The principal difference between
IFRS and US GAAP with respect to accruing for restructuring costs is that IFRS places emphasis on the recognition of the costs of
the exit plan as a whole, whereas US GAAP requires that each type of cost is examined individually to determine when it may be
accrued. As it relates to the Group’s restructuring plans, the principal difference in accounting for restructuring costs relates to
termination benefits paid pursuant to the Group’s restructuring plans.
Under IFRS, the Group applies the provision of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets in order to
assess restructuring liabilities at the balance sheet date. Under IAS 37, a provision for restructuring costs is recognized when the
Group has a constructive obligation to restructure.
Under US GAAP, termination benefits are recognized in the period in which a liability is incurred, which depends on whether the
termination costs relate to (i) contractual termination benefits or special termination benefits accounted for under SFAS No. 88,
(ii) an on-going severance plan accounted for under SFAS No. 112 – Employers’ Accounting for Post-employment Benefits, or
(iii) one-time termination benefits accounted for under SFAS No. 146 – Accounting for Costs Associated With Exit or Disposal
Activities. The application of US GAAP often results in a later recognition of restructuring costs for the Group’s
restructuring activities.

18 Revenue recognition
The principal standard for revenue recognition under IFRS is IAS 18 Revenue. In contrast, under US GAAP there are
many individual pronouncements that cover particular categories of transaction or particular industries. Additionally, the
SEC staff has issued SAB 104 Revenue Recognition in Financial Statements.
Differences can arise in practice as a result of differences in the specific IFRS and US GAAP guidance for revenue
recognition in several areas, including, but not limited to:
• long-term service arrangements;
• multiple-element arrangements;
• software transactions; and
• disposals of land and buildings.
Certain of the differences in revenue recognition under IFRS and US GAAP are illustrated by the following extracts from
Form 20-F filings.
18.1 Long-term service arrangements

United Utilities reports a difference in respect of long-term service arrangements as described in the following extract.
Extract 83: United Utilities

33 Summary of differences between International Financial Reporting Standards and accounting principles generally
accepted in the United States of America [extract]
(i) Revenue and related profit recognition [extract]
The revenue recognition adjustment principally relates to revenues under long-term service contracts in the group’s Vertex
outsourcing business and relates to the recognition of up-front fees and the treatment of planned reductions in fees over the terms
of such contract. Under IFRS, revenues under such contracts are generally recognised using the percentage completion method and
applying a cost-to-cost methodology. Application of a cost-to-cost methodology is explicitly permitted by IAS 18 ‘Revenue’, for
long-term service contracts. Furthermore, IAS 18 emphasises matching of revenues and expenses. …
Under US GAAP, revenues under long-term service contracts must be recognised based upon proportional performance under the
contract. This is similar to the percentage completion method; however, use of a cost-to-cost methodology for determining
proportional performance under service contracts is not considered acceptable. Instead emphasis is placed on the customers’
perspective under the contract. …
18.2 Multiple-element arrangements

TDC reports a reconciling item in respect of transactions that have multiple elements.
Extract 84: TDC

Note 33 Reconciliation to United States Generally Accepted Accounting Principles (US GAAP) [extract]
f) Revenue recognition
In accordance with IFRS, elements in revenue arrangements with multiple deliverables are recognized as separate units of
accounting, independent of any contingent element related to the delivery of additional items or other performance conditions.
Under US GAAP, multiple element contracts as from June 15, 2003 are recorded in accordance with EITF No. 00-21 “Accounting
for Revenue Arrangements with Multiple Deliverables” under which the amount allocable to a delivered item is limited to the
amount that is not contingent upon the delivery of additional items or meeting other performance conditions.
57
18.3 Software revenue recognition

Spirent Communications reports a difference in revenue recognition for sales of software.
Extract 85: Spirent Communications

39. Differences between International Financial Reporting Standards and United States Generally Accepted Accounting
(a) Revenue recognition
Under IFRS, multiple-element arrangements with hardware, software and post contract support (“PCS”) components are
accounted for as two or more separate transactions only where the commercial substance is that the individual components operate
independently of each other because they are capable of being provided separately from one another and it is possible to attribute
reliable fair values to every component. To the extent that a separate component comprises a product sale of hardware or
software, revenue is recognized at the time of delivery and acceptance and when there are no significant vendor obligations
remaining. Terms of acceptance are dependent upon the specific contractual arrangement agreed with the customer. Revenue is
recognized on other components as the Group fulfills its contractual obligations and to the extent that it has earned the right to
consideration.
Under US GAAP, the rules for revenue recognition under multiple-element arrangements are detailed and prescriptive. These
rules include the requirement that revenues be allocated to the respective elements of such an arrangement on the basis of Vendor
Specific Objective Evidence (“VSOE”) for each element. Statement of Position (“SOP”) 97-2 ‘Software Revenue Recognition’
sets out precise requirements for establishing VSOE for valuing elements of a multiple-element arrangement. When VSOE for
individual elements of an arrangement cannot be established in accordance with SOP 97-2, revenue is generally deferred and
recognized over the term of the final element.
Under US GAAP, the Group does not have VSOE for certain elements of certain multiple-element arrangements with customers in
the Service Assurance division of our Communications group. The terms of these arrangements with customers include, among
other terms, PCS for hardware and software and the provision of product roadmaps, which contain expected release dates of
planned updates and enhancements. The existence of a particular item on the roadmap does not, in itself, create a contractual
obligation to deliver that item; however, under US GAAP an implied obligation is deemed to exist. As a consequence of the terms
of these arrangements revenue is deferred under US GAAP and does not start to be recognized until delivery or discharge of the
obligation in respect of the final element of the arrangement for which VSOE is not determinable. If this final element is PCS,
then revenue is recognized over the remaining term of the PCS contract. The Service Assurance division has a number of multi-
year contracts for PCS and this has the effect of extending the period over which revenue is recognized for US GAAP.
Direct costs of the delivered products for which revenue recognition is deferred are also deferred.
The above gives rise to an IFRS to US GAAP difference in respect of revenue recognition in the reconciliations of both net income
and shareholders’ equity.
19 Government grants
The principal standard for accounting for government grants under IFRS is IAS 20 Accounting for Government Grants
and Disclosure of Government Assistance. There is no prescribed treatment for government grants under US GAAP.
However, accounting practice under US GAAP is generally the same as the required IFRS treatment.
20 Segmental reporting
The principal standards for segmental reporting under IFRS and US GAAP are IAS 14 Segmental Reporting and FAS 131
Disclosures about Segments of an Enterprise and Related Information.
A broadly similar level of detail is required under both IFRS and US GAAP but differences in disclosure may arise
in practice.

21 Employee share option plans
The principal standards for accounting for share-based payment are IFRS 2 Share-based Payment under IFRS and
FAS 123(R) Share-Based Payments under US GAAP.
Since the publication of FAS 123(R), both IFRS and US GAAP have similar requirements for accounting for share-based
payments. However, differences between IFRS and US GAAP may arise in practice in specific areas, including, but not
limited to:
• identifying the grant date;
• share-based transactions other than with employees;
• employee share purchase plans;
• modifications to the terms of an award;
• payroll taxes;
• income taxes; and
• earnings per share.
Certain of the differences in accounting for share-based payments under IFRS and US GAAP are illustrated by the
21.1 Grant date

France Telecom reports a difference where the grant date under IFRS was considered to be earlier than the grant date
under US GAAP.

Share based payment (J) [extract]
Employee share offers [extract]
…
The IFRS accounting for the plan is described in Note 2.1.22 to these consolidated financial statements. Under IFRS, at the grant
date, which France Telecom considers to be the date on which the main terms of the employee share offer were announced, the fair
value of stock options, employee share issues and share grants without consideration is determined. The fair value of employee
share offers are recorded immediately in personnel costs, with an adjustment to equity. Other share-based payments are recognized
as personnel costs on straight-line basis over the vesting period and in equity for equity-settled plans or in debt for
cash-settled plans.
Under US GAAP France Telecom recognized €122 million and €424 million as of December 31, 2005 and 2004, respectively, in
compensation expense, including compensation for all potential “bonus shares”, based on the fair value of the shares issued at the
grant date, which was determined to be the end of the subscription period. All such compensation expense was recognized in the
second halves of 2005 and 2004. As these shares were previously issued and outstanding, there is no effect on France Telecom’s
capital structure.
59
21.2 Payroll taxes

Nokia reports a difference in respect of the recognition of payroll taxes.
Extract 87: Nokia

39 Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles
[extract]
Social security cost on share-based payments
Under IFRS, the Group recognizes a provision for social security costs on unvested equity instruments based upon local statutory
law, net of deferred compensation, which is recorded as a component of total equity. The provision is considered as a cash-settled
share-based payment and is measured by reference to the fair value of the equity benefits provided and the amount of the provision
is adjusted to reflect changes in Nokia’s share price.
Under US GAAP, a liability for social security costs on unvested equity instruments is recognized on the date of the event
triggering the measurement and payment of the tax to the taxing authority. Accordingly, no expense is recorded until stock
options are exercised or nonvested shares are fully vested.
The US GAAP social security costs adjustment reflects the reversal of social security costs recorded under IFRS for outstanding
options and unvested performance and restricted shares.
22 Pension costs
Accounting for pension costs is discussed in this section. Accounting for other post-retirement benefits is discussed in
section 23 and other employee benefits are covered in section 24.
Accounting for defined contribution pension schemes is straightforward under both IFRS and US GAAP as the pension
cost is generally the contributions due from the employer in each period.
The principal IFRS standard for accounting for employee benefits other than share-based payments is IAS 19 Employee
Benefits. The principal US GAAP standards are FAS 87 Employers’ Accounting for Pensions, FAS 88 Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, FAS 106
Employers’ Accounting for Postretirement Benefits Other than Pensions and FAS 132(R) Employers’ Disclosure about
Pensions and Other Postretirement Benefits.
FAS 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) was issued in September 2006. FAS 158 does not change the amount of net
periodic benefit cost included in net income but it does address several of the reported differences between IFRS and
US GAAP.
IFRS and US GAAP have broadly comparable approaches to accounting for the costs of providing pension schemes to
employees. However, there are differences in the detailed guidance and differences have arisen because the standards
have been applied for the first time in different reporting periods, or because of differences in transitional provisions.
Differences in accounting for defined benefit pension plans that may give rise to reconciling differences include, but are
not limited to those relating to:
• the classification of pension arrangements;
• the calculation of the benefit obligation;
• past service costs;

• insurance contracts;
• measurement of plan assets;
• application of an asset cap;
• recognition of actuarial gains and losses; and
• settlements and curtailments.
Certain of the differences in accounting for pension costs under IFRS and US GAAP are illustrated by the following
22.1 Classification of a pension arrangement

Differences between the IFRS and US GAAP criteria for classification of a pension arrangement as either defined benefit
or defined contribution may result in accounting differences, as reported by Akzo Nobel and Stora Enso in the
following extracts.
Extract 88: Akzo Nobel

(23) Application of Generally Accepted Accounting Principles in the United States of America [extract]
(b) …
During 2005, Akzo Nobel reached an agreement with the unions on a change of its pension plan in the Netherlands, so that,
effective December 31, 2005, it changed from a defined benefit plan to a defined contribution plan for IFRS, as the actuarial
or investment risks related to the Dutch plan no longer rest with the company. However, SFAS 87 specifically prescribes for
a defined contribution plan that the plan provides an individual account for each participant. The Dutch plan does not provide
such individual accounts per participant as it is a collective defined contribution plan. Therefore, in accordance with
SFAS 87 the changed pension plan in the Netherlands still is to be qualified as a defined benefit plan for US GAAP purposes.
…
Extract 89: Stora Enso

Note 32—Summary of differences between International Financial Reporting Standards and Generally Accepted
Accounting Principles in the United States of America [extract]
a) Employee benefit plans [extract]
…
Disability benefits under the Finnish statutory employment pension scheme (“TEL”) were previously accounted for as a defined
benefit plan under IFRS. In late 2004 the Finnish Ministry of Social Affairs and Health approved changes to the TEL which
affected the method for calculating and funding these disability benefits (see note 21). IFRS provides that the use of insurance
premiums to fund benefits should be accounted for using defined contribution accounting as long as a company retains no ongoing
legal or constructive obligations, under any circumstances. Because of this change to the TEL the disability benefits are accounted
fort as a defined contribution plan under IFRS. In 2004, the Company recorded a reduction in personnel expenses amounting to
€179.9 million for its defined benefit obligation related to those benefits. U.S. GAAP contains no provision to allow defined
contribution accounting where insurance premiums are used to fund benefits. Under U.S. GAAP, the cost of a benefit can and
should be determined without regard to how an employer decides to finance the plan. The changes to the TEL had no impact on
the defined benefit accounting treatment for the disability benefits under U.S. GAAP.
…
61
22.2 Past service cost

In the extract below Syngenta reports a difference in the periods over which past service costs are recognised.
Extract 90: Syngenta

33. Significant differences between IFRS and United States Generally Accepted Accounting Principles [extract]
d: Pension provisions (including post-retirement benefits) [extract]
…
As described in Note 26, past service cost of US$60 million related to the Swiss pension plan rule change was expensed for IFRS
in 2004. For US GAAP, in accordance with SFAS No. 87, this cost is being amortized over the expected future service period of
that part of the workforce which was affected – approximately 8 years. Amortization expense of US$7 million was recorded for
US GAAP in 2005.
…
22.3 Measurement of plan assets

Electrolux reports a difference in the measurement of pension plan assets in the following extract.

Pensions and other post-employment benefits [extract]
Accounting for pensions and other post-employment benefits is made in accordance with IAS 19, Employee Benefits. Under
US GAAP, guidance is defined in SFAS 87, Employers’ Accounting for Pensions, and SFAS 106, Employers’ Accounting for
Post-retirement Benefits Other than Pensions. The material differences between IAS 19 and US GAAP which affect the Group are:
…
Under IAS 19, the estimated return on plan assets is based on actual market values, while US GAAP allows market-related values
as the basis for estimation of the return on assets.
…
22.4 Asset cap

In the extract below, Lafarge reports a difference arising from the application of an asset cap under IFRS.
Extract 92: Lafarge

2. Pension obligations [extract]
Accounting for pensions [extract]
Under U.S. GAAP, pension costs are accounted for in accordance with SFAS 87, “Employers’ Accounting for Pensions”
(“SFAS 87”), SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits” (“SFAS 88”) and SFAS 106, “Employers’ Accounting for Post retirement Benefits Other than Pensions” (“SFAS 106”).
IAS 19 is the corresponding standard applicable to employee benefits under IAS / IFRS. A limited number of discrepancies
between these two sets of standards have been identified. They concern:
…
the limitations applicable, under IAS 19 (asset ceiling), to prepaid pension costs to be recognized on the employer’s balance
sheet for the overfunding of a plan’s liabilities by its dedicated assets, which have no direct equivalent under U.S. GAAP;
…

22.5 Actuarial gains and losses
Reuters and British Airways illustrate differences arising on the recognition of actuarial gains and losses in the
following extracts.
Extract 93: Reuters

g. Pensions [extract]
Under IFRS, pension assets, defined benefit pension liabilities and pension expense are determined using the Projected Unit Credit
Method in a similar manner to US GAAP. However, under IFRS all actuarial gains and losses which arise in calculating the
present value of the defined benefit obligation and the fair value of plan assets, are recognised immediately in the statement of
recognised income and expense.
Under US GAAP, actuarial gains and losses in excess of the corridor are recognised over the average remaining service life of
the employees. …

(a) Pensions costs [extract]
…
Under IFRS the Group applies the 10% corridor test at the beginning of the year, to determine whether actuarial gains and losses
due to differences between expected and actual performance require amortisation. Where the gain or loss exceeds 10% of the
greater of the projected benefit obligation or the market related value of the scheme’s assets, the excess is amortised over the
active participants’ average remaining service periods. Under US GAAP, the Group has opted to apply the zero corridor approach,
and amortises the actuarial gain or loss over the average remaining service periods.
…
22.6 Curtailments
Differences can arise in the timing of the recognition of gains or losses on a curtailment, as reported by Rhodia in the
extract below.
Extract 95: Rhodia

39 Reconciliation to IFRS as adopted by the International Accounting Standards Board (“IASB”) and to U.S. GAAP [extract]
(i) Pension and retirement plans [extract]
Curtailments
Under U.S. GAAP, curtailment losses are recognized in income when it is probable that a curtailment will occur and that the
effect of the curtailment is reasonably estimable. Curtailment gains are deferred until realized and are recognized in income when
the related employees terminate or when the plan suspension or amendment is adopted. Under IFRS, curtailment gains and losses
are recognized in income when curtailments occur.
Under U.S. GAAP, the calculation of gains and losses on curtailments includes unrecognized prior-service cost for which
services are no longer expected to be rendered, and changes in the projected benefit obligation (net of any unrecognized gains or
losses). Under IFRS, the calculation of gains and losses on curtailments includes any related changes in the present value of the
defined benefit obligation, any related changes in the fair value of the plan assets and any related actuarial gains and losses and
past-service cost that had not previously been recognized.
63
23 Post-retirement benefits other than pensions

The principal IFRS standard for accounting for all types of employee benefit plans other than share-based payments is
IAS 19 Employee Benefits. The principal US GAAP standard for post-retirement benefits other than pensions is FAS 106
Employers ’ Accounting for Postretirement Benefits Other Than Pensions. The guidance in FAS 106 is similar to that in
FAS 87 Employers’ Accounting for Pensions and FAS 88 Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, such that many of the differences between the IFRS and
US GAAP treatments of pension benefits described in section 23 apply also to other post-retirement plans.
24 Other employee benefits

The principal standards for accounting for other employee benefits are IAS 19 Employee Benefits under IFRS and
FAS 112 Employers’ Accounting for Postemployment Benefits (an amendment of FASB Statements No. 4 and 43) under
US GAAP.
The accounting treatment for termination benefits related to a restructuring event is discussed in section 17.
Certain countries have specific plans for employee early retirement or severance benefits and the accounting for these
plans can differ according to the nature of the benefit obligation.
Certain of the differences in accounting for other employee benefits under IFRS and US GAAP are illustrated by the
following extracts from Form 20-F filings
France Telecom accounts for an early retirement plan as a termination benefit under IFRS, but as a post-employment
benefit plan under US GAAP.

Pension obligations and other employee benefits (Q) [extract]
…
Under IFRS, the early retirement plan in France is treated as a termination benefit and changes in actuarial assumptions are fully
charged to the income statement. Under US GAAP, the early retirement plan in France does not qualify for termination benefit
accounting treatment and is accounted for as a post-employment benefit with actuarial gains and losses recognized over the
remaining service period (ending in 2006). As a consequence, the related expense included in the restructuring costs in the IFRS
statement of income, is classified within other operational expenses under US GAAP.
…

Air France – KLM implemented an early retirement programme and accounted for the benefits as termination costs under
IFRS but expensed the costs as incurred under US GAAP.
Extract 97: Air France – KLM

41.1 Reconciliation of net income and of Stockholders’ equity [extract]
Differences between accounting principles followed by the Company and U.S. GAAP [extract]
(c) Pensions and post-retirement benefits [extract]
• Provision for early retirement
In accordance with French law. Air France-KLM has implemented a voluntary early retirement program for employees
between 55 and 60 years of age (normal retirement age). During this early retirement period, employees receive 80% of their full
time salary for working part time. The employees are required to work 50% of the total working time remaining until normal
retirement age. In most cases, the employees work 80% of the total time during the first half of the period and 20% during the
second half. Under IFRS, the Company treated the additional benefits granted under the early retirement program as termination
benefits and recorded a liability at the date of the offer to the employees.
Under U.S. GAAP, such costs are expensed as incurred as they relate solely to future service periods and do not qualify as
post-employment benefits according to SFAS 112, Employers’ Accounting for Post-employment Benefits.
Bayer accrued for the costs of an early retirement programme under IFRS but spread the costs over the remaining service
lives of participating employees under US GAAP.
Extract 98: Bayer

e. Early retirement program [extract]
The Company offers an early retirement program to its employees that provides an employee with the opportunity to work fulltime
for a period of up to two and a half years and receive fifty percent of his or her base salary for up to five years (i.e., including a
period of up to two and a half years of non-work), plus additional bonus payments during each of those five years. Under IFRS,
the company immediately accrued and expensed a portion of the related early retirement benefit obligation for certain qualified
employees who participate or are expected to participate in this program in future periods. Under U.S. GAAP, such early
retirement benefits are accrued over the employees’ remaining service lives for participating employees that signed an early
retirement agreement.
…
Benetton treats a termination indemnity benefit as a defined benefit plan under IFRS but recorded the indemnity at the
present value of the vested benefits under US GAAP.
Extract 99: Benetton

29 Summary of significant differences between IFRS and U.S. GAAP [extract]
(e) Employee benefits. The Group’s employees in its Italian operations receive when they leave the Company a termination
indemnity benefit. In accordance with Italian Severance Pay Statutes, the Group is registered to record an indemnity liability for
severance of employment. Under IFRS this benefit is treated as a defined benefit plan and is accounted based on actuarial
calculations. Actuarial gains and losses arising on changes to the underlying assumptions that are incorporated into the calculation
of defined the benefit plans are accounted for in the income statement using the corridor method.
Under U.S. GAAP in accordance with EITF 88-1 the Group elected to record the employee termination indemnity at present value
of the vested benefits to which the employee is entitled if the employee separates immediately.
65
25 Earnings per share

The principal standards for earnings per share are IAS 33 Earnings per Share under IFRS and FAS 128 Earnings per
Share under US GAAP. Differences between IFRS and US GAAP mostly arise because of differences in computational
guidance for diluted earning per share in the two standards and include, but are not limited to those relating to:
• the application of the treasury stock method;
• the treatment of contracts that may be settled in shares or cash; and
• contingently issuable shares.
26 Cash flow statements

The principal standards for cash flow statements are IAS 7 Cash Flow Statements and FAS 95 Statement of Cash Flows.
The guidance under the two standards is broadly comparable but differences can arise due to differences between IFRS
and US GAAP in respect of the definition of cash, and the classification of specific items, including, but not limited to,
interest, dividends and income tax.
27 Related party transactions

The principal standards for related party transactions are IAS 24 Related Party Disclosures and FAS 57 Related Party
Disclosures. Although related parties are defined differently in IAS 24 and FAS 57, in practice the differences between
IFRS and US GAAP requirements on reporting related party transactions generally are limited.
28 Post balance sheet events

The principal standard for post balance sheet events under IFRS is IAS 10 Events after the Balance Sheet Date.
The equivalent guidance under US GAAP is provided by Statement on Auditing Standards No. 1.
Accounting for post balance sheet events is broadly comparable under both IFRS and US GAAP but differences are
possible in practice. For example, a refinancing of a current liability that occurs after the balance sheet date but before
the financial statements are issued may be treated differently under IAS 10 and FAS 6 Classification of Short-Term
Obligations Expected to Be Refinanced, as reported by China Southern Airlines reports in the following extract.

(h) Classification of short-term obligations expected to be refinanced
As described in Note 27 to the consolidated financial statements prepared under IFRSs, the short-term notes payable included
certain notes payable of RMB2,611 which were renewed subsequent to December 31, 2005. The maturity dates of these notes
payable are extended for twelve months to after December 31, 2006.
Under U.S. GAAP, such short-term obligations which were refinanced on a long-term basis after the balance sheet date but
before issuance of financial statements are classified as non-current liabilities. Consequently, under U.S. GAAP, short-term notes
payable and consolidated current liabilities would be RMB18,834 and RMB35,739, respectively, at December 31, 2005.

First-time adoption of IFRS
There are many areas in which the requirements of IFRS and US GAAP are similar. Nevertheless, a considerable number
of reconciling differences may still arise as a result of the first-time adoption rules in IFRS 1 First-time Adoption of
International Financial Reporting Standards. An entity preparing an IFRS to US GAAP reconciliation is required to
apply US standards as if it had always applied those standards. Conversely, IFRS 1 provides first-time adopters with a
number of exemptions from full retrospective application. In some cases these rules permit a first-time adopter to base
IFRS information on measurements under its previous GAAP. Hence, some of the reconciling items may reflect
differences between a first-time adopter’s previous GAAP and US GAAP, rather than differences between IFRS and
US GAAP.
The different types of reconciling items that result from the application of IFRS 1 are discussed below.
Initial measurement in opening IFRS balance sheet

The following exemptions allow an entity to avoid a fully retrospective application of IFRS:
• Business combinations – A first-time adopter may elect not to apply IFRS 3 Business Combinations retrospectively to
business combinations that occurred before its date of transition to IFRS. Consequently, assets and liabilities
acquired and goodwill may be stated at amounts that differ from the amounts that would be recognised under
US GAAP. These differences may affect future gains and losses, depreciation charges and impairment charges;
• Fair value or revaluation as deemed cost – Instead of determining the historical cost basis for investment property,
intangible assets and property, plant and equipment, a first-time adopter is permitted to use fair value at the date of
transition or a revaluation under previous GAAP. This will affect both future balance sheets and income statements
under IFRS, and result in reconciling items with US GAAP for as long as the entity owns the assets;
• Employee benefits – First-time adopters are allowed to recognise all cumulative actuarial gains and losses at the date
of transition to IFRS, even if they use the corridor approach for later actuarial gains and losses;
• Cumulative translation differences – A first-time adopter is allowed to reset the cumulative translation difference to
zero. This means that upon disposal of a foreign operation, the gain or loss recognised under IFRS and US GAAP
will differ due to the cumulative translation difference up to the date of transition, which is deemed to be zero under
IFRS but must be recognised under US GAAP;
• Designation of previously recognised financial instruments – A first-time adopter is allowed to designate a financial
instrument at the date of transition to IFRS (or the beginning of the first IFRS reporting period, if comparatives are
not restated) as a ‘financial asset or financial liability at fair value through profit or loss’ or as available-for-sale; and
• Hedge accounting – Under the requirements of IFRS 1, transactions accounted for as hedges under national GAAP
either will continue to receive hedge accounting treatment if hedge documentation is prepared under IFRS, or are
accounted for as discontinued hedges under IFRS if no hedge documentation is prepared.
Prospective application of standards

IFRS 1 provides special rules that allow a first-time adopter not to apply IFRS to share-based payment and derecognition
of financial assets and financial liabilities transactions that were entered into before certain dates.
67
F IRST - TIME A DOPTION OF IFRS
Other first-time adoption exemptions and exceptions

It should be noted that IFRS 1 also provides exemptions and exceptions relating to the following areas, which may not
create additional reconciling differences but could affect the size and nature of existing reconciling differences:
• compound financial instruments;
• assets and liabilities of subsidiaries, associates and joint ventures;
• insurance contracts;
• changes in existing decommissioning, restoration and similar liabilities;
• estimates;
• accounting for arrangements containing leases;
• assets classified as held for sale and discontinued operations; and
• comparative information for financial instruments and insurance contracts.
Survey results
Of the 130 companies, 102 are first-time adopters of IFRS. All but two of the first-time adopters are incorporated in EU
countries. The two non-EU companies are incorporated in Norway and Venezuela. Only one of the 102 first-time
adopters did not apply any of the elective transition exemptions available under IFRS 1. Differences related to IFRS 1
elective exemptions account for 6 of the 10 most reported differences and 20% of the total number of differences reported.
The following chart shows the percentage of first-time adopters applying each of the most common of the IFRS 1 elective
transition exemptions.
100%
80%
60%
40%
20%
0%
Share-based
differences
accounting
Combinations
Deemed cost
Employee
translation
Currency
benefits
payments
Hedge
Business

SEC accommodation for first-time adoption of IFRS
In April 2005, the SEC amended Form 20-F to change the filing requirements for foreign private issuers that are first-time
adopters of IFRS. The amendment allows eligible foreign private issuers for their first year of reporting under IFRS to
file two years rather than three years of statements of income, changes in shareholders’ equity and cash flows prepared in
accordance with IFRS, with appropriate related disclosure. The amendment applies to a foreign private issuer:
• that is a ‘first-time adopter’ of IFRS, as defined in IFRS 1; and
• that adopts IFRS as its basis of accounting prior to or for the first financial year starting on or after 1 January 2007.
The accommodation is only available to a foreign private issuer that is able to state unreservedly and explicitly that its
financial statements comply with IFRS, and are not subject to any qualification relating to the application of IFRS as
issued by the IASB. However, the accommodation is available to a foreign private issuer that prepares its financial
statements in accordance with IFRS as adopted by the European Union if it also provides an audited reconciliation to
IFRS as published by the IASB.
Foreign private issuers relying on the accommodation continue to be required to provide an audited reconciliation to
US GAAP for the two financial years presented under IFRS.
The accommodation requires disclosure of (1) the foreign private issuer’s reliance on any of the transitional measurement
exemptions available to a first-time adopter under IFRS 1, and (2) a reconciliation of specified financial statement
elements from previous GAAP to IFRS.
The SEC accommodation was available to all first-time adopters and was applied by 90 of the 102 first-time adopters.
Of the twelve first-time adopters that did not apply the accommodation, seven are incorporated in the United Kingdom
and the others are from Belgium, Finland, Germany, Luxembourg and Sweden.
69
I NDUSTRY S ECTOR A NALYSIS
Industry sector analysis

We have separately identified and analysed companies in seven sectors. The industries selected were Air Transport,
Chemicals, Extractive Industries, Financial Services, Pharmaceuticals, Telecommunications and Utilities and Energy.
The ranges of differences reported by percentages of companies in each industry sector are shown below.
3-10 Total differences 11-20 Total differences 21-29 Total differences
Air Transport
Chemicals
Extractive Industries
Financial Services
Pharmaceuticals
Telecommunications
Utilities and Energy
Entire survey
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Air Transport
Introduction
The companies in the Air Transport sector are engaged in the operation of international and domestic scheduled and
charter air services for the carriage of passengers, freight and mail. Of the 130 companies, five met the criteria for an Air
Transport company. Four of the five companies have core business lines related to passenger transportation, while the
other one is primarily focused on mail and freight services. The companies in the Air Transport sector have a combined
fleet of over 1,300 aircraft. Three of the five companies are incorporated in the EU; the other two are incorporated
in China.
71
A IR T RANSPORT
Net income reconciliation
Provisions and contingencies
Pensions and post-retirement

Net profit/loss under IFRS
Financial instruments –
Business combinations
Net profit/loss under

Property, plant and
accounting
US GAAP
equipment
Taxation
Leasing
benefits
Others
Air France-KLM 100% 21.2% -10.0% 1.8% 2.1% 1.3% -4.6% -0.2% -1.6% 110.0%
British Airways 100% 0.2% 1.3% -48.6% 2.2% 51.7% -1.3% -62.3% -10.4% 32.8%
China Eastern
-100% -122.4% 16.0% 12.9% -101.0% -1.5% -296.0%
Airlines
China Southern
-100% 7.2% 2.3% -0.1% -90.6%
Airlines
TNT 100% 1.2% -2.4% -2.9% 95.9%
Net equity reconciliation

Net equity under US GAAP

Net equity under IFRS

Property, plant and
accounting
equipment
Taxation
Leasing
benefits
Others
Air France-KLM 100% -12.5% 6.5% -1.4% -0.3% -3.6% -1.4% 0.6% 2.6% 90.5%
British Airways 100% -4.9% -13.3% 1.0% -10.5% 52.8% -1.2% 123.9%
China Eastern
100% 6.1% -6.6% 0.1% 0.5% 100.1%
Airlines
China Southern
100% -3.0% 1.1% -14.8% 83.3%
Airlines
TNT 100% 1.0% 1.4% -17.4% -0.4% 84.6%

Analysis
The net income and net equity reconciliations presented by the five companies in the Air Transport sector show that the
most significant differences, both in terms of the total number of individual differences reported and the percentage
impact on net income and net equity, relate to pensions and post-retirement benefits, business combinations and
provisions and contingencies.
The most significant area of industry-specific IFRS to US GAAP difference is accounting for aircraft overhaul and
maintenance provisions. The analysis also revealed that all five companies disclosed differences relating to sale and
operating leaseback transactions, although the impact of these differences on net profit or loss and shareholders’ equity
are relatively small and only quantified by three companies in their reconciliations.
Companies in the Air Transport sector have a wide range of reported differences. One company reported only eight
differences, while another reported twenty individual differences.
The reconciling differences had the following impact on net profit or loss and net equity:
• Two out of the five companies showed an overall increase in profit or decrease in loss of 10% and 9.4% while three
showed an overall decrease in profit or increase in loss of between 4.1% and 196%.
• Two out of the five companies showed an overall increase in equity of 0.1% and 23.9% while three showed an overall
decrease in equity of between 9.5% and 16.7%.
A total of 67 individual reconciliation differences, representing 30 unique differences, were reported by the five Air
Transport sector companies. These 30 unique differences were allocated to 18 areas of accounting, or categories.
Certain of these categories have been combined to align the descriptions of differences with the quantifications of those
differences disclosed in the reconciliations. Also, the survey included three companies that are first-time adopters of
IFRS. These companies reported a total of 17 reconciling items due to applying the exemptions from full retrospective
application of IFRS provided by IFRS 1 First-time Adoption of International Financial Reporting Standards. We have
allocated those differences to the appropriate underlying categories as the reconciliations do not separately identify the
impact of first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each
of the most significant resulting categories are presented in the table below.
Property, plant and equipment 4
Leasing 8
Others 25
67
73
A IR T RANSPORT
Sector differences
Major overhaul and maintenance costs
Under IFRS, IAS 16 Property, Plant and Equipment does not permit recognition of provisions in connection with major
inspections, maintenance or overhaul of property, plant and equipment. However, when specific recognition criteria are
met, these expenses may be capitalised.
The principal source of guidance under US GAAP for planned major maintenance activities is the AICPA Industry Audit
Guide, Audits of Airlines, which permits four alternative methods of accounting; direct expense; built-in overhaul;
deferral; and, accrual (accrue-in-advance). A FASB Staff Position, FSP AUG AIR-1, was issued in September 2006 and
amends certain provisions in the AICPA Industry Audit Guide to prohibit the use of the accrue-in-advance method of
accounting for planned major maintenance activities. The FASB believes that the accrue-in-advance method results in the
recognition of liabilities that do not meet the definition of a liability in FASB Concepts Statement No. 6 Elements of
Financial Statements.
With no specific guidance on accounting for and recognition of the cost of planned major maintenance, inspection or
overhaul under US GAAP, many companies have historically followed the policy applied for local financial statements
and avoided a reconciliation difference.
For many companies, the adoption of IFRS has resulted in a change in accounting for major inspections, maintenance or
overhaul costs from a policy under previous GAAP of expensing as incurred to an IFRS policy of capitalising and
amortising these costs. To continue to avoid a reconciliation difference, a similar change in accounting policy under
US GAAP is required.
Two companies, British Airways and China Eastern Airlines, disclosed a US GAAP cumulative effect adjustment for a
change of accounting principle required to re-align the US accounting policy following a change of accounting on the
adoption of IFRS.

(e) Change in accounting principle
Under IFRS the Group has applied the component based approach of IAS 16 ‘Property, Plant and Equipment’ for tangible assets.
This resulted in a change in accounting policy for the costs of major engine overhaul as compared to the accounting previously
applied under UK GAAP. Previously, under UK GAAP, the Group had expensed these costs as incurred, but under IAS 16 these
costs are capitalised at the time of expenditure and amortised over the period between major overhauls.
As of April 1, 2005, the Group changed its US GAAP accounting policy for major engine overhaul from ‘expense as incurred’ to
‘capitalise and amortise’. This change represents a change in accounting principle as defined by APB No. 20 ‘Accounting
Changes’, and a cumulative effect adjustment is recorded in the 2005/06 Income Statement.
The Group changed its accounting policy under US GAAP because it believes the new policy results in a better matching of
revenues and expenses.

Extract 102: China Eastern Airlines
43 SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP [extract]
(d) Retroactive application of the new overhaul accounting policy adopted in 2005
Prior to the adoption of the revised IAS 16 (Note 2), the Group expensed overhaul costs on owned and finance leased aircraft as
incurred. Upon the adoption of the revised IAS 16 effective January 1, 2005, the Group capitalized overhaul costs as a separate
component of the fixed assets carrying value to be depreciated over the estimated period between overhauls on a straight line
basis. Upon the completion of an overhaul, any remaining balance of the previous overhaul will be derecognised and charged to
the consolidated statements of operations. The adoption of the revised IAS 16 has been applied retrospectively to all
years presented.
Under U.S. GAAP, the capitalization of overhaul costs incurred as a separate component of fixed assets is an acceptable
alternative. Therefore, the Group also changed its accounting policy on overhaul costs for owned and finance lease aircrafts in the
U.S. GAAP condensed consolidated financial statements as such policy was considered to be preferable. Under U.S. GAAP, the
effect of a change in accounting policy is recognized in the period of the change by including the cumulative effect of the change
to the new accounting policy.
The survey identified one company, Air France – KLM, with a current difference arising from continuing to expense
maintenance costs as incurred under US GAAP.

(b) Reconciling items related to aircraft [extract]
• Accounting for maintenance costs
Under IFRS, the Company applies the component method for major airframe and engine maintenance. The estimated
maintenance costs related to aircraft owned and held under finance leases are capitalized and depreciated over the period to the
next major overhaul.
Under U.S. GAAP, the Company accounts for maintenance costs of owned aircraft and aircraft held under capital leases using
the expense as incurred method.
There may also be a reconciling difference in accounting for major overhaul and maintenance costs related to assets held
under operating lease arrangements where the overhaul and maintenance of the aircraft is a contractual obligation under
the terms of the lease. This difference was identified by China Southern Airlines, however the effect of this difference
was not considered to have a material impact on reported net loss or shareholder’s equity.

(g) Provision for major overhauls [extract]
As disclosed in Notes 2(u) and 33 to the consolidated financial statements prepared under IFRS, in respect of aircraft held
under operating leases, a provision is made over the lease term for the estimated cost of overhauls required to be performed on the
related aircraft prior to their return to the lessors.
Under U.S. GAAP, a liability is recorded at the outset of the operating leases for the fair value of contractual obligations to
perform the overhauls and a deferred asset is recorded for the corresponding amount, which is amortized over the term of the
operating lease. …
75
A IR T RANSPORT
Leasing
Sale and leaseback
There are differences between IFRS and US GAAP in accounting for sale and leaseback transactions, particularly when
the resultant lease is an operating lease. Sale and operating leasebacks are common in the airline industry, as indicated by
all five Air Transport sector companies reporting differences arising from such arrangements. IAS 17 Leases requires the
gain on a sale and operating leaseback to be recognised immediately where the sale price is established at fair value.
Under FAS 98 Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate; Sales-Type Leases of Real
Estate; Definition of the Lease Term; Initial Direct Costs of Direct Financing Leases, any gain arising on a sale and
operating leaseback is generally deferred and only recognised over the lease rental period. An example of disclosure of
this difference is provided by the following extract for British Airways.

(h) Gains on sale and leaseback transactions
Under IFRS, gains arising on sale and leaseback transactions are recognised as part of net income to the extent that the sale
proceeds do not exceed the fair value of the assets concerned. Gains arising on the portion of the sale proceeds which exceed the
fair value are deferred and amortised over the minimum lease term. Under US GAAP, the total gains arising on qualifying sale
and leaseback transactions are deferred in full and amortised to income over the minimum lease term.
Leases involving governmental units

Under IFRS, there is no specific guidance on accounting for leases of properties owned by a government unit or authority
and therefore the general rules for leases in IAS 17 apply. Under IAS 17, a lessee should account for a lease as a finance
lease when the lease transfers substantially all the risks and rewards incidental to ownership to the lessee, even if legal
title is not transferred. All other leases are operating leases.
Under US GAAP, there is specific guidance in FIN 23 Leases of Certain Properties Owned by a Governmental Unit or
Authority for accounting for leases of certain properties owned by a government unit or authority. Under FIN 23, because
of the special provisions normally present in leases involving property owned by a governmental unit or authority, for
example, terminal space and other airport facilities, the economic life of such facilities is indeterminate and the concept of
fair value is not applicable to such leases. Further, since leases involving property owned by a governmental unit or
authority do not provide for a transfer of ownership or a bargain purchase option, they should be classified as operating
leases. Our survey indicated that one company, Air France – KLM, reported a difference in this respect, as described in
the following extract.

(b) Reconciling items related to aircraft [extract]
• Leases involving governmental units
Under IFRS, certain lease agreements with Aéroports De Paris (“ADP”), a governmental unit, have been accounted for as
finance leases in accordance with IAS 17 Leases.
Under US GAAP, in accordance with FIN 23 Leases of certain properties owned by a governmental unit or authority, lease
agreements with ADP have been accounted for as operating leases.

Chemicals
Introduction
The companies in the Chemicals sector provide a range of services such as manufacturing, distribution, research and
processing of varied products, including high value chemicals, plastics, health care products, intermediate petrochemicals,
fine chemicals, crude oil and natural gas. Of the 130 companies in the survey, seven are in the Chemicals sector. Five of
these companies are incorporated in the EU; one company is incorporated in Switzerland and one in China.
77
C HEMICALS

Other income differences


Intangible assets
Impairment
accounting
US GAAP
Taxation
Leasing
benefits
Akzo Nobel 100% -5.0% -2.5% 0.8% 10.3% -1.7% -28.0% -0.1% 73.8%
BASF 100% -0.7% 1.5% -0.9% 4.1% -2.4% 0.2% 101.8%
Bayer 100% 0.3% 1.4% 11.3% -1.3% -28.2% -0.3% 83.2%
Imperial Chemical
100% -7.9% 5.9% 0.8% 4.9% -45.1% -5.1% 53.5%
Industries
Rhodia -100% -7.8% -1.1% 2.9% 1.8% -0.2% 5.0% -4.4% -1.0% -104.8%
Sinopec Shanghai
100% 0.1% 1.2% 101.3%
Petrochemical
Syngenta 100% -14.0% -1.1% 3.9% -1.4% -2.4% 4.5% 89.5%


Other equity differences

Intangible assets
Impairment
accounting
Taxation
Leasing
benefits
Akzo Nobel 100% 90.0% -0.9% 1.8% -4.2% 9.6% -0.1% 196.2%
BASF 100% 2.1% -0.1% 0.1% -2.7% 0.7% 5.4% -0.2% 105.3%
Bayer 100% 8.3% -1.2% -2.4% 0.9% 6.2% -1.1% 110.7%
Imperial Chemical
-100% 400.7% 16.0% -17.5% -3.1% 29.3% 2.5% 327.9%
Industries
Rhodia -100% -3.2% -4.3% 0.7% -3.0% 1.3% -7.1% 17.6% 0.6% -97.4%
Sinopec Shanghai
100% 0.2% 0.2% 100.4%
Petrochemical
Syngenta 100% 4.4% 0.3% -6.5% 1.1% 0.3% 0.6% 100.2%

Analysis
The differences that had the most significant impact on the reconciliations of Chemicals sector companies, both in terms
of the total number of differences reported and the percentage impact on net profit/loss and net equity, relate to first-time
adoption exemptions for business combinations, accounting for pensions and post-retirement benefits and provisions for
restructuring, other terminations and early retirement.
The only area of reported IFRS to US GAAP difference that is particularly prevalent in the Chemicals sector is accounting
for research and development projects, either acquired in a business combination or developed internally.
The Chemicals sector companies reported a wide range of total differences. One company reported only four differences
while another reported 19 individual differences.
The reconciling differences have had both a positive and negative effect on the statements of profit and loss and equity.
• Five of the seven companies showed an overall decrease in profits or increase in losses of between 4.8% and 46.5%
while the remaining two companies showed an overall increase in profit of 1.3% and 1.8%.
• Six of the seven companies showed an overall increase in net equity of between 0.2% and 96.2% while the other
company, Imperial Chemical Industries, showed an overall increase in net equity of 427.9%, mostly due to purchase
accounting adjustments resulting in the recognition of additional goodwill and other intangible assets under
US GAAP.
The seven companies reported a total of 98 individual differences, representing 43 unique differences. These 43 unique
differences were allocated to 17 areas of accounting or categories. Certain of these categories have been combined to
align the descriptions of differences with the quantifications of those differences disclosed in the companies’
reconciliations. Also, the survey included four companies that are first-time adopters of IFRS. These companies reported
a total of 16 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by
IFRS 1 First-time Adoption of International Financial Reporting Standards. We have allocated those IFRS transition
differences to the appropriate underlying areas of accounting or categories as the companies’ reconciliations do not
separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling
items allocated to each of the most significant resulting categories are presented in the table below.
Intangible assets 2
Impairment 6
Leasing 2
Others 36
98
79
C HEMICALS
Sector differences
Business combinations and intangible assets
Development costs, both acquired in a business combination and internally developed
Companies in the Chemicals sector invest significant amounts in the development of new products.
Under IFRS 3 Business Combinations, the amounts allocated to acquired in-process research and development projects
which meet the recognition criteria are capitalised as part of the purchase price allocation and amortised over the
appropriate useful economic lives.
Under US GAAP, a portion of the purchase price paid in a business combination is allocated to tangible and intangible
assets to be used in research and development projects that have no alternative future use and charged to expense at the
acquisition date.
Two out of the seven companies, BASF and Bayer, disclosed differences relating to acquired in-process research and
development costs. Extracts for these companies are included below.
Extract 107: BASF

5. Reconciliation of net income and stockholders’ equity to U.S. GAAP [extract]
(f) Acquisitions [extract]
A difference between U.S. GAAP and IFRS with respect to the first-time consolidation involves the treatment of in-process
research and development projects of acquired businesses. Whereas these costs are expensed in the first year of consolidation
under U.S. GAAP, IFRS requires that these costs are capitalized as intangible assets and are amortized over their useful lives. …
Extract 108: BAYER

c. In-process research and development [extract]
IFRS does not consider that in-process research and development (“IPR&D”) is an intangible asset that can be separated from
goodwill, unless both the definition and the criteria for recognition of an intangible asset are met.
Under U.S. GAAP IPR&D is considered to be a separate asset that needs to be written-off immediately following an acquisition
when the feasibility of the acquired research and development has not been fully tested and the technology has no alternative
future use.
During 2002, IPR&D has been identified for U.S. GAAP purposes in connection with the Aventis CropScience and Visible
Genetics acquisitions. Fair value determinations were used to establish €138 million of IPR&D related to both acquisitions, which
was expensed immediately for U.S. GAAP purposes. The independent appraisers used a discounted cash flow income approach
and relied upon information provided by the Group management. The discounted cash flow income approach uses the expected
future net cash flows, discounted to their present value, to determine an asset’s current fair value.
…
Under IFRS, development costs may be recognised as assets if they meet the IAS 38 Intangible Assets definition and
criteria for capitalisation as an intangible asset.
Under US GAAP, research and development costs generally should be expensed as incurred in accordance with FAS 2
Accounting for Research and Development Costs.

The survey identified two companies, Rhodia and Akzo Nobel with differences related to capitalisation of internal
development costs. Extracts for these companies are included below.
Extract 109: Rhodia

39. Reconciliation to IFRS as adopted by the International Accounting Standards Board (“IASB”) and to U.S. GAAP
[extract]
a) Accounting policies [extract]
(iii) Capitalized development costs
Under U.S. GAAP, development expenses are expensed when incurred. Under IFRS, development expenses that meet specific
criteria are capitalized in other intangible assets and are amortized over their estimated useful lives. Capitalized expenditures
include personnel costs, material costs and services used that are directly assigned to the projects concerned.
Extract 110: Akzo Nobel

(23) Application of Generally Accepted Accounting Principles in the United States of America [extract]
(f) In accordance with IFRS development costs are to be capitalized and amortized, if certain conditions have been met.
US GAAP does not allow capitalization and amortization of development costs. For US GAAP purposes, these costs have to be
expensed as incurred. …
81
E XTRACTIVE I NDUSTRIES
Extractive Industries
Introduction
The Extractive Industries sector represents a broad range of natural resource extraction activities. The companies in this
sector are involved in mineral extraction, from mining of precious metals to quarrying commercial construction materials,
as well as exploration, production, refining and marketing of oil and natural gas. A total of 15 companies out of the 130
companies in the survey meet the general criteria of an Extractive Industries company. Of these, eleven are incorporated
in the EU, three are incorporated in China and one is incorporated in Papua New Guinea.


Capitalisation of borrowing
Net profit under US GAAP

Share-based payments
Property, plant and
Impairment
equipment
Inventory
Taxation
benefits
Others
costs
Oil and gas
BP 100% 0.1% -2.3% -1.6% -0.9% -0.1% -3.2% -2.8% 89.2%
China Petroleum
100% 0.1% 14.3% 0.2% 0.1% -4.4% -1.3% 109.0%
& Chemical
Co. Générale de
-100% 34.6% -19.2% 191.0% 106.4%
Géophysique
Eni 100% -0.1% -10.9% -3.2% 0.4% 86.2%
PetroChina 100% 4.9% -1.6% -4.5% 98.8%
Repsol 100% -0.9% 1.4% -2.0% 0.9% 0.1% -8.7% -0.2% -1.7% 88.9%
Royal Dutch Shell 100% 1.4% -0.1% -0.2% -1.5% 1.9% 101.5%
Total 100% -7.3% -2.8% -1.5% 3.7% -1.5% 3.9% 94.5%
Mining and construction materials

CRH 100% -2.8% 0.1% 0.6% -5.2% -1.9% 0.4% 91.2%
Hanson 100% 2.4% -5.0% 0.6% -0.4% 34.7% -2.9% -8.2% -1.5% 119.7%
Lafarge 100% 6.8% -2.0% 1.3% -7.8% 1.8% 100.1%
Lihir Gold 100% 37.4% -8.3% 94.0% 223.1%
Randgold
100% 2.8% -8.2% 94.6%
Resources
Rio Tinto 100% -1.1% 1.8% -1.3% -4.1% 95.3%
Yanzhou Coal
100% 6.5% -2.2% -0.4% 103.9%
Mining
83

Property, plant and
Impairment
equipment
Inventory
Taxation
benefits
Others
costs
Oil and gas
BP 100% 0.2% 0.5% 0.6% -0.3% -0.2% 6.0% 0.1% 106.9%
China Petroleum
100% -0.2% -0.8% -0.2% -0.1% 0.4% 0.3% 99.4%
& Chemical
Co. Générale de
100% 1.9% -1.2% -0.4% -1.7% 98.6%
Géophysique
Eni 100% 2.2% 0.6% -5.6% -9.3% 7.3% 95.2%
PetroChina 100% 0.3% -4.9% 1.6% -5.2% 91.8%
Repsol 100% -4.4% -0.6% -2.2% 0.2% 11.6% 0.3% 104.9%
Royal Dutch Shell 100% 0.2% -2.4% 6.7% -1.0% 103.5%
Total 100% 71.2% 8.1% 0.4% -4.6% 0.6% 4.1% 179.8%
Mining and construction materials

CRH 100% 6.3% -0.4% 2.2% 7.5% -1.0% 114.6%
Hanson 100% -2.1% 0.2% -0.2% 0.9% 18.2% -2.9% 114.1%
Lafarge 100% 2.5% -2.6% -0.1% 7.8% 0.3% 107.9%
Lihir Gold 100% -32.7% 0.7% 13.7% -12.5% 69.2%
Randgold
100% -2.3% 97.7%
Resources
Rio Tinto 100% 10.6% -1.6% 2.5% 3.7% 115.2%
Yanzhou Coal
100% -0.8% -6.0% 2.2% -0.6% 94.8%
Mining

Analysis
The analysis of reconciliations presented by the Extractive Industries sector identified that the most significant reported
differences, both in terms of the total number of differences and the percentage impact on net income and equity, relate to
business combinations, pensions and post-retirement benefits, property, plant and equipment revaluations and
capitalisation of borrowing costs.
The analysis also identified unique differences more prevalent in the sector. Inventory valuations and provisions for asset
retirement obligations were areas of difference across the entire sector. The capitalisation of exploration and development
costs (unsuccessful wells) is specific to the oil and gas industry and companies involved in mining and construction
materials reported differences relating to the valuation of ore reserves and accounting for mining rights and
stripping costs.
The companies had a wide range of reported differences. One company reported only 4 differences while another
reported 26 individual differences.
The reconciling differences had the following impact on net profit/loss and equity:
• Seven out of the 15 companies showed an overall increase in profit (or decrease in loss) of between 0.1% and 206.4%
while the remaining eight companies showed an overall decrease in profit of between 1.2% and 13.8%.
• Eight out of the 15 companies showed an overall increase in net equity of between 3.6% and 79.8% while the
remaining seven companies showed an overall decrease in net equity of between 0.6% and 30.8%.
The companies reported a total of 188 differences representing 71 unique differences. These 71 unique differences were
allocated to 23 areas of accounting or categories. Certain of these categories have been combined to align the descriptions
of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey
included 10 companies that are first-time adopters of IFRS. These companies reported a total of 40 reconciling items due
to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of
International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate
underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of
first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the
most significant resulting categories are presented in the table below.
Impairment 13
Inventory 4
Others 92
188
85
Sector differences
Inventory
IAS 2 Inventories requires companies to value inventory at the lower of cost and net realisable value. However, the
measurement requirements of IAS 2 do not apply to inventories held by commodity broker-traders who measure their
inventories at fair value less costs to sell.
Under US GAAP, inventories generally should be measured at the lower of cost and market value.
The survey identified two companies which disclose differences relating to the valuation of trading inventories.
An example of this difference is reported by Total in the following extract.
Extract 111: Total

4. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES [extract]
F. Trading Inventories
Under IFRS, inventories held by the Group for its energy trading activities are measured at fair value less costs to sell, based on
the scope exception provided by paragraph 3 b) of IAS 2 “Inventories” for commodity broker-traders.
Under U.S. GAAP, EITF no 02-3 Issues involved in Accounting for Derivative Contracts Held for Trading purposes and Contracts
Involved in Energy Trading and Risk Management Activities prohibits measurement at fair value of physical inventories included
in energy trading activities.

Asset retirement obligations
Under IFRS, the general principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets should be
followed, which require that a provision is recognised only where there is a legal or constructive obligation to incur costs.
There are specific rules under US GAAP for accounting for decommissioning costs in FAS 143 Accounting for Asset
Retirement Obligations. FAS 143 amended FAS 19 Financial Accounting and Reporting by Oil and Gas Producing
Companies to prohibit accounting for estimated dismantlement, restoration, and abandonment costs by a cost
accumulation approach.
Although the guidance under IFRS and US GAAP is similar, differences may arise in practice.
The principal differences between IFRS and US GAAP in accounting for provisions as they relate to decommissioning
costs or asset retirement obligations are due to the treatment of changes in discount rates. Under IAS 37, no guidance is
provided on accounting for changes in the provision as a result of changes in cost estimates or changes in discount rates.
However, this has been addressed in IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities.
Under IFRIC 1, adjustments arising from changes in either the estimated cash flows or the current discount rate should be
added to or deducted from the cost of the related asset with the adjusted depreciable amount of the asset then depreciated
prospectively over the asset’s remaining useful life.
Under US GAAP, the fair value of the liability generally is not remeasured for changes in the risk-free interest rate which
was initially used as the discount factor for the measurement of the provision.

Four companies disclosed differences relating to the discounting of decommissioning or asset retirement obligations.
Extracts from BP and Repsol are included below.
Extract 112: BP
Note 55 – US generally accepted accounting principles [extract]
(b) Provisions [extract]
Under IFRS, provisions for decommissioning and environmental liabilities are measured on a discounted basis if the effect of the
time value of money is material. In accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, the
provisions for decommissioning and environmental liabilities are estimated using costs based on current prices and discounted
using rates that take into consideration the time value of money and risks inherent in the liability. The periodic unwinding of the
discount is included in other finance expense. Similarly, the effect of a change in the discount rate is included in other finance
expense in connection with all provisions other than decommissioning liabilities.
…
Under US GAAP, decommissioning liabilities are recognized in accordance with SFAS 143 ‘Accounting for Asset Retirement
Obligations’. SFAS 143 is similar to IAS 37 and requires that when an asset retirement liability is recognized, a corresponding
amount is capitalized and depreciated as an additional cost of the related asset. The liability is measured based on the risk-adjusted
future cash outflows discounted using a credit-adjusted risk-free rate. The unwinding of the discount rate is included in operating
profit for the period. Unlike IAS 37, subsequent changes to the discount rate do not impact the carrying value of the asset or
liability. Subsequent changes to the estimates of the timing or amount of future cash flows, resulting in an increase to the asset and
liability, are re-measured using updated assumptions related to the credit-adjusted risk free rate.
…
Extract 113: Repsol

(42) DIFFERENCES BETWEEN IFRS AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
OF AMERICA (US GAAP) [extract]
15. Asset retirement obligations [extract]
…. Under SFAS 143, the fair values of asset retirement obligations are recorded as liabilities on a discounted basis when they are
incurred, which is typically at the time the assets are installed. The result is a provision being built up in cash flow layers with each
layer discounted using the discount rate at the date that the layer was created. Remeasurement of the entire obligation using
current discount rates is not permitted. Amounts recorded for the related assets will be increased by the amount of these
obligations. Over time the liabilities will be accreted for the change in their present value and the initial capitalized costs will be
depreciated over the useful lives of the related assets, principally relate to offshore oil and gas platforms.
Under IFRS it is also required to capitalize, depreciate and set-up a provision similar to SFAS No. 143. However, under IFRS
(IFRIC 1, Changes in existing decommissioning, restoration and similar liabilities) if there is a change in the discount rate the
entire provision must be recalculated using the current discount rate.
The effect of the change in the discount rates from current and prior periods has been recorded as a reconciliation item from IFRS
to U.S. GAAP.
Differences which relate specifically to oil and gas companies

Capitalisation of exploration and development costs (unsuccessful wells)
There is no accounting standard under IFRS that specifically addresses the treatment of exploration and development
costs for oil and gas companies.
Under US GAAP, costs relating to drilling an exploratory or exploratory-type stratigraphic well may be capitalised
pending determination of whether the well has found proved reserves. If the well has found proved reserves, the
capitalised costs become part of the enterprise’s wells, equipment and facilities. If it is determined that the well has not
found proved reserves, the capitalised costs of drilling the well are expensed, net of any salvage value. All costs to drill
and equip development-type stratigraphic test wells and service wells are development costs and may be capitalised
regardless of whether the well is successful or unsuccessful.
87
Only Eni disclosed a difference related to exploration and development costs, as described in the extract below.
Extract 114: Eni

33 Adjustment of the Consolidated Financial Statements to U.S. GAAP [extract]
Summary of significant differences between IFRS and U.S. GAAP [extract]
B) Exploration & production activities [extract]
Development
Development costs are those costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating,
gathering and storing oil and gas. Costs to operate and maintain wells and field equipment are expensed as incurred.
Under IFRS, costs of unsuccessful development wells are expensed immediately. Costs of successful development wells are
capitalized and amortized on the basis of units of production.
Under U.S. GAAP, costs of productive wells and development dry holes, both tangible and intangible, are capitalized and
amortized on UOP method.
Differences which relate specifically to mining and construction

materials companies
Exploration costs
Currently there is no accounting standard under either IFRS or US GAAP that specifically addresses the treatment of
exploration costs.
Therefore, under IFRS, companies generally follow current mining industry practice which is to carry forward the
exploration and evaluation expenditure on a project after it has reached a stage where there is a high degree of confidence
in its viability. In addition, impairment of exploration and evaluation expenditure capitalised in prior years can be
reversed when the project proceeds to development, to the extent that relevant costs are determined to be recoverable.
Under US GAAP, expenditure generally is not allowed to be carried forward unless the viability of the project is
supported by a final feasibility study. Also, US GAAP generally does not allow impairment to be reversed. However,
given that expenditure is capitalised under US GAAP only if it is supported by a final feasibility study, it is less likely that
exploration costs would be capitalised, and therefore subject to impairment.
With no specific accounting standards, industry practice has generally been applied consistently under both IFRS and
US GAAP, resulting in few reported differences.
IFRS 6 Exploration for and Evaluation of Mineral Resources, which is effective from 1 January 2006, does not require or
prohibit any specific accounting policies for the recognition and measurement of exploration and evaluation assets.
Our survey identified two companies that reported reconciling differences for capitalised exploration costs and
related impairment.

The GAAP differences are disclosed by Randgold Resources in the following extract.
Extract 115: Randgold Resources

27. RECONCILIATION TO U.S. GAAP [extract]
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract]
EXPLORATION COSTS
During the years ended December 31, 2005 and 2004, the Group has capitalized certain exploration and evaluation expenditure
under its IFRS accounting policy because it is considered probable that a future economic benefit will be generated. Under this
accounting policy, expenditure of US$3.2million and US$3.9million incurred during the years ended December 31, 2005 and 2004
respectively relating to the underground development study at Loulo, have been capitalized. U.S. GAAP is more restrictive
regarding the capitalization of such costs, since the project involves a different mining method (underground mine as opposed to
an open pit) which means that proven and probable reserves need to be established before expenditure can be capitalized.
Therefore, since a final feasibility study had not yet been established, this expenditure was expensed as incurred under
U.S. GAAP.
A final feasibility study for the Loulo underground project was completed in July 2005, and since that date, the costs relating to the
project have been capitalized under both IFRS and U.S. GAAP.
Mineral rights
Under IFRS, there is no specific guidance for accounting for mineral rights by mining and construction materials
companies. The general industry practice is that where mineral rights are in-substance the underlying ore reserves, then
the price paid to acquire those rights will vary depending on the value of the ore reserves and the mineral rights will be
classified as tangible assets.
Under US GAAP, there is specific guidance for accounting for mineral rights in EITF 04-2 Whether Mineral Rights Are
Tangible or Intangible Assets. Under EITF 04-2, companies should report the aggregate carrying amount of mineral
rights as a separate component of property, plant and equipment either on the face of the financial statements or in the
notes to the financial statements.
The following extract from Lafarge describes this difference.
Extract 116: Lafarge

Note 36 - Summary of Differences Between Accounting Principles Followed by the Group and U.S. GAAP
d) Intangible assets
Under IFRS, mineral rights are classified as “Intangible assets”. In accordance with EITF 04-2, “Whether Mineral Rights Are
Tangible or Intangible Assets”, mineral rights should also be reclassified to quarries, within tangible assets, for purposes of
U.S. GAAP.
There is no specific guidance for valuation of mineral reserves under IFRS. Therefore, companies either continue to
apply previous local GAAP guidance, where available, or follow the US GAAP guidance.
Under US GAAP, although the SEC Industry Guide does not specify the basis of the commodity price to be used for
reserves estimation, it is evident from presentations made by the SEC staff and from comments addressed to mining
companies that, whenever possible, mineral reserves reporting should be based on historical commodity prices.
89
Differences arise where companies continue to apply previous local GAAP guidance under IFRS, as reported by
Rio Tinto in the following extract.

Effect of price assumptions specified for determination of ore reserves for US GAAP depreciation/amortisation
For UK and Australian reporting, the Group’s ore reserves estimates are determined in accordance with the JORC code and are
based on forecasts of future commodity prices. During 2003, the SEC formally indicated that, for US reporting, historical price
data should be used to test the determination of reserves. The application of historical prices to test the reserves estimates has led
to reduced ore reserve quantities for US reporting purposes for certain of the Group’s operations, which results in lower earnings
for US reporting, largely as a result of higher depreciation charges. The reduced ore reserves have also had the effect of increasing
the present value of provisions for closure obligations for certain of the Group’s operations.
Valuation of ores
Under IFRS, ore stockpiles are carried at the lower of cost and net realisable value. Reductions in the carrying values
from cost to net realisable value are recognised as an expense in the period incurred as a write-down of inventory.
Subsequent increases in net realisable value are recorded through the reversal of previously recognised write-downs,
up to original cost.
Under US GAAP, ore stock piles generally should be carried at the lower of cost and market. Market means current
replacement cost, except that market should not exceed net realisable value. Losses are recognised in the period incurred.
Subsequent increases in the net realisable values or reversal of previously recognised losses generally are not permitted.
The reversal of impairment losses under IFRS can result in significant IFRS to US GAAP differences for mining
companies and Lihir Gold reported a difference in this respect as follows.
Extract 118: Lihir Gold

NOTE 30: RECONCILIATION TO US GAAP [extract]
(vi) Impairment: Economic grade stockpile: [extract]
…
In prior years and as at 31 December 2003, the Company determined that the net realizable value of the economic grade stockpile
was zero for IFRS and US GAAP purposes because of the historically low gold prices during the periods of production and due to
the long lead time before the stockpiles were expected to be processed.
In 2004, following the improvement in the gold price environment and improvements to the plant and operating conditions, the
directors resolved to reverse the previously recognized impairments on the basis that the current estimated net realizable value was
higher than zero cost previously recognized under IFRS. The reinstatement to cost resulted in a non recurring gain of US$90.2
million in 2004. Under, U.S. GAAP, the cost of the existing stockpile at 31 December 2004 continues to be recorded at zero.
Discussion of future IFRS and US GAAP developments

Accounting for stripping costs
Stripping costs are costs of removing overburden and waste materials to access mineral deposits. There is currently no
specific accounting standard under IFRS that addresses accounting for stripping costs. The general industry practice is to
capitalise pre-production stripping costs. For post-production stripping costs, two methods of accounting are used. The
first method is to expense costs as incurred when the stripping ratio (ratio of ore extracted to waste material) is relatively
even during the life of the mine. The second method is to defer the stripping costs, when the stripping ratio varies
substantially during the life of the mine.

Under US GAAP, prior to EITF 04-06 Accounting for Stripping Costs Incurred during Production in the Mining Industry
there was no specific guidance either and diversity in practice exists. EITF 04-06 is effective for the first reporting period
in fiscal years beginning after 15 December 2005, with early adoption permitted. Under EITF 04-06, the stripping costs
incurred during the production phase of a mine are variable production costs that should be included in the cost of the
inventory produced during the period that stripping costs are incurred. As a result, capitalisation of production stripping
costs generally is appropriate only to the extent that product inventory exists at the end of the reporting period.
Our survey indicated that three mining companies, Lihir Gold, Randgold Resources and Rio Tinto, expect a significant
cumulative effect adjustment under US GAAP on adoption of EITF 04-06. The remaining four mining companies either
do not consider the impact of adoption of EITF 04-06 to be material or have not yet estimated the potential impact.
An extract from Rio Tinto, which describes the expected impact of adopting EITF 04-06, is included below.

New US accounting standards [extract]
… The Group will adopt EITF 04-06 with effect from 1 January 2006. On implementation of EITF 04-06, deferred post
production stripping balances brought forward, (net of taxes and minority interests) will be written off through beginning retained
earnings as the cumulative effect of a change in accounting policy; and production phase stripping costs incurred each year will be
treated as a variable production cost. Details of the Group’s deferred stripping balances and costs deferred during 2004 and 2005
are set out in Note 14 to the consolidated financial statements. Adoption of EITF 04-6 will have no impact on the Group’s
cash balances.
…
91
F INANCIAL S ERVICES
Financial Services
Introduction
The companies in the Financial Services sector provide a diverse array of services from commercial and retail banking to
insurance and investment management. A total of 18 companies are in the Financial Services sector for the survey,
approximately 14% of the total survey sample of 130 companies. 10 out of the 18 companies are incorporated in the
United Kingdom, nine are incorporated in other EU countries and one is incorporated in Switzerland.

recognition and measurement

Net profit under IFRS

Investment property
accounting
Taxation
benefits
Others
ABN AMRO 100% -2.4% -10.6% -21.2% 14.1% -5.0% -1.7% -7.7% 65.5%
AEGON 100% -7.4% -9.6% 0.5% 8.3% -10.2% -5.2% 76.4%
Allianz 100% -4.9% -4.4% -22.3% 5.8% -0.7% 9.8% -1.4% 2.3% 84.2%
Allied Irish Banks 100% -17.3% -6.7% 3.6% 1.2% -4.4% -4.5% 71.9%
AMVESCAP 100% -1.5% 3.5% 5.7% -2.4% 105.3%
AXA 100% 6.2% -8.2% 5.2% 20.1% 8.9% -5.7% -1.2% 125.3%
Banco Bilbao
100% -17.3% -7.3% -2.6% 37.1% -56.9% -0.1% 52.9%
Vizcaya Argentaria
Banco Santander
100% 1.6% -3.7% 5.5% -2.0% 0.1% 101.5%
Central Hispano
Barclays 100% -3.5% -1.8% -6.0% 6.2% -0.7% 0.6% -5.9% -3.8% 85.1%
HSBC 100% -5.6% 15.5% -14.2% 3.8% 1.5% -1.2% -2.3% 97.5%
ING 100% -6.2% -1.1% -4.8% 11.0% -2.6% 0.8% -1.7% 1.2% 96.6%
Lloyds TSB 100% -5.6% -37.8% -6.5% 16.4% -0.1% -12.2% -0.1% 54.1%
Prudential 100% -3.7% -101.7% 194.4% -8.2% 12.3% -2.7% 0.4% -31.4% 159.4%
Royal Bank of
100% -1.2% -9.1% -2.2% 4.1% -6.7% -1.9% 83.0%
Scotland
Royal & Sun
100% -11.2% -2.7% -1.3% 4.0% 0.2% 1.1% -53.7% 3.4% 39.8%
Alliance
Sanpaolo IMI 100% -18.1% -0.9% -12.9% 14.1% -0.9% -0.3% 0.7% 81.7%
SVG Capital 100% 16.5% -8.8% 0.4% 108.1%
UBS 100% -6.6% -3.2% -3.8% 2.6% -0.1% -0.8% 88.1%
93

Investment property
accounting
Taxation
benefits
Others
ABN AMRO 100% 26.4% -1.1% 1.6% -3.7% 1.0% 0.3% 3.6% 128.1%
AEGON 100% 15.5% -5.8% 4.3% 0.5% -1.7% 6.6% -0.5% 118.9%
Allianz 100% 12.5% -0.8% 2.0% -0.4% 2.2% -6.1% 3.0% 112.4%
Allied Irish Banks 100% 4.4% -3.0% -1.2% 16.7% -3.0% 113.9%
AMVESCAP 100% 52.3% -0.3% 0.4% 0.1% 152.5%
AXA 100% 7.9% -2.1% 3.3% 0.6% -6.1% 0.4% 6.1% -3.4% 106.7%
Banco Bilbao
100% 55.0% 10.6% 0.9% -8.5% -2.6% 155.4%
Vizcaya Argentaria
Banco Santander
100% 8.6% 2.0% 1.0% -0.8% -0.7% 110.1%
Central Hispano
Barclays 100% -0.1% 1.5% -3.2% 0.6% 7.3% -0.2% 105.9%
HSBC 100% 3.6% -1.6% -0.1% -1.3% 1.7% -1.1% 101.2%
ING 100% 10.4% -8.2% 9.6% 1.6% -1.3% 0.3% 1.6% -0.7% 113.3%
Lloyds TSB 100% 14.3% -13.3% 1.5% -0.2% 6.7% -1.3% 107.7%
Prudential 100% 11.6% -133.0% 210.9% -0.1% -8.1% -0.1% 8.5% -51.2% 138.5%
Royal Bank of
100% 6.9% 7.4% 0.7% -0.8% 0.4% -1.0% 113.6%
Scotland
Royal & Sun
100% -9.7% -1.7% 7.4% -22.8% 2.0% 0.1% 75.3%
Alliance
Sanpaolo IMI 100% 36.0% 0.7% -7.2% -0.4% 1.7% -5.7% 125.1%
SVG Capital 100% -0.7% 99.3%
UBS 100% 39.3% 0.1% 0.2% -2.0% -1.8% 0.5% 0.2% 136.5%

Analysis
The reconciliations presented by the Financial Services sector show that two of the most significant differences, both in
terms of the total number of individual differences reported and the percentage impact on net income and net equity, relate
to recognition and measurement of financial instruments and derivatives and hedge accounting. Many of the differences
reported under these areas of accounting are specific to the Financial Services sector as they relate to banking or
insurance activities.
Other differences specific to the Financial Services sector include the consolidation of special purpose entities, real estate
and investment property valuation, subsequent recoveries of impaired-debt securities, venture capital and private equity
investments and allowances for loan losses, foreign exchange differences on available for sale securities, the classification
of available for sale investments, designation of financial assets and liabilities as carried at fair value through profit and
loss, accounting for non-marketable securities, loan origination fees and costs and insurance contract deferred
acquisition costs.
The Financial Services sector reported a wide range of total differences. One company reported only five individual
differences, while another reported 26 individual differences.
The reconciling differences had the following impact on profit/loss and equity:
• 5 out of the 18 companies showed an overall increase in profit of between 1.5% and 59.4%, while 13 companies
showed an overall decrease in profit of between 2.5% and 60.2%.
• 16 out of the 18 companies showed an overall increase in net equity of between 1.2% and 55.4%, while 2 companies
showed an overall decrease in net equity of 0.7% and 24.7%.
The 18 companies reported a total of 313 individual differences representing 82 unique differences. These 82 unique
reconciliations. Also, the survey included 16 companies that are first-time adopters of IFRS. These companies reported a
total of 68 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by
separately identify the impact of first-time adoption differences. After these allocations, the total numbers of reconciling
items allocated to each of the most significant resulting categories are presented in the table below.
95
Investment property 9
Others 109
313

Sector differences
Consolidated financial statements
Consolidation of special purpose entities
Under IFRS, a special purpose entity should be consolidated by the company that is deemed to control it. Indicators of
control include arrangements whereby a special purpose entity conducts activities on behalf of a company or where a
company holds the majority of the risks and rewards of the special purpose entity.
Under US GAAP, a special purpose, or variable interest, entity generally is consolidated by the interest holder that is
exposed to the majority of the entity’s expected losses or residual returns.
The differences in the definitions of special purpose entities and variable interest entities, compounded by different and
detailed assessment, accounting and application guidance, can result in different consolidation outcomes for
particular entities.
The financial services sector uses special purpose or variable interest entities extensively, for example; as financing
vehicles, leasing partnerships, securitisation conduit vehicles, venture capital enterprises, open ended companies and unit
trusts. It is not surprising therefore that 8 of the 18 companies in this sector reported differences related to the
consolidation of special purpose entities.
The IFRS and US GAAP guidance and accounting implications are described by HSBC in the following extract.
Extract 120: HSBC

47 Differences between IFRS and US GAAP [extract]
Consolidation of Special Purpose Entities or Variable Interest Entities
IFRSs
Under the IASB’s Standards Interpretations Committee (‘SIC’) Interpretation 12 (‘SIC-12’), an SPE should be consolidated when
the substance of the relationship between an enterprise and the SPE indicates that the SPE is controlled by that entity.
US GAAP
• FASB Interpretation No. 46 (revised December 2003), ‘Consolidation of Variable Interest Entities’ (‘FIN 46R’), requires
consolidation of variable interest entities (‘VIE’s) in which HSBC is the primary beneficiary and disclosures in respect of all
other VIEs in which it has a significant variable interest.
• A VIE is an entity in which equity investors hold an investment that does not possess the characteristics of a controlling
financial interest or does not have sufficient equity at risk for the entity to finance its activities. HSBC is the primary
beneficiary of a VIE if its variable interests absorb a majority of the entity’s expected losses. Variable interests are
contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of an entity’s net
assets exclusive of variable interests. If no party absorbs a majority of the entity’s expected losses, HSBC consolidates the
VIE if it receives a majority of the expected residual returns of the entity.
Impact
• When HSBC is deemed the primary beneficiary under US GAAP, but does not consolidate the vehicle under IFRSs, the assets
and liabilities of that vehicle are consolidated on the US GAAP balance sheet. This results in a grossing up of the balance
sheet but does not have a material impact on net income for the period or on shareholders' equity.
• When HSBC is deemed not to be the primary beneficiary under US GAAP of a vehicle that is consolidated under IFRSs, the
assets and liabilities of that vehicle are de-consolidated in the US GAAP balance sheet. This results in a reclassification in the
2004 balance sheet but does not have a material impact on shareholders' equity or on net income for 2004 or 2005.
97
Investment property
Real estate and investment property valuation
Under IFRS, property held for investment purposes generally is carried at fair value with changes in fair value reported in
profit or loss. Additionally, IFRS provides the option to revalue property occupied for own use at fair value with changes
in the fair value reported in profit or loss.
US GAAP does not permit revaluations of either type of property held, instead such properties generally are carried at
cost less accumulated depreciation.
This difference is reported by Royal & Sun Alliance in the extract below.
Extract 121: Royal & Sun Alliance

38. SUMMARY OF DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AS
ADOPTED BY THE EUROPEAN UNION (“IFRS”) AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (“US GAAP”) [extract]
E. REAL ESTATE [extract]
Under IFRS, properties that are not occupied by the Group for its own use are treated as investment properties. These
properties are reported at fair value with no depreciation charged against income. Properties that are occupied by the Group for its
own use are treated as Group occupied properties. These properties are reported at fair value and depreciation is charged against
income over their expected useful lives, primarily 30 years.
Under US GAAP all properties are recorded at their historical cost less depreciation thereon and segregated between those
held for investment purposes and those occupied. Real estate assets are depreciated over their expected useful lives, primarily
30 years. The equity reconciliation reflects the impact of accounting for real estate on a depreciated cost basis. The net income
adjustment reflects the depreciation charge and the change to realized gains as a result of this difference. It also reflects the
reversal of the unrealized gains/losses recorded on an IFRS basis.
…

Impairment
Subsequent recoveries of impaired debt securities
Under certain circumstances, IFRS permits the reversal of previously recognised impairment losses for debt securities.
US GAAP generally does not permit reversal of any previously recognised impairment losses. The timing of recognition
of an impairment loss may also be earlier under US GAAP than under IFRS. The following extract from HSBC describes
the IFRS to US GAAP difference arising from the reversal of impairment losses for debt securities under IFRS.
Extract 122: HSBC

Financial investments [extract]
IFRSs [extract]
…
• If an available-for-sale security is determined to be impaired, the cumulative loss (measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income
statement) is removed from equity and recognised in the income statement. If, in a subsequent period, the fair value of a debt
instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the
impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement.
Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.
…
US GAAP [extract]
…
• A decline in fair value below cost of an available-for-sale or held-to-maturity security is treated as a realised loss and included
in earnings if it is considered ‘other than temporary’. The reduced fair value is then treated as the cost basis for the security.
A decline in fair value is generally considered other than temporary when management does not intend or expect to hold the
investment for sufficient time to enable the fair value to rise back to the original cost of the investment.
…
Impact [extract]
…
• Subsequent recoveries in the value of an impaired debt security are not reported in net income for US GAAP purposes.
Financial instruments – recognition and measurement

Venture capital and private equity investments
Under IFRS, venture capital organisations and similar financial institutions are not required to apply the IAS 28
Investments in Associates equity method of accounting for investments over which they have significant influence.
However, IAS 27 Consolidated and Separate Financial Statements does not exempt such companies from consolidating
investments over which they have control.
In accordance with the specialised accounting practices that exist in US GAAP for investment companies, such
investments generally are carried at fair value with changes in the fair value recognised in profit or loss.
99
In the extract below, ABN AMRO discloses the impact of this difference as it relates to accounting for private
equity investments.
Extract 123: ABN AMRO

50 Shareholders’ Equity and Net Profit under US GAAP) [extract]
IFRS US GAAP
Private equity investments
Under IFRS all investments where the Group has a controlling Under US GAAP the Group accounts for its private equity
financial interest are required to be consolidated in the Group’s investments in accordance with the AICPA Auditing and
financial statements. Accounting Guide, “Audits of Investment Companies”.
Consequently, such investments are recorded at their fair value
For all investments where the Group has a financial interest that with changes in fair value from period to period being recorded
is not controlling, the Group has elected to designate these in income.
investments as fair value through income with changes in fair
value from period to period being recorded in income.
Allowance for loan losses

Theoretically, there are no significant differences in the methodology for the calculation of non-specific impairment
provisions related to loans under IFRS and US GAAP. Both methodologies focus on the calculation of a non-specific
impairment provision based on historical loss experience but their application requires considerable judgement and is
influenced by local regulators.
The reconciliation adjustments reported relate to the non-specific allowance for loan losses for the following reasons:
• First-time adoption of IFRS resulted in a change in methodology for calculation of the allowance for loan losses in
accordance with IAS 39. Several companies took this opportunity to realign their US GAAP methodology to
conform to IFRS and have reported a change in accounting estimate for US GAAP purposes.
Lloyds TSB describes the difference related to the first-time adoption of IAS 39 and re-alignment of the methodology for
US GAAP as follows.
Extract 124: Lloyds TSB

Notes to the IFRS/US GAAP reconciliation [extract]
n Loan impairment [extract]
…
In 2004, Lloyds TSB Group determined the carrying value of its loans under IFRS and US GAAP using the same methodology.
On 1 January 2005, the Lloyds TSB Group adopted IAS 39 and, as a result, now calculates the carrying value of its loans by
discounting the expected cash flows. As described in note 54, an adjustment to equity of £221 million was made at
1 January 2005 and the carrying value of the loans reduced by £314 million (with associated deferred tax of £93 million).
The Lloyds TSB Group has adopted a similar methodology under US GAAP. This change in the model for estimating the carrying
value of its loans is considered a change of estimate and the adjustment detailed above has been included within the allowance for
loan losses in the income statement in 2005. At 31 December 2005, there is no difference between the carrying value of loans
under IFRS and US GAAP.

• The detailed application of IFRS and US GAAP methodologies can produce reconciliation differences.
The following extract describes the impact of the difference in the detailed application of each methodology
by HSBC.
Extract 125: HSBC

Loan impairment
IFRSs
• When statistical models, using historic loss rates adjusted for economic conditions, provide evidence of impairment in
portfolios of loans, their values are written down to their net recoverable amount. The net recoverable amount is the present
value of the estimated future recoveries discounted at the portfolio’s original effective interest rate. The calculations include a
reasonable estimate of recoveries on loans individually identified for write-off pursuant to HSBC’s credit guidelines.
US GAAP
• When the delinquency status of loans in a portfolio is such that there is no realistic prospect of recovery, the loans are written
off in full, or to recoverable value where collateral exists. Delinquency depends on the number of days payments is overdue.
The delinquency status is applied consistently across similar loan products in accordance with HSBC’s credit guidelines.
When local regulators mandate the delinquency status at which write-off must occur for different retail loan products and
these regulations reasonably reflect estimated recoveries on individual loans, this basis of measuring loan impairment is
reflected in US GAAP accounting. Cash recoveries relating to pools of such written-off loans, if any, are reported as loan
recoveries upon collection.
Impact
• Under both IFRSs and US GAAP, HSBC’s policy and regulatory instructions mandate that individual loans evidencing
adverse credit characteristics which indicate no reasonable likelihood of recovery, are written off. When, on a portfolio basis,
cash flows can reasonably be estimated in aggregate from these written-off loans, an asset equal to the present value of the
future cash flows is recognised under IFRSs.
• No asset for future recoveries arising from written-off assets was recognised in the balance sheet under IFRSs prior to
1 January 2005.
Foreign exchange differences on available for sale investments

Under IFRS, changes in the fair value of available-for-sale investments resulting from changes in foreign exchange rates
are recognised in profit or loss.
Under US GAAP, such amounts are recognised in shareholders’ equity and recognition in the income statement occurs
when the security is disposed. Barclays reports a difference in this respect.

Foreign exchange on available for sale securities
IFRS US GAAP
Changes in the fair value of available for sale debt securities Under EITF 96-15, as amended by SFAS 133, changes in the
resulting from movements in foreign currency exchange rates value of available for sale debt instruments due to changes in
are reflected in the income statement as exchange differences. foreign currency exchange rate are carried in shareholders’
equity and transferred to income on sale of the instrument.
Classification differences for investments available for sale

On transition to IFRS, several entities noted that certain financial instruments were classified differently under IFRS and
US GAAP. This is due to differences in the fundamental definitions of the loans and receivables and
available-for-sale categories.
101
In the following extract, Royal Bank of Scotland describes this difference as it applies to debt securities classified as loans
and receivables.
Extract 127: Royal Bank of Scotland

46 Significant differences between IFRS and US GAAP [extract]
IFRS US GAAP
(g) Financial instruments [extract]
Debt securities classified as loans and receivables
Non-derivative financial assets with fixed or determinable Under US GAAP, these debt securities are classified as
repayments that are not quoted in an active market are available-for-sale securities with unrealised gains and losses
classified as loans and receivables except those that are reported in a separate component of equity, except when the
classified as held-to-maturity, held-for-trading, available-for- unrealised loss is considered other than temporary in which
sale or designated as at fair value through profit or loss. Loans case the loss is included in net income.
and receivables are initially recognised at fair value plus
directly related transaction costs. They are subsequently
measured at adjusted cost using the effective interest method
less any impairment losses. The Group has classified some debt
securities as loans and receivables.
…
Fair value option

Under IFRS, financial assets and financial liabilities may be designated at fair value through profit or loss at inception if
they meet certain criteria.
US GAAP currently does not provide this option and, accordingly, such financial assets and financial liabilities are
measured in accordance with the applicable US GAAP guidance for each financial asset or financial liability.
Many companies use the fair value option for: (1) designated financial assets used to hedge unit-linked insurance
contracts; (2) designated financial liabilities that correspond either to unit-linked contracts or structured debt instruments
containing significant embedded derivatives; or (3) designated financial assets or financial liabilities where hedge
accounting would not otherwise be achievable.
The following extracts from Barclays and Lloyds TSB illustrate the differences related to the fair value option available
under IFRS.

Financial instruments
IFRS US GAAP
Financial assets and financial liabilities may be designated at US GAAP does not permit an entity to apply the ‘fair value
fair value through profit or loss (the ‘fair value option’) where option’. These instruments have to be measured in accordance
they contain substantive embedded derivatives, where doing so with the appropriate US GAAP.
significantly reduces measurement inconsistencies, or where
they are managed and evaluated on a fair value basis with a Certain entities have been deemed to be investment companies
documented risk management or investment strategy and or broker/dealers in accordance with the specific industry
reported to Key Management Personnel on that basis. guidance applicable to those entities under US GAAP. The
specific industry guidance requires certain financial
instruments, held within these entities, to be measured at fair
value through income.

Extract 129: Lloyds TSB
Notes to the IFRS/US GAAP reconciliation [extract]
h Investment securities [extract]
2005
Under IFRS in 2005, following the adoption of IAS 39, all debt and equity securities are classified as either (i) held at fair value
through profit or loss, with unrealised gains or losses reflected in profit or loss; or (ii) available-for-sale at fair value, with
unrealised gains and losses reflected in shareholders’ equity or (iii) held-to-maturity, at amortised cost or (iv) as loans and
receivables, at amortised cost. Under IFRS, assets can only be held at fair value through profit or loss if they are held for trading
or designated on initial recognition as at fair value through profit or loss; the decision to classify assets at fair value through profit
or loss (including trading) is irrevocable.
There are currently no provisions in US GAAP to elect for investment securities to be classified as held at fair value through profit
or loss. For financial assets to be held at fair value with changes being recognised in the income statement, they must meet the
definition of trading securities in SFAS 115.
…
Non-marketable securities
Under IFRS, non-marketable equity securities generally are carried at fair value (classified as available for sale) unless the
fair value cannot be reliably measured.
Under US GAAP, such investments generally are outside of the scope of FAS 115 Accounting for Certain Investments in
Debt and Equity Securities as sales prices are not currently available on a recognised securities exchange and
consequently, they do not have readily determinable fair values. Investments that are not accounted for under FAS 115,
or under the equity method, generally should be carried at cost.
The following extract from Sanpaolo IMI describes this difference.
Extract 130: Sanpaolo IMI

PART M–SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN EU GAAP, IFRS AS PUBLISHED BY IASB AND
U.S. GAAP [extract]
Section 2–Significant differences in valuation and income recognition principles under EU GAAP and U.S. GAAP [extract]
(c) Investment in Equity Securities (2005)
Non-marketable equity investments of 20% or less, with Non-marketable equity investments of 20% or less are
reliable fair value, are accounted at fair value with unrealized accounted for under the cost method, reduced through write-
gains or losses recognized in a specific equity reserve. Certain downs to reflect “other than temporary” impairments in value.
unlisted equity securities, whose fair value cannot be reliably Reversals of impairments are not permitted.
established or verified, are stated at cost, as adjusted for any
impairment losses verified.
103
Loan origination fees and costs

Several entities reported an adjustment related to loan origination fees and costs. Under IFRS, certain fees and costs that
are incremental and directly attributable to the origination of a loan are deferred and amortised over the life of the loan as
part of the effective interest rate yield. US GAAP has similar requirements for the deferral of fees but only restricts the
deferral to those costs that are directly attributable to the origination of a loan. Such costs may be internal costs and may
not satisfy the incremental criteria under IFRS (for example, internal labour or overhead). Accordingly, the amount of
cost deferral under US GAAP may be greater than the amount required to be deferred under IFRS. Any difference in cost
deferral will impact financial assets and financial liabilities that are required to be recognised using the effective interest
method which produces a constant yield over the life of the instrument, as ‘interest’ includes fees and incremental costs
associated with the origination of a loan or receivable.
Barclays describes the difference related to the deferral of loan origination fees and costs as follows.

Fee and cost recognition [extract]
IFRS US GAAP
IAS 39 does not consider certain internal costs to be SFAS 91 requires loan origination fees and direct costs
incremental costs directly attributable to the origination of (including certain internal costs) to be deferred and amortised
financial instruments and are excluded from effective interest over the life of the loan as an adjustment of yield.
calculations and are taken as an expense to income. Redemption fees are recorded in income as received.
Redemption fees are deferred and amortised on the balance …
sheet using the effective yield method.
…
Insurance contracts discretionary participation and deferred acquisition costs

Common rules for accounting for insurance contracts will only be introduced with Phase 2 of IFRS 4 Insurance
Contracts. Currently, IFRS 4 permits assets and liabilities of insurance and investment contracts with discretionary
participation features and their related deferred acquisition costs to be accounted for under an entity’s previous GAAP.
Many entities with significant insurance operations elected to continue to apply their previous GAAP therefore making it
difficult to develop a meaningful comparison of the reconciliation adjustments between IFRS and US GAAP. However,
IFRS 4 defines what is deemed to be an insurance activity and will result in many transactions which were previously
treated as insurance contracts being accounted for as financial instruments under IAS 39.

The use of previous GAAP as permitted by IFRS 4 is illustrated in the extract below in which Prudential describes how
previous GAAP (UK GAAP) has been applied in 2005.
Extract 132: Prudential

J: Summary of Material Differences between IFRS and US Generally Accepted Accounting Principles [extract]
Long-term Business [extract]
Policy liabilities [extract]
…
The Group adopted IFRS 4 on January 1, 2005. As permitted by IFRS 4, assets and liabilities of insurance contracts and
investments contracts with discretionary participation features are accounted for under previously applied GAAP. Accordingly,
except as described below relating to UK regulated with-profits funds, the MSB of reporting as set out in the revised ABI SORP in
December 2005 has been applied for the 2005 results. Investment contracts without discretionary participation features are
accounted for on a basis that reflects the hybrid nature of the arrangements whereby the deposit component is accounted for as a
financial instrument under IAS 39 and the service component is accounted for under IAS 18, 'Revenue'.
Under IFRS, from January 1, 2005, the Group has chosen to improve its accounting for UK regulated with-profits funds by
the voluntary application of the UK accounting standard FRS 27, 'Life Assurance'. This standard requires the liabilities of the
policyholders of the UK regulated with-profits life insurance business to be measured on the basis determined in accordance with
the UK FSA Peak 2 realistic capital regime, subject to adjustments specified in the FRS. As all amounts of the with-profits funds
not yet allocated to policyholders or shareholders are recorded to the unallocated surplus, shareholders' equity is not affected by
this change.
Under US GAAP, for unitized with-profits life insurance and other investment-type policies, the liability is represented by
the policyholders' account balances before any applicable surrender charges. Policyholder benefit liabilities for conventional with-
profits life insurance and other protection-type insurance policies are developed using the net level premium method, with
assumptions for interest, mortality, morbidity, withdrawals and expenses using best estimates at date of policy issue plus
provisions for adverse deviation based on Group experience. Interest assumptions range from 0.3 per cent to 12 per cent. When
the policyholder benefit liability plus the present value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses, using current best estimate assumptions, deferred acquisition costs are written down and/or a
deficiency liability is established by a charge to earnings.
…
105
P HARMACEUTICALS
Pharmaceuticals
Introduction
The companies included in the Pharmaceuticals sector are engaged in a wide range of activities including research and
development, manufacturing and marketing of pharmaceutical, bio-technology and consumer health-related products.
There are thirteen companies in the Pharmaceuticals sector, or 10% of the total survey sample. Of these, eleven are
incorporated in the EU and two are incorporated in Switzerland.


Revenue recognition

Intangible assets
accounting
US GAAP
Taxation
benefits
Others
Acambis -100% 0.4% -1.5% costs 1.1% -10.0% 30.4% 4.4% -75.2%
Altana 100% -2.3% 0.4% 0.4% -0.6% -0.1% -0.2% 97.6%
AstraZeneca 100% -21.7% -0.6% -0.3% -0.7% 7.4% -1.6% 82.5%
GlaxoSmithKline 100% -35.9% -0.6% 11.5% 0.1% -2.7% -1.2% 71.2%
Novartis 100% -20.3% 2.9% -0.7% -2.9% 5.5% 84.5%
Novo Nordisk 100% -5.0% 0.3% -6.8% -4.9% 83.6%
Sanofi-Aventis 100% -17.4% 10.4% 4.8% -0.9% 0.5% 97.4%
Schering 100% -1.0% -5.3% 2.9% 0.3% -1.8% -0.2% 94.9%
Serono -100% -80.1% -18.1% -10.3% -0.4% 6.3% -202.6%
Skyepharma -100% 0.4% 0.4% -9.8% 12.4% -96.6%
Smith & Nephew 100% -18.2% 2.7% 4.8% -0.5% -5.3% 9.1% 92.6%
Trinity Biotech 100% -93.0% 1.0% -4.6% 17.7% 25.6% 2.2% 48.9%
Vernalis -100% 8.8% -144.3% 4.4% -0.1% -231.2%
107
P HARMACEUTICALS

Revenue recognition
Intangible assets
accounting
Taxation
benefits
Others
costs
Acambis 100% -8.8% -0.5% 1.0% -1.0% 3.7% -0.2% 94.2%
Altana 100% 0.9% 0.2% -1.3% -0.5% 1.5% 0.9% 101.7%
AstraZeneca 100% 138.2% -0.8% 1.8% 0.1% -15.6% 10.9% 234.6%
GlaxoSmithKline 100% 412.1% 2.4% -0.5% -62.0% 15.9% 0.9% 468.8%
Novartis 100% 12.6% -4.3% -0.3% 9.4% -1.9% 115.5%
Novo Nordisk 100% -1.7% 1.0% -1.4% -0.3% 97.6%
Sanofi-Aventis 100% 13.3% -11.1% -2.0% -0.7% 0.1% 99.6%
Schering 100% -5.4% 0.5% -3.2% 0.3% 8.9% 0.7% 101.8%
Serono 100% -4.3% -2.2% 0.4% -0.7% 93.2%
Skyepharma 100% 189.3% -4.7% -15.7% -112.2% 156.7%
Smith & Nephew 100% 7.4% -3.6% 6.1% -0.2% 109.7%
Trinity Biotech 100% 7.5% -9.1% 1.3% -0.3% 99.4%
Vernalis 100% -74.2% -1.7% 0.3% 62.8% 87.2%

Analysis
The most significant areas of difference identified by Pharmaceuticals sector companies, both in terms of the total number
of individual differences reported and the percentage impact on net income and equity relate to business combinations,
pensions and post-retirement benefits, share-based payments and intangible assets.
The other areas of reported IFRS to US GAAP difference that relate to companies in the Pharmaceuticals sector are
accounting for research and development projects, either acquired in a business combination or acquired directly and
accounting for multiple element arrangements and long-term service arrangements, including differences in accounting
for marketing contributions, pre-launch samples and licence fees.
The Pharmaceuticals sector companies reported a wide range of total differences. One company reported only seven
differences while another reported 23 individual differences.
Our analysis revealed that the reconciling differences had the following impact on profit/loss and equity:
• Two out of the thirteen companies showed an overall decrease in loss of 3.4% and 24.8% while the remaining eleven
companies showed an overall decrease in profit of between 2.4% and 131.2%.
• Seven out of the thirteen companies showed an overall increase in net equity of between 1.7% and 368.8% while the
remaining six companies showed an overall decrease in net equity of between 0.4% and 12.8%.
The 195 individual differences represent 71 unique differences. These 71 unique differences were allocated to 19 areas of
accounting or categories. Certain of these categories have been combined to align the descriptions of differences with the
quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey included eight
companies that are first-time adopters of IFRS. These companies reported a total of 22 reconciling items due to applying
the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of International
Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate underlying areas
of accounting or categories as the companies’ reconciliations do not separately identify the impact of first-time adoption
differences. After these allocations, the total numbers of reconciling items allocated to each of the most significant
resulting categories are presented in the table below.
Intangible assets 18
Others 74
195
109
P HARMACEUTICALS
Sector differences
Business combinations and intangible assets
Acquired in-process research and development projects
Under IFRS 3 Business Combinations, an acquirer recognises separately an intangible asset for in-process research and
development of the acquiree at the acquisition date only if it meets the definition of an intangible asset in IAS 38
Intangible Assets and its fair value can be measured reliably.
Under US GAAP, costs assigned to intangible assets for in-process research and development acquired in business
combinations are initially recognised and measured in accordance with FAS 141 Business combinations. However, FIN 4
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method requires that
identifiable tangible and intangible assets to be used in research and development projects and that have no alternative
future use be charged to expense at the date of consummation of the combination.
Research and development is very significant in the Pharmaceuticals sector where a key priority is the quality of the
product range and the new product pipeline. Nine of the thirteen companies reported a difference for in-process research
and development acquired in a business combination. The difference as reported by GlaxoSmithKline is shown in the
extract below.
Extract 133: GlaxoSmithKline

38 Reconciliation to US accounting principles [extract]
Summary of material differences between IFRS and US GAAP [extract]
In-process research and development (IPR&D) [extract]
Under IFRS, IPR&D projects acquired in a business combination are capitalised and remain on the balance sheet, subject to any
impairment write downs. Amortisation is charged over the assets’ estimated useful lives from the point when the assets became
available for use. Under US GAAP, such assets are recognised in the opening balance sheet but are then written off immediately
to the income statement, as the technological feasibility of the IPR&D has not yet been established and it has no alternative future
use. Under IFRS, deferred tax is provided for IPR&D assets acquired in a business combination. US GAAP does not provide for
deferred tax on these assets, resulting in a reconciling adjustment to deferred tax and goodwill.
…

Intangible assets
Acquired in-process research and development projects
In-process research and development projects acquired other than as part of a business combination generally are
capitalised under IFRS if the cost of acquiring the projects meets the definition of an intangible asset in IAS 38 Intangible
Assets. Under US GAAP, the costs of acquired research and development projects, or assets used in research and
development projects, that have no alternative future use generally are charged to expense as incurred. Nine companies
reported differences arising from the capitalisation of research and development project costs acquired other than as part
of a business combination.
The following extract from Novo Nordisk illustrates this difference.

c) Acquired in-process research and development projects
Under IFRS, acquired in-process research and development projects are capitalised as intangible assets at the price paid, with
annual impairment testing and subsequent amortisation when the product receives marketing authorisation.
According to US GAAP, such projects are expensed immediately following the acquisition as the feasibility of the acquired
research and development project has not been fully tested and the technology has no alternative future use.
The future amortisation of the assets is therefore reversed under US GAAP.
d) Acquired single-purpose research and development tangible assets
US GAAP requires a company to expense acquired tangible assets used in a research and development project if these assets do
not have an alternative use in future R&D projects or otherwise (single-purpose R&D assets). Under IFRS there is no such
requirement to expense single-purpose R&D assets.
Novo Nordisk also reports a difference in accounting for a gain on a deemed partial disposal of an investment in a
research and development company.

e) Unrealised capital gain on investments in research and development companies
According to IFRS, the gain on a capital injection, where the shareholding of Novo Nordisk is diluted, is recognised in the
Income statement.
Under US GAAP, the gain is recognised in equity where the issued securities are not common stock or the main activity of
the investee is research and development.
Revenue recognition
Only three companies reported revenue recognition differences. However, the differences identified relate to up-front
fees and multiple-element arrangements and result from transactions that are specifically associated with the sector.
Under IFRS, accounting for revenue follows the general principles provided by IAS 18 Revenue.
Under US GAAP, there is revenue recognition guidance for specific types of transactions, including guidance in
EITF 01-9 Accounting for Consideration Given by a Vendor to a Customer, EITF 00-21 Accounting for Revenue
Arrangements with Multiple Deliverables and SAB 104 Revenue Recognition.
111
P HARMACEUTICALS
Licence Fees
Under SAB 104, up-front fees, even if non-refundable, are earned as the products and or services are delivered or
performed over the term of the arrangement or the expected period of performance and generally should be deferred and
recognised systematically over the periods that the fees are earned.
Under IFRS, such fees are not specifically addressed by IAS 18 and therefore general rules of revenue recognition apply.
Therefore, in practice, differences in accounting for such revenues may arise. Acambis has reported a difference in
this respect.
Extract 136: Acambis

29 RECONCILIATION TO US ACCOUNTING PRINCIPLES [extract]
SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS FOLLOWED BY THE GROUP AND US GAAP [extract]
c) LICENSE FEES [extract]
Under IFRS certain license fees were recognized when paid, where such payments were not refundable. Under US GAAP the
Group follows SAB 104, ‘Revenue Recognition in Financial Statements’, and where such license fees are not refundable and are
not credited against associated R&D activities, these fees are considered inseparable from the associated R&D effort. As such,
those license fees are deferred and recognized over the period of the license term or over the period of the R&D agreement.
Deferred revenues relating to research programs terminated during this period are released to revenue on termination of
the program.
…
Contingent marketing contributions and pre-launch samples

Although there is no specific guidance under IFRS or US GAAP for accounting for marketing contributions and pre-
launch samples, in practice, revenue recognition differences arise as a result of the application of guidance for multiple
element arrangements as reported by Skyepharma.
Extract 137: Skyepharma

37 Summary of Material Differences between IFRS and U.S. GAAP [extract]
Description of U.S. GAAP Adjustments [extract]
(8) Revenue recognition
Under IFRS the Company accounts for revenues in accordance with IAS 18 and allocates revenue to the separate elements of
each contract after consideration of the fair values and commercial substance of the contracts. The basis of such allocation differs
from the allocation made under U.S. GAAP which, following the more prescriptive guidance in EITF 01–9; Accounting for
Consideration Given by a Vendor to a Customer, EITF 00–21; Accounting for Revenue Arrangements with Multiple Deliverables
and SAB 104; Revenue recognition, for determining the deliverable elements, the fair values of these deliverables and the
allocation of consideration received.
Under U.S. GAAP, the Company has accounted for contingent marketing contributions as a reduction of up-front
consideration received in determining the revenue to be recognized. If the contingent marketing contributions do not reach the
contractually agreed reimbursements, the difference would be recognized as revenue at the time further marketing contributions
are no longer required. Under IFRS, marketing contributions are expensed as incurred, in line with the timing of the resulting
expected product sales. Furthermore, under EITF 00–21, pre-launch samples are considered a separate unit of accounting to which
revenue is allocated, with such allocated revenue recognized as samples are delivered. Under IFRS, the samples are accounted for
as a marketing contribution and expensed upon delivery.

Telecommunications
Introduction
The Telecommunications sector represents a broad range of telecommunications-related services, from mobile to fixed
line communications, as well as network and consumer equipment. There are 32 companies in the Telecommunications
sector, approximately 17% of the total survey population of 130 companies, incorporated in 11 countries in the EU, as
well as Switzerland, Norway, China and Venezuela.
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Revenue recognition

Intangible assets
accounting
US GAAP
Taxation
benefits
Others
costs
Alcatel 100% -10.8% 2.5% -7.0% -1.0% -1.7% 82.0%
BT 100% -1.0% -28.2% 13.3% -14.2% -1.2% 68.7%
CANTV 100% -3.6% -1.1% 6.8% -0.2% 101.9%
China Telecom 100% 6.5% -25.7% 80.8%
Deutsche Telekom 100% -5.4% -4.7% -7.0% -1.1% 1.9% -0.5% 12.1% 95.3%
eircom 100% -13.4% -1.2% 8.5% -11.0% -2.4% 22.0% 102.5%
Ericsson 100% -0.3% 1.7% -0.3% -0.3% -0.1% 100.7%
France Telecom 100% 10.7% -0.5% -0.5% 8.2% -19.8% -2.2% 4.0% 99.9%
Gemplus 100% -3.6% -1.2% 3.1% 98.3%
Global Crossing
100% -90.6% -4.6% -33.0% -28.2%
(UK)
Inmarsat 100% -3.9% -26.3% 116.6% 7.5% -38.4% 3.9% -7.8% -6.2% 145.4%
Koninklijke KPN 100% -5.7% -1.0% -1.6% 1.4% 4.4% -5.4% 2.4% 94.5%
Nokia 100% -0.2% 0.3% -0.3% 0.3% -0.1% -0.9% 99.1%
Portugal Telecom 100% -1.1% -5.0% 1.1% 8.3% 1.0% -37.8% -19.6% 46.9%
Spirent
-100% 114.9% -4.4% -79.1% 93.6% -3.6% 23.7% 45.1%
Communications
Swisscom 100% 0.7% 1.0% -0.1% 1.7% -1.3% 13.2% 115.2%
TDC 100% -0.2% 2.0% -5.6% 0.6% 96.8%
Tele2 100% -0.3% 0.4% 100.1%
Telecom Italia 100% -52.7% -0.8% 15.6% -1.8% 60.3%
Telefonica 100% -4.6% 0.5% -0.9% -3.4% 0.6% -3.5% 4.6% 93.3%
Telenor 100% 3.9% -1.7% 0.8% -4.1% -1.8% 97.1%
TeliaSonera 100% -58.0% 2.8% -1.2% -0.7% -10.6% 32.3%
Vodafone -100% -65.5% -0.3% 40.8% 64.2% -60.8%


Revenue recognition
Intangible assets
accounting
Taxation
benefits
Others
Alcatel 100% 52.4% -3.1% costs -6.8% -2.6% 139.9%
BT 100% 6.9% 10.5% 0.2% 16.8% -79.0% -65.6% -10.2%
CANTV 100% 4.5% -1.7% 0.5% -0.1% 103.2%
China Telecom 100% -2.0% 8.4% 106.4%
Deutsche Telekom 100% 12.8% -5.0% 0.1% 0.1% 0.9% -2.8% -2.3% 103.8%
eircom 100% -6.4% 7.1% -8.3% -3.9% 88.5%
Ericsson 100% 2.6% -0.1% 0.6% -2.3% -0.7% 100.1%
France Telecom 100% -48.2% 5.0% 1.1% -0.9% 1.4% 0.3% -5.6% 52.9%
Gemplus 100% 4.6% 0.2% -1.2% -2.2% 101.4%
Global Crossing
-100% -4.3% -0.4% 39.1% -65.6%
(UK)
Inmarsat 100% -11.3% -8.9% 20.9% -8.9% 0.4% 2.3% -9.3% 85.2%
Koninklijke KPN 100% 1.4% 12.4% 1.4% 0.7% 5.7% -4.2% -7.5% 109.9%
Nokia 100% 1.6% -0.4% 0.1% 0.7% -0.5% 1.8% 103.3%
Portugal Telecom 100% -2.0% 2.5% -4.3% 6.6% -3.7% -7.5% 40.1% -32.3% 99.4%
Spirent
100% -10.2% -37.6% 7.7% 0.6% 60.5%
Communications
Swisscom 100% 1.9% 1.0% 3.7% -1.7% -9.7% -8.7% 86.5%
TDC 100% -0.3% -0.5% 1.9% -0.1% 101.0%
Tele2 100% 27.1% 0.2% -0.5% -1.6% 125.2%
Telecom Italia 100% 104.1% 2.9% -30.5% -2.7% 173.8%
Telefonica 100% 46.0% -0.6% 3.2% -0.1% 2.7% 0.5% -0.7% 151.0%
Telenor 100% 1.6% -0.9% -0.5% 3.1% -1.1% 102.2%
TeliaSonera 100% -2.2% 3.8% -3.7% -3.3% -12.0% 82.6%
Vodafone 100% 38.2% 1.7% -35.6% -2.3% 102.0%
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Analysis
The most significant areas reported by companies in the Telecommunications sector, both in terms of the total number of
differences reported and the percentage impact on net income and equity, are business combinations, pensions and post-
retirement benefits and derivatives and hedge accounting.
The analysis also revealed certain differences more prevalent in the Telecommunications sector. These include
differences relating to customer acquisition costs, sales incentives, trademark licence intangibles, capitalisation of start-up
costs and capitalisation of borrowing costs.
The companies reported a wide range of total differences. One company reported only 3 differences while another
reported 27 individual differences.
The reconciling differences had the following impact on profit/loss and equity:
• Only 8 of the 23 companies showed an overall increase in profit (or decrease in loss) ranging from 0.1% to 145.1%
while the remaining 15 companies showed an overall decrease in profit (or increase in loss) of between 0.1%
and 128.2%.
• 15 out of the 23 companies showed an overall increase in net equity of between 0.1% and 73.8% while 8 companies
showed an overall decrease in net equity of between 0.6% and 89.8%.
The 23 companies reported a total of 339 individual differences representing 86 unique differences. These 86 unique
reconciliations. Also, the survey included 18 companies that are first-time adopters of IFRS. These companies reported a
total of 70 reconciling items due to applying the exemptions from full retrospective application of IFRS provided by
separately identify the impact of first-time adoption differences.
The total numbers of reconciling items allocated to each of the most significant resulting categories are presented in the
table below.
Intangible assets 8
Financial instruments – derivative and hedge accounting 25
Pension and post-retirement benefits 51
Others 167
339

Sector differences
Revenue recognition
The survey identified three different types of reconciling items related to revenue recognition. These differences relate to
up-front fees and deferral of related costs and multiple-element arrangements. The most common revenue recognition
accounting differences relate to up-front fees and multiple-element arrangements; both are reported by five companies in
this sector.
Up-front fees
In the Telecommunications sector, up-front fees are generally customer connection and access fees which are charged at
the beginning of a service arrangement. Under IFRS, there is no specific guidance relating to up-front fees, so the general
IAS 18 Revenue rules apply. Under US GAAP, SAB 104 Revenue Recognition requires that up-front fees, even if non-
refundable, are earned as the products and/or services are delivered and/or performed over the term of the arrangement or
the expected period of performance. Consequently, unless the up-front fee is in exchange for products delivered or
services performed that represent the culmination of a separate earnings process, revenue from up-front fees generally
should be deferred and recognised systematically over the periods that the fees are earned. Furthermore, under SAB 104,
in order for up-front fees to be recognised separately from the on-going service or product, the criteria for separating
components in a multiple-element arrangement must be met.
Examples of disclosures of differences for up-front fees are provided by Swisscom and Portugal Telecom.

44. Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles
[extract]
i) Revenue recognition [extract]
In 2004, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 104 which amended SAB 101.
Under this guidance, revenue earned from access and similar charges should be recognized over the estimated life of the customer
relationship. Under IFRS, this revenue is recognized immediately upon connection or similar activity. In 2005, 2004 and 2003, the
effect of the deferred and released revenue from prior periods amounted to CHF 35 million, CHF 56 million and CHF 31 million
respectively, which has been recorded as an addition to net revenue. SAB 104 allows companies to defer costs directly associated
with revenue that has been deferred. Swisscom has elected not to defer any such costs.
…
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T ELECOMMUNICATIONS
Extract 139: Portugal Telecom

46. Summary of Significant Differences between Accounting Principles followed by the Company and U.S. Generally
Accepted Accounting Principles [extract]
e) Revenue recognition [extract]
(i) Connection fees
The principal difference between SAB 101 and IFRS for revenue recognition is related with the recognition of connection fees.
Under IFRS, in accordance with IAS 18, revenue recognition regarding entrance fee (certain “up front” fees) depends on the
nature of the services provided. If the fee includes only the entrance as a standalone transaction, and all other services or products
are paid for separately, or if there is a separate annual subscription, the fee is recognized as revenue if no significant uncertainty as
to its collectability exists.
Under U.S. GAAP, Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101 modified by
SAB 104, or SEC Staff Accounting Bulletin Topic13-A.1, Revenue Recognition) guidance is followed, and such entrance fee
which is considered to be revenue earned from access and similar charges should be recognized over the estimated life of the
customer relationship.
The Company has estimated the following average lives of customers of its various businesses for which initial fees are being
charged: 5 years for cable/internet access and 15 years for fixed line telephony. These estimated average customer lives are based
on management’s best estimates. Such estimates are subject to revision, based on changes in customer demographics, the
introduction of increased competition, as well as other factors.
Deferred costs
One company, Koninklijke KPN, disclosed a difference related to deferral of incremental direct costs associated with
connection fees as follows.
Extract 140: Koninklijke KPN

RECONCILING ITEMS AND EXPLANATION OF CERTAIN DIFFERENCES BETWEEN IFRS AND
US GAAP [extract]
E. REVENUE RECOGNITION (DEFERRED EXPENSES)
Under US GAAP and IFRS, up-front connection fees are deferred over the estimated customer relation period. During this period,
the associated incremental direct costs, in so far they do not exceed the deferred revenues, are capitalized and recognized over the
estimated customer relation period under US GAAP as the matching principle is applied. Under IFRS, these incremental direct
costs are not allowed to be capitalized as the definition of an asset is not met.
Multiple-element arrangements
Five companies disclosed differences due to multiple-element arrangements which primarily related to equipment and
services. Under IFRS, companies may allocate the cash consideration received from the customer between equipment and
service elements based on their relative fair value. Under US GAAP, the amount allocated to the equipment generally is
limited to the amount that is not contingent upon delivery of additional items or meeting other specific performance
conditions.

Examples of disclosures of differences in accounting for multiple-element arrangements are provided by Spirent
Communications and Tele2.
Extract 141: Spirent Communications

39. Differences between International Financial Reporting Standards and United States Generally Accepted Accounting
(a) Revenue recognition
Under IFRS, multiple-element arrangements with hardware, software and post contract support (“PCS”) components are
accounted for as two or more separate transactions only where the commercial substance is that the individual components operate
independently of each other because they are capable of being provided separately from one another and it is possible to attribute
reliable fair values to every component. To the extent that a separate component comprises a product sale of hardware or
software, revenue is recognized at the time of delivery and acceptance and when there are no significant vendor obligations
remaining. Terms of acceptance are dependent upon the specific contractual arrangement agreed with the customer. Revenue is
recognized on other components as the Group fulfills its contractual obligations and to the extent that it has earned the right
to consideration.
Under US GAAP, the rules for revenue recognition under multiple-element arrangements are detailed and prescriptive. These
rules include the requirement that revenues be allocated to the respective elements of such an arrangement on the basis of Vendor
Specific Objective Evidence (“VSOE”) for each element. Statement of Position (“SOP”) 97-2 ‘Software Revenue Recognition’
sets out precise requirements for establishing VSOE for valuing elements of a multiple-element arrangement. When VSOE for
individual elements of an arrangement cannot be established in accordance with SOP 97-2, revenue is generally deferred and
recognized over the term of the final element.
Under US GAAP, the Group does not have VSOE for certain elements of certain multiple-element arrangements with customers in
the Service Assurance division of our Communications group. The terms of these arrangements with customers include, among
other terms, PCS for hardware and software and the provision of product roadmaps, which contain expected release dates of
planned updates and enhancements. The existence of a particular item on the roadmap does not, in itself, create a contractual
obligation to deliver that item; however, under US GAAP an implied obligation is deemed to exist. As a consequence of the terms
of these arrangements revenue is deferred under US GAAP and does not start to be recognized until delivery or discharge of the
obligation in respect of the final element of the arrangement for which VSOE is not determinable. If this final element is PCS,
then revenue is recognized over the remaining term of the PCS contract. The Service Assurance division has a number of multi-
year contracts for PCS and this has the effect of extending the period over which revenue is recognized for US GAAP.
Direct costs of the delivered products for which revenue recognition is deferred are also deferred.
The above gives rise to an IFRS to US GAAP difference in respect of revenue recognition in the reconciliations of both net income
and shareholders’ equity.
Extract 142: Tele2

Note 39 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP [extract]
Explanation of current differences between IFRS and US GAAP [extract]
f) Connection charges [extract]
According to IFRS, connection charges may be recognized as revenue when collected at the inception of a contract.
According to US GAAP, for all contracts entered into prior to 2004, connection charges collected at the inception of a service
contract were deferred and recognized as revenue over the period in which there is a customer relationship which is approximately
three years. Effective for new contracts entered into from January 1, 2004, US GAAP changed in regards to the Group’s
accounting for revenue arrangements containing multiple elements which are required to be treated as separate units of accounting
as a result of the adoption of Emerging Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables”
(“EITF 00-21”). Where a revenue arrangement contains multiple elements which are determined to require separate accounting,
total revenue under the contract is allocated and measured using units of accounting within the arrangement based on relative
fair values.
The application of EITF 00-21 by the Group to revenue arrangements containing multiple elements which are required to be
treated as separate units of accounting generally results in the connection charges being recognized as revenue at the inception of
the contract, together with any proceeds received pertaining to the delivery of a mobile handset.
…
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Development costs
Under IAS 38 Intangible Assets, development costs should be capitalised and amortised if they meet the specific
definition and criteria for capitalisation as an intangible asset.
Under US GAAP, research and development costs generally should be expensed as incurred in accordance with FAS 2
Accounting for Research and Development Costs.
The survey identified eight companies with differences related to internal development costs. Included below are extracts
from Ericsson and Nokia.
Extract 143: Ericsson

C32 RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED STATES [extract]
SIGNIFICANT DIFFERENCES BETWEEN IFRSs AND US GAAP [extract]
Capitalization of development costs
According to IFRSs development costs are capitalized after the products have reached a certain degree of technological feasibility.
Capitalization ceases and amortization begins when the product is ready for its intended use. The Company has adopted an
amortization period for capitalized development cost of three to five years. Under US GAAP, The Company applies US GAAP
SFAS 86 “Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed” and SOP 98-1, “Accounting
for the costs of Computer Software Developed or Obtained for Internal use”. According to SFAS 86, software development costs
are capitalized after the product involved has reached a certain degree of technological feasibility similarly to IFRSs. However,
under US GAAP non-software related development costs may not be capitalized as per IFRSs, and is therefore expensed under
US GAAP.
Extract 144: Nokia

39. Differences between International Financial Reporting Standards and US Generally Accepted Accounting
Development Costs
Development costs are capitalized under IFRS after the product involved has reached a certain degree of technical feasibility.
Capitalization ceases and depreciation begins when the product becomes available to customers. The depreciation period of these
capitalized assets is between two and five years.
Under US GAAP, software development costs are similarly capitalized after the product has reached a certain degree of
technological feasibility. However, certain non-software related development costs capitalized under IFRS are not capitalizable
under US GAAP and therefore are expensed.
Under IFRS, whenever there is an indication that capitalized development costs may be impaired the recoverable amount of the
asset is estimated. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. Recoverable
amount is defined as the higher of an asset’s net selling price and value in use. Value in use is the present value of estimated
discounted future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.
Under US GAAP, the unamortized capitalized costs of a software product are compared at each balance sheet date to the net
realizable value of that product with any excess written off. Net realizable value is defined as the estimated future gross revenues
from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of
performing maintenance and customer support required to satisfy the enterprise’s responsibility set forth at the time of sale.
The amount of unamortized capitalized software development costs under US GAAP is EUR 213 million in 2005
(EUR 210 million in 2004).
The US GAAP development cost adjustment reflects the reversal of capitalized non-software related development costs under
US GAAP net of the reversal associated amortization expense and impairments under IFRS. The adjustment also reflects
differences in impairment methodologies under IFRS and US GAAP for the determination of the recoverable amount and net
realizable value of software related development costs.

Capitalisation of interest
The survey identified that 13 companies disclosed differences relating to the capitalisation of interest.
Under IAS 23 Capitalisation of Borrowing Costs, entities have the choice of applying the benchmark treatment, which is
to expense all borrowing costs as incurred, or the allowed alternative treatment, which is to capitalise borrowing costs on
qualifying assets. There is no such choice under US GAAP since FAS 34 Capitalisation of Interest Cost makes the
capitalisation of interest compulsory for certain qualifying assets that require a period of time to get them ready for their
intended use.
In the Telecommunications sector, capitalisation of interest differences generally relate to either capitalisation of interest
on the construction of tangible and intangible assets or on the acquisition of licences.
The sector has invested significant amounts in licences to operate mobile telephone networks. Under US GAAP,
borrowing costs generally are capitalised until the licence is ready for use.
Examples of the GAAP differences disclosures for capitalisation of interest are provided by the following extracts from
Vodafone and Deutsche Telekom.
Extract 145: Vodafone

38. US GAAP information [extract]
Summary of differences between IFRS and US GAAP [extract]
f. Capitalised interest
Under IFRS, the Group has adopted the benchmark accounting treatment for borrowing costs and, as a result, the Group does not
capitalise interest costs on borrowings in respect of the acquisition or construction of tangible and intangible fixed assets. Under
US GAAP, the interest costs of financing the acquisition or construction of network assets and other fixed assets is capitalised
during the period of construction until the date that the asset is placed in service. Interest costs of financing the acquisition of
licences are also capitalised until the date that the related network service is launched. Capitalised interest costs are amortised over
the estimated useful lives of the related assets.
Extract 146: Deutsche Telekom

(48) Reconciliation of IFRS to U.S. GAAP [extract]
(b) Mobile Communication Licenses [extract]
….
Under IFRS, the Company has elected to expense finance charges on debt related to construction period capital expenditures,
including the costs to acquire mobile licenses. Under U.S. GAAP, finance charges on qualifying capital expenditures are
capitalized during the period the mobile network is being constructed, and are subsequently amortized over the expected period of
use. This difference has resulted in deferrals of interest expense and higher carrying bases for the mobile network fixed assets
under U.S. GAAP. During 2003 and 2004, certain of the Company’s mobile networks in different countries were placed in use,
and amortization commenced for those previously capitalized costs. …
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Intangible assets
Under US GAAP, FAS 141 Business Combinations and FAS 142 Goodwill and Other Intangible Assets generally require
that measurement of an intangible asset is based on its intended use. Under IFRS, IAS 38 Intangible Assets does not
require intended use to be taken into account. Measurement differences where the intended useful life of an intangible
asset is less than its expected useful life will result in a lower fair value for the identified intangible, and consequently a
higher balance of goodwill, under US GAAP. Such differences, which may impact deferred taxation and amortisation to
the extent that the identified intangible assets have finite useful lives, are explained in the following extract from
France Telecom.

2005 Acquisition of Amena
…
(2) Under US GAAP, the portion of the purchase price allocated to the identified brand name intangible asset was lower than the
amount recognized under IFRS by €347 million, which generates a discrepancy between IFRS and US GAAP goodwill of
€173 million, net of the related deferred tax effect. In accordance with US GAAP practice, the brand name was valued based on
France Telecom’s intended useful life whereas under IFRS, the brand name was valued based on an indefinite useful life.
…

Utilities and Energy
Introduction
The primary business lines for the companies in the Utilities and Energy sector are the transmission and distribution of
electricity and natural gas, for both commercial and residential purposes. Some of the companies in this sector are also
involved in providing telecommunications and environmental management services.
There are 11 companies in the Utilities and Energy sector, approximately 8% of the total survey population of 130
companies. Of the 11 companies, 10 are incorporated in the EU and the other is incorporated in China.
123
U TILITIES AND E NERGY

Net profit under IFRS
Revenue recognition
Property, plant and
Impairment
accounting
equipment
Taxation
Leasing
benefits
Others
BG 100% -0.1% -29.8% 12.7% -0.9% -0.4% -7.0% 74.5%
EDP–Energias de
100% -1.7% 16.7% -2.1% -1.3% -2.1% -3.4% -6.9% 4.1% 103.3%
Portugal
Endesa 100% 0.2% 3.9% -0.1% 0.4% 7.4% -0.5% -10.7% -14.1% 86.5%
ENEL 100% 20.7% 4.4% 6.0% 1.5% -10.1% 0.1% -8.9% 113.7%
Huaneng Power 100% 14.2% 0.6% -2.8% -0.6% 111.4%
International
100% 0.4% -26.3% 30.2% 2.1% -1.4% -21.1% 83.9%
Power
National Grid 100% -60.4% -7.0% -3.4% 12.8% -1.2% -4.8% -2.1% 33.9%
Scottish Power 100% 0.1% 1.8% -2.0% -1.7% -27.8% 70.4%
SUEZ 100% -4.8% -2.6% -1.0% 10.2% 0.4% -4.0% -0.1% -28.0% 70.1%
United Utilities 100% -3.3% -8.0% 15.7% -1.3% -7.0% -26.5% 14.7% 84.3%
Veolia
100% 4.9% -1.0% -8.5% 1.0% -7.2% 89.2%
Environment


Revenue recognition
Property, plant and
Impairment
accounting
equipment
Taxation
Leasing
benefits
Others
BG 100% 1.7% -8.7% 4.4% -0.6% 1.1% -1.1% 96.8%
EDP–Energias de
100% 0.8% -12.1% 2.8% 3.5% 3.4% 19.8% -3.0% 115.2%
Portugal
Endesa 100% 11.4% -10.6% 0.3% -0.9% 6.4% 1.2% 1.1% -5.2% 103.7%
ENEL 100% -3.6% 3.3% -2.5% -2.8% -9.4% 0.8% 5.0% 90.8%
Huaneng Power 100% -10.8% 0.1% 2.6% -0.9% 91.0%
International
100% -3.2% 23.0% -0.8% -6.7% 0.8% -5.1% 108.0%
Power
National Grid 100% 78.0% 62.1% -1.1% 3.4% -60.0% 76.4% 25.4% -4.3% 279.9%
Scottish Power 100% 9.4% -0.9% -6.2% 0.3% 4.8% 0.7% 108.1%
SUEZ 100% 38.0% 0.3% 1.0% 0.3% -0.3% -4.7% 0.8% -5.9% 129.5%
United Utilities 100% 34.5% -1.2% -5.8% -2.4% 9.6% 13.9% 148.6%
Veolia
100% -26.4% -3.2% -2.8% 7.8% -0.9% 74.5%
Environment
125
Analysis
The most significant areas of differences reported by companies in the Utilities and Energy sector, both in terms of the
total number of individual differences reported and the percentage impact on net income and equity are business
combinations, derivatives and hedge accounting, pensions and post-retirement benefits and impairment. However these
areas are common across all sectors and are not specific to the Energy and Utilities industry. The differences reported that
would be considered more industry-related include regulated pricing, accounting for leases, revenue recognition for up-
front fees, the classification of an asset for CO2 emission allowances and nuclear fuel inventory.
The companies in this sector reported a wide range of total differences. One company reported only six differences while
another reported 29 differences.
Overall, the reconciling differences for the companies in this sector had the following impact on profit/loss and equity:
• Three of the eleven companies showed an overall increase in profit of between 3.3% and 13.7% while eight showed
an overall decrease in profit of between 10.8% and 66.1%.
• Seven out of the eleven companies showed an overall increase in net equity of between 3.7% and 179.9% while four
showed an overall decrease in net equity of between 3.2% and 25.5%.
The total of 237 differences reported by this sector represents 67 unique differences. These 67 unique differences were
allocated to 21 areas of accounting or categories. Certain of these categories have been combined to align the descriptions
of differences with the quantifications of those differences disclosed in the companies’ reconciliations. Also, the survey
included 10 companies that are first-time adopters of IFRS. These companies reported a total of 54 reconciling items due
to applying the exemptions from full retrospective application of IFRS provided by IFRS 1 First-time Adoption of
International Financial Reporting Standards. We have allocated those IFRS transition differences to the appropriate
underlying areas of accounting or categories as the companies’ reconciliations do not separately identify the impact of
first-time adoption differences. After these allocations, the total numbers of reconciling items allocated to each of the
most significant resulting categories are presented in the table below.
Impairment 13
Leasing 6
Others 106
237

Sector differences
Regulated pricing
Under US GAAP, FAS 71 Accounting for the Effects of Certain Types of Regulation provides specific guidance relating
to pricing within a regulated industry. Under FAS 71, an entity accounts for the effects of regulation by recognising a
‘regulatory’ asset (or liability) that reflects the increase (or decrease) in future prices approved by the regulator.
Due to the nature of the industry, revenue may be received before or after the costs relating to this revenue are incurred
and this may cause a mismatching of the periods in which the revenue and expense are recognised. Under FAS 71, if the
regulation provides assurance that incurred costs will be recovered in the future, companies generally are required to
capitalise those costs and if the current regulated rates are intended to recover costs that are expected to be incurred in the
future, then companies generally are required to recognise those current receipts as liabilities. FAS 71 applies only to
general-purpose external financial statements of an enterprise that has regulated operations that meet all of the criteria
specified in the statement. However, if only some of an enterprise’s operations are regulated and meet the criteria
specified in FAS 71, then the guidance will apply to only that portion of the enterprise’s operations.
Under IFRS, there is no specific guidance which addresses regulated pricing.
The survey identified three companies with differences related to regulated pricing. Extracts from EDP–Energias de
Portugal and Scottish Power are included below.
Extract 148: EDP–Energias de Portugal

48. Reconciliation to accounting principles generally accepted in the United States of America [extract]
h) Regulatory assets and liabilities
In accordance with the IFRS conceptual framework, regulatory assets and liabilities, including tariff adjustments, are not
recognized and on that basis, at the transition date, these assets and liabilities were adjusted against reserves. Under IFRS,
regulatory assets and liabilities which relate to deferred costs and deferred income, respectively, defined and regulated by the
Regulator, being recoverable or payable through tariff adjustments to be charged to customers in future years were also adjusted
against reserves at the transition date. These future tariff adjustments are recorded as income in the period when they are charged
to customers.
Under U.S. GAAP, tariff adjustments, for the regulated activity in Portugal are eliminated because management believes that, in
substance, the tariff adjustments regulation does not meet in full the criteria set out in SFAS 71. Even though the scope criterion
of SFAS 71 is met with respect to the regulated activities in Portugal, due to the uncertainty in relation to future income being in
an amount at least equal to the capitalized cost or a situation of a permanent roll forward of cost with current year costs being
deferred and prior cost being recovered in each period, the asset recognition criteria as defined in SFAS 71 is not met. As a result,
tariff adjustments related to Portuguese activities, consistently with the accounting treatment under IFRS, are not also reflected in
U.S. GAAP accounts.
The regulatory assets and liabilities including the tariff adjustments mechanism set out by the regulator (ANEEL) regarding the
activities in Brazil meets the requirements of SFAS 71 and therefore are accounted for on that basis. Eligible costs are specifically
determined by the Regulator and are recoverable through the recovery rates. Resulting from measures taken by the Brazilian
government and by ANNEL in 2001, the companies in Brazil are subject to the application of SFAS 71.
127
Extract 149: Scottish Power

44 Summary of differences between IFRS and US Generally Accepted Accounting Principles (‘GAAP’) [extract]
(c) Description of US GAAP adjustments [extract]
(ii) US regulatory net assets [extract]
FAS 71 ‘Accounting for the Effects of Certain Types of Regulation’ establishes US GAAP for utilities in the US whose regulators
have the power to approve and/or regulate rates that may be charged to customers. FAS 71 provides that regulatory assets may be
capitalised if it is probable that future revenue in an amount at least equal to the capitalised costs will result from the inclusion of
that cost in allowable costs for ratemaking purposes. Due to the different regulatory environment, no equivalent GAAP applies
under IFRS.
Under IFRS, no regulatory assets are recognised. …
Leasing
IFRIC 4 Determining whether an Arrangement contains a Lease provides guidance for determining whether arrangements
that do not take the legal form of a lease, should nonetheless be accounted for as a lease in accordance with IAS 17
Leases. IFRIC 4 is applicable for periods beginning on or after 1 January 2006, with early adoption encouraged and is
applied retrospectively. The assessment of whether an arrangement contains a lease may be made at the start of the
earliest comparative period presented (and for first-time adopters, at the date of transition) based on the facts and
circumstances existing at that date.
Under US GAAP, the specific guidance for determining whether an arrangement contains a lease is given in EITF 01-8
Determining Whether an Arrangement Contains a Lease and is applicable for all arrangements agreed to, modified, or
acquired in a business combination initiated after the beginning of an entity’s next reporting period beginning after
28 May 2003.
The guidance is comparable under IFRS and US GAAP but the adoption dates and transition provisions can result in
different treatments for a particular arrangement.
Two companies reported differences relating to the adoption of IFRIC 4 as follows.
Extract 150: Veolia Environment

Note 50 A. Summary of significant differences between US GAAP and IFRS [extract]
PRINCIPAL ACCOUNTING DIFFERENCES BETWEEN IFRS AND U.S. GAAP RELATING TO THE GROUP [extract]
Arrangements containing a lease
Under IFRS, the Group has elected the early application of IFRIC 4 “Determining whether an arrangement contains a lease” in
advance on January 1, 2004. Certain industrial contracts, Build, Operate & Transfer (BOT) contracts, incineration contracts and
co-generation contracts have been considered as containing a lease that is accounted for as a financial lease in accordance with
IAS 17. Consistent with IFRIC 4 the determination and the accounting of the financial assets as of January 1, 2004 has been
made retrospectively.
Under US GAAP, Emerging Issues Task Force (EITF) 01-08 “Determining Whether an Arrangement Contains a Lease”, is
effective prospectively for contracts entered into or significantly modified after January 1, 2004.

Extract 151: EDP–Energias de Portugal
48. Reconciliation to accounting principles generally accepted in the United States of America [extract]
c) Power purchase agreements
EDP Group executed several contracts with REN, which are treated as finance leases, under U.S. GAAP. The evaluation of
whether an arrangement contains a lease within the scope of Statement 13 and EITF 01-8 is based on the substance of the
arrangements. Those contracts, include agreements that, although not nominally identified as leases, meet the definition stated in
the referred statements, that a lease transfers substantially all of the benefits and risks related to the property of the lessee. In
substance, those contracts explicitly identified the group of assets (power plants) under which EDP produces power exclusively to
be provided to the lessee and cannot use any other power plant to supply the referred power to the referred lessee.
Additionally, those contracts convey the right to use those power plants and require that the total production is acquired by REN,
who is the lessee. Those contracts are being considered as capital leases for U.S. GAAP purposes, due to the fact that those
contracts transfer the risks and the rewards of the usage to the lessee during the period of the lease term and the ownership of the
property to the lessee (REN) at the end of the lease term and the lease terms are the same as the useful lives of power plants.
Under IFRS, fixed assets used by binding producers are recorded as tangible fixed assets in the financial statements of each
company, and are stated at deemed cost, which includes the revalued amount. The referred tangible assets are amortized on a
straight line basis, over their estimated useful life. The remain useful life of PPA’s agreements is from 8 to 19 years for hydro
power plants and 2 to 12 years for thermal power plants.
On January 27, 2005 in accordance with Decree-Law 240/2004, of December 27, the EDP Group signed the early termination
contracts of PPA related to the binding electricity producers’ centres. The termination agreements effects are suspended until a set
of conditions is met-which includes the start up of the spot market that assures the sales of generated electric energy and the
attribution of non-binding production licenses. When the conditions set on above allow for the effective termination of PPA’s,
under U.S. GAAP, the accounting of these agreements will be re-assessed.
On December 2, 2004 IFRIC 4 – Determining whether an arrangement contains a lease as defined in IAS 17 was published,
effective only after January 1, 2006. An arrangement that contains a lease will be the same under IFRS and U.S. GAAP, effective
January 1, 2006.
Under IFRIC 4, in accordance with the transition regime set by this rule, PPAs should be analysed based on the existing
information and facts at the date such transition, as to whether in substance the contracts are a financial lease. On this basis, the
above mentioned Decree-Law that established the early termination of PPAs and the terms of the termination agreements signed in
January 2005 relating to the electric generation facilities in PES, are relevant facts that should be taken in that should be taken in
consideration, in the assessment of the adoption of IFRIC 4 effective January 1, 2006.
Revenue recognition
Under IFRS, there is no specific guidance for revenue recognition relating to up-front fees so the general rules on revenue
recognition apply. However, the treatment of various specific situations is discussed in the appendix to IAS 18 Revenue.
Under US GAAP, up-front fees, even if non-refundable, are earned as the products and/or services are delivered and/or
performed over the term of the arrangement or the expected period of performance. Unless the up-front fee is in exchange
for products delivered or services performed that represent the culmination of a separate earnings process, revenue
generally should be deferred and recognised systematically over the periods that the fees are earned. Furthermore, in
order for up-front fees to be recognised separately from the revenue from on-going service or product delivery, the criteria
for separability in EITF 00-21 Revenue Arrangements with Multiple Deliverables should be met.
129
Three companies reported differences relating to the recognition of up-front fees. Extracts from Endesa and ENEL are
included below.
Extract 152: Endesa

4. Revenue recognition [extract]
4.1. Up-front Fee
Under IFRS, in accordance with IAS 18 revenue recognition regarding entrance fees (certain “up front” fees) depends on
the nature of the services provided. If the fee includes only the entrance, and all other services or products are paid for separately,
or if there is a separate annual subscription, the fee is recognized as revenue if no significant uncertainty as to its
collectability exists.
Under U.S. GAAP Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101 modified
by SAB 104, or SEC Staff Accounting Bulletin Topic 13-A.1, Revenue Recognition) guidance is followed.
Under IFRS, such entrance fee collected by Electricity Distribution Activities from new customers is considered to be a
standalone transaction and all other services are paid for separately, therefore such fee is recognized up-front as revenue when no
significant uncertainty as to its collectability exists.
Under U.S. GAAP, such entrance fee which is considered to be revenue earned from access and similar charges should be
recognized over the estimated life of the customer relationship.
The effect of the deferred and released revenue from prior periods has been recorded as a reconciliation item from IFRS to
U.S. GAAP.
Extract 153: ENEL

21. RECONCILIATION OF NET INCOME AND SHAREHOLDERS’ EQUITY FROM IFRS-EU AND
U.S. GAAP [extract]
Differences Between IFRS-EU and United States Generally Accepted Accounting Principles [extract]
21.2. Customers’ Connection Fees
Under IFRS–EU the connection fees collected from new non eligible customers for connection to the electricity network which
does not require an upgrade of the distribution network assets, are considered as a standalone transaction as there is no further
obligation for the Company and all other service are for separately. Therefore such fees are immediately recognized as revenues.
Under U.S. GAAP, these fees are deferred over the estimated life of the customer relationship (20 years).
Others – classification of assets

There are some specific differences related to classification of emission rights and nuclear fuel assets under IFRS and
US GAAP.
Emission rights
IFRIC 3 Emission Rights requires a participant in an operational ‘cap and trade’ scheme to account for emission rights
(allowances) as an intangible asset under IAS 38 Intangible Assets. On initial recognition such allowances should be
recognised at fair value, even if they were issued for less than fair value. The allowances should subsequently be
measured under either the cost model or the revaluation model in IAS 38. The difference between the amount paid and
the fair value of the allowances is a government grant that is initially recognised as deferred income in the balance sheet
and recognised subsequently in income on a systematic basis over the compliance period for which the allowances
were issued.

US GAAP does not provide specific guidance on accounting for emission rights and practice may therefore vary.
The survey identified one company which disclosed a difference in this respect as follows.
Extract 154: Endesa

16.1. CO2 emission allowances [extract]
Under IFRS as indicated in Note 3.d the group is recording CO2 emission allowances received as an intangible asset and
deferred income by their fair value at date they are granted by each respective Government. Such intangible assets are not
subsequently revalued and are excluded when delivered to each respective Government.
As indicated in Note 3.k under IFRS, Endesa records a provision against earnings considering the same cost of the
respective intangible asset for those amounts that the Group has been granted. In this respect the Company recorded in earnings a
part of Endesa’s deferred income for the same amount of emission rights used.
In addition, any shortfall of emissions allowance after consideration of amounts granted is recorded as a provision at fair
value against earning for the amount considered necessary to buy such allowances. Such provision is reviewed and recorded in
every period at its fair value with any change recorded in earnings.
Under U.S. GAAP the Group has eliminated from Endesa’s balance sheet all intangible asset, deferred income, provision for
emission granted and all respective income and expenses from Endesa’s income statement since the Company is not recording any
accounting effect for emissions granted or used under the granted amount. In addition in U.S. GAAP the Group has maintained the
provision at fair value through earnings for those rights that Endesa will need to buy.
…
Nuclear fuel
In the following extract, Endesa reports a difference relating to nuclear fuel assets. Under IFRS, Endesa accounts for
nuclear fuel assets under IAS 2 Inventories as inventory. Under US GAAP, Endesa treats these assets as
depreciable assets.
Extract 155: Endesa

16.2 Nuclear Fuel
As disclosed in Note 3.h, under IFRS, the Company has classified Nuclear Fuel in Inventory that under U.S. GAAP
constitutes a depreciable asset. Consequently, under U.S. GAAP, €253 million and €216 million should be reclassified from
inventory to long -term asset as of December 31, 2005 and 2004, respectively. The related U.S. GAAP depreciation expense of
€81 million and €88 million for the years ended December 31, 2005 and 2004, respectively, is reclassified but remains unchanged.
131
Appendix A
Convergence update
Progress towards eliminating the reconciliation requirement in SEC filings has been ongoing since the Norwalk
Agreement, published in October 2002, when the IASB and the FASB formalised their commitment to the convergence of
IFRS and US GAAP. In February 2006, the IASB and the FASB published a Memorandum of Understanding that
reaffirms the two boards’ shared objective of developing high quality, common accounting standards for use in the
world’s capital markets. Both the IASB and the FASB recognise that removing the current reconciliation requirements
will require continued progress on the joint convergence programme through the development of new high quality,
common standards.
Convergence work will continue, firstly through short-term standard-setting projects, to be completed or substantially
completed by 2008, and secondly, by addressing other areas identified by the IASB and the FASB where accounting
practices under IFRS and US GAAP are regarded as candidates for improvement.
Short-term convergence projects

The following short-term convergence projects are ongoing:
• Borrowing costs, government grants, joint To be examined by the IASB

ventures and segment reporting
• Fair value option, investment properties, To be examined by the FASB

research and development and subsequent events
• Impairment and income tax To be examined by the IASB and the FASB
Joint projects
Joint projects are those that standard setters have agreed to conduct simultaneously in a coordinated manner. Currently,
the IASB and the FASB are conducting joint projects to address the following areas:
Convergence topic Current status of the IASB and the FASB Progress targeted to be achieved
agendas by 2008
Business combinations Exposure drafts issued on 30 June 2005 by both the Convergence standards projected
IASB and the FASB. Deliberations of comments for 2007.
received in response to the exposure drafts are in
process.
Revenue recognition On agendas – No publication yet To have issued one or more due
process documents relating to a
proposed comprehensive standard.
133
A PPENDIX A – C ONVERGENCE U PDATE
Consolidations On agendas – No publication yet To implement work aimed at the

completed development of converged
standards as a matter of high priority.
Fair value measurement FAS 157 issued by the FASB in September 2006. The To have issued converged guidance
guidance IASB issued a discussion paper in November 2006 and aimed at providing consistency.
aims to issue an exposure draft in early 2008.
Liabilities and equity On agendas – No publication yet To have issued one or more due
distinctions process documents relating to the
proposed standard.
Performance reporting Exposure draft issued by the IASB on 16 March 2006. To have issued one or more due
process documents on the full range of
FASB – On agenda, no publication yet.
topics in this project.
Post-retirement benefits FASB – Deliberations underway for first phase of multi- To have issued one or more due
(including pensions) phase project. process documents relating to the
proposed standard.
IASB – Not yet on agenda.
Future projects
In addition to the short-term and joint projects, other items designated as convergence topics already being researched by
the IASB and the FASB, but not as yet on an active agenda include; derecognition, financial instruments, intangible assets
and leases. By 2008, the IASB and the FASB target to have issued due process documents for derecognition and financial
instruments and to have agreed the scope and timing of potential projects for intangible assets and leases.
Survey results
The survey identified almost 200 individual differences. These differences fall into a number of areas of accounting,
many of which either have been the subject of recently issued IFRS or US GAAP accounting standards or are being
addressed by one of the short-term, joint or future conversion projects. Based on the timing of IASB/FASB conversion
projects, some key areas of differences are likely to be eliminated in the near future.

The following chart allocates the over 1,900 reported differences by area of convergence and is based on the timing of the
IASB and the FASB conversion projects. Details and timings of short-term, joint or future conversion projects to address
key accounting areas are discussed below.
Total differences
2000
1800
Taxation
1600
1400
Borrowing costs
Joint ventures
1200
Pensions
1000
Financial instruments
800
600 Derivatives and hedge accounting
Impairment
400
Foreign currency
200
Others
0
2005 2006 2007 2008 2009
onwards
Measurement differences account for the majority of the IFRS to US GAAP differences reported for share-based
payments, with 48 of the 130 companies surveyed applying the IFRS 2 Share-based Payment fair value based model
under IFRS and the APB 25 Accounting for Stock Issued to Employees intrinsic value based model under US GAAP.
Since the publication of FAS 123(R) Share-Based Payment, which eliminates the alternative of using the APB 25 intrinsic
value based method, IFRS and US GAAP have similar requirements for accounting for share-based payments. However,
although application of IFRS 2 is required for annual periods beginning on or after 1 January 2005, differences related to
share-based payments will only be eliminated from the first fiscal year beginning after 15 June 2005 when FAS 123(R)
is applied.
135
There are significant differences in accounting for business combinations between IFRS and US GAAP as evidenced by
the 258 differences reported in this category, representing 13% of the total differences reported.
The project on business combinations is a joint project and is now in it’s second phase with both the IASB and the FASB
reconsidering the existing guidance for applying the purchase method of accounting for business combinations (now
called the acquisition method) that IFRS 3 Business Combinations, and FAS 141 Business Combinations carried forward
without reconsideration. The current project plan targets that final standards will be issued by the IASB and the FASB by
the second half of 2007 and any company adopting both standards should find very few, if any, differences arising from
subsequent business combinations.
Taxation
Although IAS 12 Income Taxes and FAS 109 Accounting for Income Taxes are based on similar principles, there are
certain differences in application that result in non comparability of financial information reported. Excluding the tax
effects of other reconciling items, our analysis identified 99 individual differences relating to taxation.
The taxation project is a joint short-term convergence project aimed at eliminating the exceptions to the basic principles
underlying IAS 12 and FAS 109. The current project plan targets that final standards will be issued in the second half
of 2007.
Borrowing costs
Of the 130 companies surveyed, 43 companies reported a difference relating to the capitalisation of borrowing costs as
they apply the option available under IAS 23 Borrowing Costs to expense all borrowing costs incurred while capitalising
borrowing costs under FAS 34 Capitalization of Interest Cost.
The objective of this short-term convergence project is to amend IAS 23 to require the capitalisation of borrowing costs to
the extent they are directly attributable to the acquisition, production or construction of a qualifying asset. The project is
targeted to be completed in the first half of 2007.
Joint ventures
The most reported difference in this area arises from the application of the benchmark treatment of proportionate
consolidation under IFRS as only the equity method of accounting is allowed for joint ventures under US GAAP. A total
of 30 individual differences relating to the accounting for joint ventures were reported by 20 of the companies in
the survey.
This project is part of the short-term convergence project to be examined by the IASB. The objective is to amend IAS 31
Interests in Joint Ventures, to require the use of the equity method for accounting for interests in jointly controlled
entities. The final amendments to the standard are targeted to be published in 2008.

Pensions
A total of 311 differences relating to pensions and post-retirement benefits were reported by 101 companies in the survey.
The post-retirement benefits project is a joint project to be conducted in two phases. The first phase will consider issues
that can be resolved within the next four years, namely: presentation and disclosure, the definitions of defined benefit and
defined contribution arrangements, the accounting for cash balance plans, smoothing and deferral mechanisms and the
treatment of settlements and curtailments.
FAS 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans was issued on
29 September 2006 and represents the completion of the first phase in the FASB’s post-retirement benefits accounting
project. FAS 158 requires an entity to:
• recognise in its statement of financial position an asset for a defined benefit post-retirement plan’s overfunded status
or a liability for a plan’s underfunded status;
• measure a defined benefit post-retirement plan’s assets and obligations that determine its funded status as of the end
of the employer’s fiscal year; and
• recognise changes in the funded status of a defined benefit post-retirement plan in comprehensive income in the year
in which the changes occur.
FAS 158 does not change the amount of net periodic benefit cost included in net income or address the various
measurement issues associated with post-retirement benefit plan accounting. For public companies, the requirement to
recognise the funded status of a defined benefit post-retirement plan and the disclosure requirements are effective for
fiscal years ending after 15 December 2006. The requirement to measure plan assets and benefit obligations as of the date
of the employer’s balance sheet is effective for fiscal years ending after 15 December 2008.
The amendments to US GAAP accounting under FAS 158 will remove many of the reported differences, including the
current requirement under US GAAP to recognise a minimum liability at least equal to the unfunded accumulated
benefit obligation.
The IASB plans to issue a final standard for the first phase of its project in 2010. Although the timing and scope of the
first phases of the projects might differ, the objectives of the IASB and FASB are ultimately to develop converged
standards. If the IASB and FASB achieve their stated objective, new differences relating to pensions and post-retirement
benefits should be eliminated from 2010 onwards.
Government grants
This project is a short-term convergence project to be examined by the IASB. The objectives are to amend IAS 20
Accounting for Government Grants and Disclosure of Government Assistance, principally for the recognition requirement
for a deferred credit when an entity has no liability and to address non-reciprocal transfers, including government grants.
Under the current project plan, a final standard is targeted to be issued in 2008.
137
Other short-term convergence projects

The other short-term convergence projects which the IASB and the FASB are targeting to be completed or substantially
completed by 2008 are as follows:
Research and development

This is a project to be examined by the FASB. This project is currently in the staff research phase.
Subsequent events
This project is also to be examined by the FASB and deliberations are targeted to begin in 2007.
Impairment
The impairment project is to be covered jointly. Both the IASB and the FASB have yet to discuss the dates for
this project.
Leasing
The scope of this joint project includes a reconsideration of existing standards of accounting for both lessees and lessors.
The current project plan envisages, as a first step, the publication of a joint discussion paper. Deliberations are targeted to
begin in 2007.

Appendix B
Form 20-F financial statement
requirements
Item 17 and Item 18 requirements
Item 17 of Form 20-F requires the financial statements to disclose, inter alia, an information content substantially similar
to financial statements that comply with US GAAP and Regulation S-X. The financial statements may be prepared
according to US GAAP or according to a comprehensive body of local accounting principles, eg, IFRS, if the following
are disclosed:
• an indication of the comprehensive body of accounting principles applied;
• a discussion of the material variations from US GAAP and Regulation S-X in the accounting principles, practices and
methods used in preparing the financial statements. These material variations have to be quantified in the
following format:
– for each period (including any interim periods) for which an income statement is presented, a reconciliation of
net income in tabular format either on the face of the income statement or in a note. A reconciliation of net
income of the earliest of the three years presented may be omitted if that information has not previously been
included in a filing made under the 1933 Act or 1934 Act.
– for each balance sheet presented, the amount of each material variation between an amount of a line item
appearing in a balance sheet and the amount determined using US GAAP and Regulation S-X. These amounts
may be shown in parentheses, in columns, as a reconciliation of the equity section, as a restated balance sheet, or
in any similar format that clearly presents the differences in the amounts. In practice, the usual presentation
adopted is a reconciliation of shareholders’ equity. The reconciliation of shareholders’ equity should be in
sufficient detail to allow an investor to determine the differences between a balance sheet prepared using, for
example, IFRS and one prepared using US GAAP. In particular:
– reconciling items should be shown gross and not net of taxes;
– adjustments affecting several balance sheet captions should not be shown as one item, eg, purchase
accounting adjustments;
– each adjustment should be made at the subsidiary level to determine the impact on items such as minority
interest, taxes and the currency translation adjustment; and
– adjustments for items such as property, plant and equipment or goodwill should be presented gross, with
separate disclosure of the amounts of accumulated depreciation and amortisation;
• for each period for which an income statement is presented and required to be reconciled to US GAAP, either a
statement of cash flows prepared in accordance with IAS 7 Cash Flow Statements, US GAAP, or a quantified
description of the material differences between cash flows reported in the primary financial statements and those that
would be reported under US GAAP; and
139
A PPENDIX B – F ORM 20-F F INANCIAL
S TATEMENT R EQUIREMENTS
• for each period for which an income statement is presented, a statement of comprehensive income prepared using
either home country GAAP, eg, a statement of changes in equity under IFRS, or US GAAP. These statements may be
presented in any format permitted by FAS 130 Reporting Comprehensive Income. Reconciliation to US GAAP is
encouraged, but not required.
If a company prepares its financial statements under a comprehensive body of accounting principles other than US GAAP,
Item 17 permits the inclusion of a cash flow statement in those statements prepared under US GAAP or IAS 7 rather than
a statement prepared under the accounting principles used for the rest of the financial statements.
Item 18 requires all of the information required by Item 17 and all other information required by US GAAP and
Regulation S-X, unless those requirements specifically do not apply to the registrant as a foreign issuer. Information may
be omitted for any period for which net income has not been reconciled to US GAAP.
SAB 88 Interpretation of requirements of Item 17 of Form 20-F states that the distinction between Items 17 and 18 is
premised on a classification of the requirements of US GAAP and Regulation S-X into (1) those that specify the methods
of measuring the amounts shown on the face of the financial statements and (2) those prescribing disclosures that explain,
modify or supplement the accounting measurements. Under Item 17, disclosures required by US GAAP, but not required
under the other comprehensive body of accounting principles under which the financial statements are prepared, need not
be furnished.
Of the 130 companies in the survey, 106 or just over 80% filed financial statements under the more onerous requirements
of Item 18.
The above represents only a brief summary of certain of the SEC rules and regulations relating to foreign private issuer
financial statements. A registrant should refer to the SEC guidelines, rules and regulations, including staff interpretations,
for a more comprehensive discussion of the SEC registration and reporting requirements.
Presentation of minority interest

The revision of IAS 1 Presentation of Financial Statements, effective for accounting periods beginning on or after
1 January 2005, introduced the requirement to disclose on the face of the income statement the entity’s profit or loss for
the period and the allocation of that amount between ‘profit or loss attributable to minority interest’ and ‘profit or loss
attributable to equity holders of the parent’. IAS 1 also requires that the balance sheet includes, as line items, ‘minority
interest’ (presented within equity) and ‘issued capital and reserves attributable to equity holders of the parent’. A similar
allocation and presentation is required for the statement of changes in equity and statement of recognised income
and expense.
Under US GAAP, minority interest is shown as a deduction in arriving at both net income and shareholders’ equity.
Survey results
109 companies disclosed minority interests in their financial statements.
Income statement
The wording in Form 20-F requires a reconciliation between net income as shown in the financial statements and net
income according to US GAAP. This would suggest that the reconciliation should start with net income (or profit for the
period) under IFRS and end with the net income under US GAAP. This reconciliation would include as a reconciling
amount the minority interest in net income for the period.

61 companies reconciled income under IFRS net of minority interest. 48 companies reconciled income under IFRS
including minority interest, of which 25 eliminated the IFRS minority interest as a presentation adjustment and 23
eliminated the IFRS minority interest as a reconciliation item.
Balance sheet
The wording in Form 20-F states that the reconciliation of balance sheet line item amounts should include only those
items where there is a material variation between the amount appearing in the IFRS balance sheet and the amount
determined using US GAAP. This would suggest that minority interest should only be included as a reconciling amount
where the amount of minority interest under IFRS differs from that under US GAAP.
50 companies reconciled equity under IFRS net of minority interest. 59 companies reconciled equity under IFRS
including minority interest, of which 33 eliminated the IFRS minority interest as a presentation adjustment and 26
eliminated the IFRS minority interest as a reconciliation item.
It is evident that the FPI community is split on the presentation of minority interest in IFRS to US GAAP reconciliations.
Now that the 2006 Form 20-Fs have been filed, it will be interesting to see whether practice moves towards a consistent
presentation or the current diversity continues.
141
A PPENDIX C – A BBREVIATIONS U SED
Appendix C
Abbreviations used
EITF Emerging Issues Task Force (of the FASB)
FAS Statement of Financial Accounting Standards (issued by the FASB)
FASB Financial Accounting Standards Board (United States)
GAAP Generally Accepted Accounting Practice
IAS International Accounting Standard
IASB International Accounting Standards Board
IFRIC International Financial Reporting Interpretations Committee
IFRS International Financial Reporting Standards
SEC United States Securities and Exchange Commission
US GAAP United States Generally Accepted Accounting Principles

Appendix D
The companies surveyed
• ABN AMRO • China Southern Airlines
• Acambis • China Telecom
• AEGON • Compagnie Générale de Géophysique
• Air France-KLM • Corus Group
• Aixtron • CRH
• Akzo Nobel • Delhaize Brothers
• Alcatel • Deutsche Telekom
• Allianz • Dialog Semiconductor
• Allied Irish Banks • Ducati
• Altana • EDP-Energias de Portugal
• AMVESCAP • eircom
• Arcadis • Electrolux
• AstraZeneca • Endesa
• AXA • ENEL
• Banco Bilbao Vizcaya Argentaria • Eni
• Banco Santander Central Hispano • Ericsson
• Barclays • FIAT
• BASF • France Telecom
• Bayer • Gallaher
• Benetton • Gemplus
• BG • GlaxoSmithKline
• BP • Global Crossing (UK)
• British Airways • Guangshen Railway
• BT • Hanson
• Buhrmann • HSBC
• Bunzl • Huaneng Power
• Cadbury Schweppes • Imperial Chemical Industries
• CANTV (National Telephone Company Venezuela) • ING
• China Eastern Airlines • Inmarsat
• China Petroleum & Chemical • InterContinental Hotels Group
143
A PPENDIX D – T HE C OMPANIES S URVEYED
• International Power • Skyepharma

• Koninklijke KPN • Smith & Nephew
• Lafarge • Spirent Communications
• Lihir Gold • Steamship Company Torm
• Lloyds TSB • Stora Enso
• Metso • SUEZ
• National Grid • SVG Capital
• Nokia • Swedish Match
• Novartis • Swisscom
• Novo Nordisk • Syngenta
• Pearson • TDC
• PetroChina • Technip
• Portugal Telecom • Tele2
• Prudential • Telecom Italia
• Publicis • Telefonica
• Quilmes Industrial • Telenor
• Randgold Resources • TeliaSonera
• Reed Elsevier • Tenaris
• Repsol • Ternium
• Reuters • Thomson
• Rhodia • TMM
• Rio Tinto • TNT
• Royal & Sun Alliance • Total
• Royal Ahold • Trinity Biotech
• Royal Bank of Scotland • UBS
• Royal Dutch Shell • Unilever
• Sanofi-Aventis • United Utilities
• Sanpaolo IMI • UPM-Kymmene
• Schering • Veolia Environment
• Scottish Power • Vernalis
• Serono • Vivendi
• SGL Carbon • Vodafone
• Signet Group • Volvo
• Sinopec Shanghai Petrochemical • WPP
• SKF • Yanzhou Coal Mining

E R N S T & YO U N G www.ey.com
© 2007 EYGM Limited. All Rights Reserved.

EYG No. AU0037
Job No. 11016 03/07. Designed by Living Designs, London
This publication contains information in summary form and is therefore intended for general
guidance only. It is not intended to be a substitute for detailed research or the exercise of professional
judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organisation
can accept any responsibility for loss occasioned to any person acting or refraining from action as a
result of any material in this publication. On any specific matter, reference should be made to the
appropriate advisor.

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U S C A P I TA L M A R K E T S

About Ernst & Young

First-time adoption of IFRS 67

Industry sector analysis 70

Appendix A – Convergence update 133

Appendix B – Form 20-F financial statement requirements 139

Appendix C – Abbreviations used 142

Appendix D – The companies surveyed 143

2 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Extract 1: France Telecom

4 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

6 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

8 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Business combinations 258

Foreign currency translation 90

Capitalisation of borrowing costs 47

Financial instruments – recognition and measurement 126

Financial instruments – shareholders’ equity 41

Financial instruments – derivatives and hedge accounting 159

Provisions and contingencies 125

Share-based payments 152

Pensions and post-retirement benefits 311

Under IFRS, purchase consideration allocated to acquired in-process research and

10 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Impairment 62 companies reported a total of 87 differences relating to impairment. Of these 87

23 (18%) of the differences relate to the measurement of investments in non-exchange listed or

12 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Leasing A total of 61 differences relating to leasing transactions were reported by 49 companies.

14 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Revenue recognition 35 companies reported a total of 46 differences relating to revenue recognition.

16 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

1 Presentation of financial statements

Extract 6: Royal Ahold

18 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

2 Consolidated financial statements

2.1 Definition of a subsidiary

Extract 8: China Petroleum & Chemical

2.2 Minority interests

2.2.1 Carrying amount of minority interests

20 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Extract 10: Reuters

2.3 Purchase of a non-controlling interest

Extract 11: Lafarge

2.4 Special Purpose Entities

Extract 12: Telenor

(13) Consolidation of variable interest entities [extract]

Extract 13: Endesa

Extract 14: International Power

22 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

• accounting for goodwill and negative goodwill; and

3.1 The cost of the acquired entity

Extract 15: France Telecom

Description of US GAAP adjustments [extract]

Extract 16: WPP

24 T O W A R D S C O N V E R G E N C E – A S URVEY OF IFRS/US GAAP D IFFERENCES

Extract 17: UBS

B In-process research and development

Extract 18: Bayer

C Provisions for reorganisations and future losses