Illustrations

For all leases with option periods that are at the company's sole discretion, the subsidiary must make a determination at lease inception as to whether the option period is reasonably assured of renewal or if a purchase option is reasonably assured of being exercised (generally options that are not FMV options may be considered). This "reasonably assured of renewal" determination is based on the "penalty" that would be incurred if the subsidiary does not renew the lease. "Penalty" means that the lessee would forgo an economic benefit or suffer an economic detriment if it does not renew the lease. Thus, it is not a cash payment, but a loss of the ability to recover the investment in assets or continue to capture the economic benefit of restaurant profitability. Based on this, the company's includes renewal/extension periods when significant capital expenditures have been invested in the site. Thus, subsidiaries must use their own experience and the level of investment for each lease type in their portfolio to make the determination whether the option is "reasonably assured of renewal" in order to determine if option periods should be included or not.

"[In 1995, the Commission] recognized that the existing Directives as such were not suitable for the information needs of international capital markets and consequently large companies were increasingly being drawn to use U.S. Generally Accepted Accounting Practices (U.S. GAAP) in addition to their local Generally Accepted Accounting Practices (GAAP). This increased costs and sometimes resulted in confusion when comparisons were made to local GAAP. Furthermore, at a political level, the European Union had no influence on accounting standards adopted under U.S. GAAP, nor were the standards necessarily appropriate in an E.U. context.

"For these reasons, the Commission proposed that the European Union should place its full weight behind the international standards being developed by the International Accounting Standards Committee with the objective of establishing a set of standards that would be acceptable in capital markets world-wide."

Alexander Schaub, The Use of International Accounting Standards in the European Union, 25 Nw. J. Int'l L. & Bus. 609 (2004-2005)

While the IFRS standards published by the IASB are not law, the IFRS standards republished in the European Union's Official Journal are.

As part of its agreement with the IFRS Foundation, the EU has the make IFRS standards it has adopted (European-IFRS) available for free both in the original and in translation.

IFRS does, however, continue to be the copyrighted property of the IFRS Foundation.

One reason the US SEC has not embraced IFRS is the influence the European political establishment exerts on IASB through its contributions (link: iasplus.com).

Obviously, £200 per year will not pay for the IASB's independence, but every little bit helps.

A summary of US GAAP's pre-codification structure:

Specifically, SOX.SEC. 108 (link: gpo.gov) gives the SEC the right to designate a standard setter, not ratify individual standards.

This provision was included to prevent the SEC from cherry-picking standards, and so limits the influence of politics and politicians on standard setting.

In the past, the AICPA's pronouncements were generally available to AICPA members (family and friends) only.

Like the Liturgical Latin of old, this allowed AICPA members to project an aura of Ecclesiastical like infallibility that not only enhanced their prestige, but proved quite lucrative.

Obviously, in a post Enron/WorldCom world, such an approach to standard setting is no longer consistent with standards of transparency and objectivity to which the profession is now held.

As a result, the AICPA no longer sets accounting standards.

Instead, it concentrates on its roles as the guardian of the CPA exam and profession's chief lobbyist (link: aicpa.org).

Being quasi law, US GAAP's full text cannot be sold for profit.

However, the FASB is free to charge for premium services (such as search or copy functions).

While not absolutely necessary, these services make researching US GAAP much easier.

More importantly, they give those who use US GAAP the opportunity to directly support a standard setting process that is, without question, second to none.

GAAP is an acronym for Generally Accepted Accounting Principles.

This implies that GAAP derives its authority from its being accepted by the profession.

In contrast, "statutory accounts", as their name implies, are law.

As such, they derive their authority from the sovereign power of the state.

Among the implications:

Not applying statutory accounts is generally a crime punishable by incarceration (at minimum of an entity's statutory representative, a.k.a. managing director).

Statutory accounts are generally procedural and legalistic (not judgmental or principles based).

Statutory accounts are generally used for taxation (focus on information useful to tax authorities rather than investors).

On a fundamental level, statutory accounts are generally based on a physical, rather than financial, capital maintenance concept.

That being said, since "national GAAP" has become too ingrained in the vernacular to dislodge, this site has no choice but to use the term, even if it is both inaccurate and misleading.

While the IASB publishes an IFRS for SME standard for Small and Mid-sized Enterprises (link: ifrs.org), this standard is not accepted for statutory accounting purposes by any EU country except Ireland and the United Kingdom.

Worldwide, the 85 jurisdictions that require or permit the IFRS for SME standard are:

Anguilla, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Bermuda, Bhutan, Bosnia and Herzegovina, Botswana, Brazil, Cambodia, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, Kazakhstan, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya, Kosovo, Lesotho, Liberia, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mauritius, Montserrat, Myanmar, Namibia, Nicaragua, Nigeria, Pakistan, Palestine, Panama, Paraguay, Peru, Philippines, Qatar, Rwanda, Saint Lucia, Saudi Arabia, Serbia, Sierra Leone, Singapore, South Africa, Sri Lanka, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Swaziland, Switzerland, Tanzania, Trinidad & Tobago, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Venezuela, Yemen, Zambia, and Zimbabwe (link: ifrs.org).

While not a separate standard like IFRS-SME ( link: ifrs.org), GAAP-Lite does try to make life simpler for accountants working at companies not listed on an exchange (link: fasb.org).

For example, unlike their public counterparts, private company accountants are allowed to amortize goodwill instead of having to regularly test it for impairment (conceivably forever).

IFRS 15.35 | ASC 606-10-25-27: An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

(a) the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs (see paragraphs B3-B4);

(b) the entity's performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5); or

(c) the entity's performance does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).

IFRS 15.36 | ASC 606-10-25-28: An asset created by an entity's performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation. Paragraphs B6-B8 provide guidance for assessing whether an asset has an alternative use to an entity.

IFRS 15.37 | ASC 606-10-25-29: An entity shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 35(c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity's failure to perform as promised. Paragraphs B9-B13 provide guidance for assessing the existence and enforceability of a right to payment and whether an entity's right to payment would entitle the entity to be paid for its performance completed to date.

IFRS 15.B14 | ASC 606-10-55-16: Methods that can be used to measure an entity’s progress towards complete satisfaction of a performance obligation satisfied over time in accordance with paragraphs 35–37 include the following:

(a) output methods (see paragraphs B15–B17); and

(b) input methods (see paragraphs B18–B19).

Output methods

IFRS 15.B15 | ASC 606-10-55-17: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered. When an entity evaluates whether to apply an output method to measure its progress, the entity shall consider whether the output selected would faithfully depict the entity’s performance towards complete satisfaction of the performance obligation. An output method would not provide a faithful depiction of the entity’s performance if the output selected would fail to measure some of the goods or services for which control has transferred to the customer. For example, output methods based on units produced or units delivered would not faithfully depict an entity’s performance in satisfying a performance obligation if, at the end of the reporting period, the entity’s performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the output.

IFRS 15.B16 | ASC 606-10-55-18: As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognise revenue in the amount to which the entity has a right to invoice.

IFRS 15.B17 | ASC 606-10-55-19: The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an entity without undue cost. Therefore, an input method may be necessary.

Input methods

IFRS 15.B18 | ASC 606-10-55-20: Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognise revenue on a straight-line basis.

IFRS 15.B19 | ASC 606-10-55-21: A shortcoming of input methods is that there may not be a direct relationship between an entity’s inputs and the transfer of control of goods or services to a customer. Therefore, an entity shall exclude from an input method the effects of any inputs that, in accordance with the objective of measuring progress in paragraph 39, do not depict the entity’s performance in transferring control of goods or services to the customer. For instance, when using a cost-based input method, an adjustment to the measure of progress may be required in the following circumstances:

(a) When a cost incurred does not contribute to an entity’s progress in satisfying the performance obligation. For example, an entity would not recognise revenue on the basis of costs incurred that are attributable to significant inefficiencies in the entity’s performance that were not reflected in the price of the contract (for example, the costs of unexpected amounts of wasted materials, labour or other resources that were incurred to satisfy the performance obligation).

(b) When a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation. In those circumstances, the best depiction of the entity’s performance may be to adjust the input method to recognise revenue only to the extent of that cost incurred. For example, a faithful depiction of an entity’s performance might be to recognise revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met:

   (i) the good is not distinct;

   (ii) the customer is expected to obtain control of the good significantly before receiving services related to the good;

   (iii) the cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation; and

   (iv) the entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal in accordance with paragraphs B34–B38).

If this sounds familiar, it is likely because IFRS 15.31 | ASC 606-10-25-33 state: An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

IFRS 15.33 | ASC 606-10-25-25 state: Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

And IFRS 15.32 | ASC 606-10-25-24 point out: For each performance obligation identified in accordance with paragraphs 22–30 | 606-10-25-14 through 25-22, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with paragraphs 35–37 | 606-10-25-27 through 25-29) or satisfies the performance obligation at a point in time (in accordance with paragraph 38 | 606-10-25-30). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

Some companies take the time to write clear and thoughtful policy statements.

For example, one company had this to say about determining if lease includes a non-renewal penalty.

Others prefer the Ctrl-c / Ctrl-v method, which is fine, as long as they take the time to absorb the true meaning of IFRS / US GAAP and give additional explanations where needed.

If not, it just causes confusion.

IFRS 15.B18 | ASC 606-10-55-20 state: Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.

In other words, if a company recognizes revenue by applying a percentage determined by comparing cost to date with total cost, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the cost-to-cost method.

Similarly, IFRS 15.B15 | ASC 606-10-55-17 state: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered.

In other words, if a company recognizes revenue by applying a percentage determined by evaluating surveys, appraisals, milestones (a.k.a. benchmarks) or time, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the efforts-expended method.

Likewise, if a company recognizes revenue by applying a percentage determined by dividing the number of units delivered by total number units to be delivered, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the units-of-delivery method.

Obviously, care must be taken to evaluate whether the percentage used clearly represents the portion of the delivery that has been transferred into the control of the customer, but that is not an accounting issue. It is an internal control issue.