Local GAAP and IFRS are not aligned on many different aspects, varying in degree of relative importance, and both sets of principles are subject to unpredictable regulatory changes. Therefore, should it be necessary to study these differences in any depth, this should be done at the time the information is needed and only under expert guidance. The table which follows is intended solely for illustration of sample notions which could be of interest and therefore cannot be considered exhaustive.
LOCAL GAAP IFRS
GENERAL
Statement of cash flows is highly recommended but not required.
The format of the components of the financial statements is prescribed by the Company law. Extraordinary items are disclosed on the face of the income statements.
Restatement of comparative is not allowed. The effects of changes in accounting policies and corrections of errors are included in the income statements of the current year. In addition to actions attributable to equity holders, net equity changes only in consequence of the profit or loss of the period.
Statement of cash flows is required. IFRS does not prescribe a standard format of components of the financial statements.
No extraordinary items are presented in the income statements.
Change in accounting policies and correction of errors could lead to a restatement of comparatives. In addition to actions attributable to equity holders, net equity changes in consequence of profit or loss of the period and also for income or expense recognized directly in equity (other comprehensive income).
CONSOLIDATION
The existence of currently exercisable potential voting rights are not taken into consideration in order to identify subsidiaries and associates. Special purposes entities (SPEs) are not included in the consolidation due to the absence of participating interest.
Minority interests are not part of net equity.
For identification of subsidiaries and associates, the existence of currently exercisable potential voting rights is taken into consideration. SPEs are consolidated where the substance of the relationship indicates control.
Minority interests, i.e. non controlling interests, are part of net equity.
ASSETS
Acquired intangible assets
All intangible fixed assets are amortised and for some of them the maximum useful life is five years. It is permitted, with certain restrictions, to capitalise start-up costs (i.e. training), advertising costs and cost of issuing shares.
Goodwill arising from a business combination is amortised over its useful life (useful life longer than five years must be justified) Revaluations are not permitted unless authorised by special laws.
If the criteria for capitalisation are satisfied, intangible assets must be amortised over their estimated useful life. Costs of issuing shares are recognised as deduction from equity.
Goodwill arising from a business combination and intangible assets with an indefinite useful life are not amortised but subject to impairment test at least annually.
Revaluations are possible only in a very few cases.
INTERNALLy GENERATED INTANGIBLE ASSETS
Similar to IFRS, except that there is the option to capitalise and amortise development costs if the conditions are satisfied.
Research costs are expensed when incurred. Development costs are capitalised and amortised when rigorous criteria are satisfied.
Property, plant and equipment
These must be stated at historical cost. Revaluations are not permitted unless authorised by special laws.
They are measured using either the cost model or the revaluation model.When the revaluation model is used, the entire category of assets has to be revaluated with sufficient regularity.
Leases (as lessee)
All leases are accounted in the financial statements as operating lease. Disclosures are required by law with reference to finance lease.
Finance lease are accounted in the financial statements on the basis of substance rather than form.
Investment properties
These must be stated at cost and depreciated over their useful life. Depreciation is not mandatory. Fair value is not permitted.
They must be stated at depreciated cost or at fair value. If fair value is used, variations are recognised in profit or loss.
Inventories
Similar to IFRS; however, LIFO is admitted. Stated at the lower of cost and net realizable value. The cost is based on the FIFO method or weighted average cost. The LIFO method is not admitted.
Financial assets (measurement and derecognition)
Long-term investments are accounted for at cost less other than temporary impairment losses.
Short-term investments are accounted for at lower of cost and market value.
Loans and receivables are accounted for at nominal amount less any impairment losses. No guidance for derecognition. Generally based on loss of legal ownership.
Measurement of financial assets depends on their classification:
- at amortised cost (held to maturity, loan and receivables)
- at fair value through equity (available for sales) - at fair value through profit and loss (financial assets not included in the above mentioned categories)
Derecognition of financial assets is mainly based on the transfer of risk and rewards.
Hedging derivatives instruments
Specific guidance only for hedging derivatives on foreign exchange rates.
In general, hedging derivatives are not booked in the financial statements, but disclosures are required.
All derivative instruments are measured at fair value. Change in fair value is recognised in income statements except for effective cash flow hedges, where the changes are deferred in equity until effect of the underlying transaction is recognised in the income statement.
LIABILITIES AND EQUITy
Financial liabilities and equity instruments (classification)
Classification is based on legal form of financial instruments.
Preference shares are ever included within equity.
Convertible debt is always recognised as a financial liability.
Purchased own shares are showed as assets investment and a non distributable reserve in equity must be created.
Classification depends on substance of the issuer’s obligations.
Mandatorily redeemable preference shares are classified as financial liabilities.
Proceeds received as a result of issuing a convertible debt is allocated between equity and financial liability
Purchased own shares are recognised as deduction from equity.
Restructuring provision
A restructuring provision is recognised at the
moment of the board of directors’ resolution. A restructuring provision must be made if a detailed plan has been announced or if implementation of the plan has actually started.
INCOME STATEMENTS Revenue
No detailed standard on revenue recognition exists. Revenue is generally recognised when ownership is transferred or when revenue is legally enforceable.
Based on several criteria, which require the recognition of revenue when risks and rewards have been transferred and the revenue can be measured reliably.
Employee benefits – pension costs (defined benefit plans)
No general guidance for pension cost. No actuarial calculation is applied on the obligation for severance pay (i.e. TFR-trattamento di fine rapporto).
Obligation for a defined benefit plan is estimated using an actuarial calculation (projected unit credit method)