X » Topics » Note 24. Canadian GAAP vs. US GAAP Differences

This excerpt taken from the X 8-K filed Jan 11, 2008.

Note 24. Canadian GAAP vs. US GAAP Differences

The following table summarizes the material differences in the accounting principles, practices and methods used in preparing Stelco’s Consolidated Financial Statements under generally accepted accounting principles in Canada (Canadian GAAP) and methods that would be used under generally accepted accounting principles in the United States (US GAAP):

 

Canadian GAAP    US GAAP
Joint Venture Investments   
Joint venture investments are accounted for using the proportionate consolidation method. Under the proportionate consolidation method, the investor’s proportionate interest in the assets, liabilities, revenues, expenses and cash flows of the investee are combined with similar items, line by line, in the investor’s financial statements.   

Joint venture investments are accounted for under the equity method if the reporting entity exerts significant influence over the venture or under the cost method if the entity does not exert significant influence.

 

The difference in the accounting treatment between Canadian GAAP and US GAAP affects only the display and classification of financial statement items and does not change net income or shareholder’s equity.

Financial Instruments and Hedging Activities   
Under Canadian GAAP at December 31, 2006, embedded derivatives are precluded from being separated from the host contract unless the criteria for hedge accounting are satisfied and non-financial contracts are not evaluated to determine if they are derivatives.   

According to Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), embedded derivatives are separated from the host contract and accounted for as a derivative instrument if certain criteria are met.

 

The derivatives would be recognized on the Statement of Financial Position as either an asset or liability measured at fair value. Stelco’s Floating Rate Notes have an embedded derivative relating to the call option and a purchase contract of Stelco has an embedded derivative that must be separated under US GAAP. Recording these financial instruments would cause financial assets or liabilities to be recorded. Quarterly, changes in fair value of these financial instruments would be recognized as a charge or credit to costs on the Consolidated Statement of Earnings (Loss).

 

In addition, Stelco has a number of purchase contracts for various commodities that could be net settled. Stelco did not avail itself of the normal purchase, normal sale exemption, permitted under FAS 133 and, accordingly such contracts would have been derivative contracts requiring measurement and recognition under US GAAP.

Employee Future Benefits – Funded Status   

The Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3461, “Employee Future Benefits” does not require the over or under funded status of defined benefit plans to be recognized in the Statement of Financial Position. Also, Canadian GAAP does not require the recognition of unamortized gains or losses in other comprehensive income.

 

Under Canadian GAAP, the overfunded or underfunded status of a plan is included in the notes to the financial statements in the form of a reconciliation of the overfunded or underfunded status to amounts recognized in an employer’s Statement of Financial Position.

  

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other

Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“FAS 158”). FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit plan (other than a multiemployer plan) as an asset or liability on the Statement of Financial Position. Changes in the funded status, net of the related tax effects, are recognized through comprehensive income and the funded status of the plan is measured as of the year-end date.

 

FAS 158 requires overfunded plans to be aggregated and recognized as an asset in its Statement of Financial Position. Additionally, it requires underfunded plans to be aggregated and recognized as a liability in its Statement of Financial Position.

 

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Canadian GAAP    US GAAP
   Under US GAAP, other assets would increase to reflect the overfunded status of certain of Stelco’s pension plans; the pension liability would increase to reflect the underfunded status of certain of Stelco’s pension plans; the employee future benefit liability would decrease to reflect the difference between the funded status and the accrued benefit liability; and accumulated other comprehensive income would increase, net of the related tax effect.
Employee Future Benefits – Pension Valuation   
Canadian GAAP requires the recognition of a pension valuation allowance for any excess of the prepaid benefit expense over the expected future benefit. Changes in pension valuation allowances are recognized in the Consolidated Statement of Earnings (Loss).    Recognition of a pension allowance is not permitted under US GAAP.
Inventory   
Under CICA Handbook Section 3030 “Inventories”, Stelco has valued inventory using fixed production overhead costs, excluding depreciation.   

Statement of Financial Accounting Standard No. 151 “Inventory Costs” requires the allocation of fixed production overhead costs to inventory.

 

Under US GAAP, the carrying amount of finished goods inventory and cost of goods sold would increase based on an appropriate allocation of depreciation costs and depreciation expense would decrease.

Income Taxes   
CICA Handbook Section 3465 “Future Income Taxes” requires that future income taxes be accounted for under the asset and liability method. This method requires that the calculation of future income taxes include currently enacted, or substantively enacted tax rates and laws expected to apply when temporary differences reverse.   

FASB Statement No. 109 “Accounting for Income Taxes” also uses the asset and liability method, but permits only enacted tax rates to be used in the calculation of future income taxes. At December 31, 2006 and March 31, 2006, the tax rates in Canada are enacted; therefore, there is no difference between Canadian and US GAAP.

 

FASB Statement No. 109 “Accounting for Income Taxes”, as amended, requires the tax effects of gains and losses included in other comprehensive income but excluded from net income to be charged or credited directly to other comprehensive income. Therefore, the tax effects related to the minimum pension liability adjustment and FAS 158 adjustments made for US GAAP purposes are recorded in comprehensive income.

 

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Canadian GAAP    US GAAP
Capitalization of Interest   
CICA Handbook Section 3061 “Property, Plant and Equipment” provides an option to either expense or capitalize interest related to capital projects undertaken during the year. Stelco’s policy is to expense interest related to capital projects.   

FASB Statement No. 34 “Capitalization of Interest Cost” requires interest related to capital projects undertaken during the year to be capitalized.

 

Accordingly, under US GAAP, the carrying amount of certain machinery and equipment would increase, accumulated depreciation and depreciation expense would increase and interest expense would decrease.

Comprehensive Income/Loss   
As of December 31, 2006, Canadian GAAP does not require comprehensive income to be presented as a separate component of shareholders’ equity.   

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”) establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income equals net income (loss) for the period as adjusted for all other non-owner changes in shareholder’s equity. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement.

 

FASB Statement No. 109 “Accounting for Income Taxes”, as amended, requires the tax effects of gains and losses included in other comprehensive income but excluded from net income to be charged or credited directly to other comprehensive income.

Statement of Cash Flows   
Cash and Cash equivalents may include bank overdrafts when the bank balance fluctuates frequently between positive and overdrawn. As a result, changes in bank overdrafts are classified as operating activities in the Statement of Cash Flows under Canadian GAAP.    Bank overdrafts are not included in the definition of cash and cash equivalents, but rather are considered a form of short-term financing and as such changes therein would be classified as financing activities in the Statement of Cash Flows.

 

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