IFRS 1, transition from US GAAP to IFRS disclosures

Kubota Corporation – Annual report – 31 December 2018
Industry: manufacturing
32. DISCLOSURE OF TRANSITION TO IFRS
The condensed consolidated financial statements have been prepared in accordance with IFRS for the first time from the beginning of the fiscal year ending December 31, 2018. The latest consolidated financial statements in accordance with U.S. GAAP were prepared for the year ended December 31, 2017, and the transition date is January 1, 2017.

IFRS 1 Exemptions
IFRS 1 requires an entity which adopts IFRS for the first time (the “first-time adopter”) to adopt IFRS retrospectively to prior periods. However, IFRS 1 provides mandatory exceptions prohibiting retrospective application and certain exemptions that allow first-time adopters to voluntarily choose not to apply certain standards retrospectively.

The effects of applying IFRS 1 are adjusted in retained earnings or other components of equity at the transition date.

Major exemptions adopted by the Company are as follows:
(1) Business combinations
IFRS 1 permits first-time adopters not to apply IFRS 3, Business Combinations (“IFRS 3”), retrospectively to business combinations that occurred prior to the transition date. The Company chose to apply this exemption and did not apply IFRS 3 retrospectively to business combinations that occurred prior to the transition date. The Company performed impairment tests at the transition date on goodwill arisen from business combinations that occurred prior to the transition date regardless of whether there was any indication that goodwill may be impaired.

(2) Exchange rate differences on translating foreign operations
IFRS 1 permits first-time adopters to choose to deem the cumulative amount of the exchange differences on translating foreign operations to be zero as of the transition date. The Company chose to apply this exemption and deemed the full cumulative amount of the exchange differences on translating foreign operations to be zero at the transition date.

(3) Exemptions from retrospective application of IFRS 9
IFRS 1 permits first-time adopters adopting IFRS from years beginning before January 1, 2019, that choose to apply IFRS 9 to not restate the comparative information in its first IFRS financial statements in accordance with IFRS 9. The Company chose to apply this exemption, and recognized and measured the comparative information in accordance with the previous accounting standards, U.S. GAAP.

Reconciliations from U.S. GAAP to IFRS
The effects of the transition from U.S. GAAP to IFRS on financial position, profit or loss, and cash flows of the Company are shown in the following reconciliations.

Reclassification includes items that do not affect retained earnings or comprehensive income, while Recognition and measurement includes items that affect retained earnings or comprehensive income.

(1) Reconciliation of equity as of January 1, 2017 (Transition date)

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(2) Reconciliation of equity as of December 31, 2017

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(3) Reconciliation of comprehensive income for the year ended December 31, 2017

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Notes to Reconciliation of Equity and Comprehensive Income
A. Reclassification
The major items of Reclassification are as follows:

(1) Presentation of finance receivables
Under U.S. GAAP, the Company accrued the preferential interest equivalents arising from retail finance operations in liabilities and recorded finance receivables including those amounts in assets.

Under IFRS, the preferential interest equivalents are considered a part of consideration received, and therefore they are subtracted from finance receivables.

(2) Presentation of financial assets and liabilities
IFRS requires an entity to separately state financial assets and liabilities on the consolidated statement of financial position.

Therefore, time deposits and derivatives, which were included in other current assets under U.S. GAAP; other investments and long-term trade accounts receivable, which were separately stated under U.S. GAAP; and derivatives, which were included in other assets—other under U.S. GAAP, are all included in other financial assets under IFRS. Notes and accounts payable for capital expenditures, which were separately stated under U.S. GAAP, and derivatives, which were included in other current liabilities and other long-term liabilities under U.S. GAAP, are all included in other financial liabilities under IFRS.

(3) Presentation of contract assets
Under U.S. GAAP, receivables arising from the percentage-of-completion method, which were recognized during construction in process, were included in trade accounts receivable.

Under IFRS, the rights to the consideration, which are recognized in line with the progress towards complete satisfaction of a performance obligation, are stated as contract assets, and the Company distinguishes them from trade receivables, which are the Company’s rights to unconditional consideration, and includes them in other current assets.

(4) Presentation of deferred tax assets and liabilities
The Company adopted a new accounting standard under U.S. GAAP which required deferred tax assets and liabilities to be classified as noncurrent on January 1, 2017. However, the financial statements as of the transition date were prepared under U.S. GAAP without the adoption of this standard by using the information as of December 31, 2016. For this reason, on the transition date, deferred tax assets and liabilities were presented separately as current and noncurrent and included in other current assets, other assets—other, other current liabilities, and other long-term liabilities under U.S. GAAP.

Under IFRS, deferred tax assets and liabilities were all presented as noncurrent.

There was no difference between U.S. GAAP and IFRS in terms of presentation on the financial statements as of December 31, 2017.

B. Capitalization of development expenses
Under U.S. GAAP, expenditures related to research and development are expensed as incurred.

Under IFRS, certain development expenditures which meet the required criteria for capitalization are recognized as intangible assets and amortized over their estimated useful lives on a straight-line basis.

C. Impairment of goodwill
Under U.S. GAAP, when evaluating whether goodwill is impaired, the fair value of the reporting unit including goodwill is compared with its carrying amount. When the fair value of the reporting unit is lower than its carrying amount, the fair value of goodwill is calculated, and if the fair value of goodwill is lower than its carrying amount, the difference is recognized as impairment loss of goodwill.

Under IFRS, when the carrying amount of the cash-generating unit including goodwill exceeds its recoverable amount, the excess amount is recognized as impairment loss. For impairment loss arising in the cash-generating unit including goodwill, the Company first impairs goodwill, and when there is any remaining amount, recognizes impairment loss for other assets in the cash-generating unit.

On the transition date, the Company conducted impairment tests on each cash-generating unit. Impairment losses of ¥3,982 million, ¥149 million, and ¥1,439 million were recognized on goodwill; property, plant, and equipment; and intangible assets, respectively, all in the Farm & Industrial Machinery segment.

The recoverable amount is measured using the value in use. The value in use is calculated by discounting the estimated future cash flows based on the market growth rate to which each cash-generating unit belongs, as well as the business plan for the next five years approved by management, to the present value by the weighted average cost of capital on cash-generating unit (7.5% is largely used).

D. Postemployment benefits
Under U.S. GAAP, postemployment benefits related to defined benefit pension plans, service cost, interest cost, and expected return on plan assets are recognized in profit or loss. The portion of actuarial gains and losses arising from the defined benefit pension plans and past service cost incurred that was not recognized as a component of retirement benefit expenses for the period is recognized at the amount net of income tax in accumulated other comprehensive income. The amount recognized in accumulated other comprehensive income is subsequently reclassified to income or loss as a component of retirement benefit expenses over a period of time in the future.

Under IFRS, postemployment benefits related to defined benefit pension plans, current service cost, and past service cost are recognized in profit or loss, and the amount calculated by multiplying net defined benefit liabilities and assets by the discount rate is recognized as net interest expense in profit or loss. If the defined benefit pension plan has a surplus, the net defined benefit asset is limited to the present value of any future economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

As a result, other components of equity increased by ¥916 million at January 1, 2017. At December 31, 2017, other components of equity and other noncurrent assets decreased by ¥2,331 million and ¥6,611 million, respectively, and retirement benefit liabilities increased by ¥139 million. Cost of sales and selling, general, and administrative expenses increased by ¥1,727 million and ¥660 million, respectively, for the year ended December 31, 2017.

Remeasurements of the net defined liability and asset are recognized at the amount net of income tax in other comprehensive income and transferred from other components of equity directly to retained earnings, not through profit or loss.

As a result, other components of equity increased by ¥25,308 million and ¥22,469 million at January 1 and December 31, 2017, respectively.

E. Exchange rate differences on translating foreign operations
The Company chose to apply the IFRS 1 exemption and deemed the full cumulative amount of the exchange differences on translating foreign operations to be zero at the transition date.

As a result, other components of equity decreased by ¥26,009 million and ¥25,646 million at January 1 and December 31, 2017, respectively.

F. Revenue recognition
Under U.S. GAAP, discounts and rebates depending on sales volumes are measured and recognized based on the related incentive program at the later of the time when the Company recognizes and measures related revenue, and the time when related incentive programs are provided to the customers.

Under IFRS, discounts and rebates depending on sales volumes are measured and recognized when the Company satisfies performance obligations by the method that seems to appropriately estimate the amount of consideration by using past, current, and future expected information which is reasonably available to the Company.

As a result, other current liabilities increased by ¥6,455 million and ¥6,366 million at January 1 and December 31, 2017, respectively. Revenue decreased by ¥77 million for the year ended December 31, 2017.

Under U.S. GAAP, revenue from short-term construction contracts is recognized by the completed-contract method.

Under IFRS, as stated in Note 3. SIGNIFICANT ACCOUNTING POLICIES, Revenue Recognition, revenue from construction contracts is considered to be transferred control of promised assets over time, and revenue from those contracts is recognized over time by measuring the progress towards complete satisfaction regardless of the term of those contracts.

As a result, other current assets increased by ¥5,580 million and ¥5,160 million at January 1 and December 31, 2017, respectively. Inventories decreased by ¥3,582 million and ¥3,791 million at January 1 and December 31, 2017, respectively. Revenue decreased by ¥420 million, and cost of sales increased by ¥209 million for the year ended December 31, 2017.

G. Income taxes
Under U.S. GAAP, subsequent changes to deferred tax assets and liabilities recognized on items previously recognized in other comprehensive income are recognized in profit or loss.

Under IFRS, subsequent changes to deferred tax assets and liabilities recognized on items previously recognized in other comprehensive income are recognized in other comprehensive income.

As a result, other components of equity increased by ¥20,912 million both at January 1 and December 31, 2017.

Under U.S. GAAP, with respect to unrealized gains and losses from intercompany transactions, a deferred tax asset is recognized using the effective tax rate of the seller.

Under IFRS, a deferred tax asset is recognized using the effective tax rate of the buyer as a temporary difference of assets held by the buyer.

As a result, net deferred tax assets decreased by ¥318 million and ¥1,908 million at January 1 and December 31, 2017, respectively. Income tax expenses increased by ¥1,590 million for the year ended December 31, 2017.

H. Retained earnings
Effects of the transition, net of income tax, on retained earnings from U.S. GAAP to IFRS are as follows:

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Notes to Reconciliation of Consolidated Statement of Cash Flows for the Year Ended December 31, 2017
Among the expenditures related to research and development, which were classified into cash flows from operating activities under U.S. GAAP, the expenditures related to development activities which meet the required criteria for capitalization under IFRS are classified into cash flows from investing activities under IFRS.

Under U.S. GAAP, increase in and collection of finance receivables were classified into cash flows from investing activities, whereas under IFRS, they are classified into cash flows from operating activities.

(1) Consolidated Statement of Financial Position
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