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Explanation, Comparison, and Contrasting GAAP and IFRS
Transcript of Explanation, Comparison, and Contrasting GAAP and IFRS
Explanation, Comparison, and Contrast of GAAP and IFRS
The US GAAP has slowly evolved from an emphasis on revenues and expenses to an emphasis on assets and liabilities.
Evolving US GAAP
What are GAAP and IFRS?
A. Objective and Qualitative Characteristics
B. Elements and Recognition
D. Reporting Entity
E. Presentation and Disclosure
F. Framework for a GAAP Hierarchy
G. Applicability to the Not-For-Profit Sector
H. Remaining Issues
FASB and IASB Joint Conceptual Framework Project
Most agree there should be one set of global standards
These standards must meet the stringent legal and regulatory requirements of the US
There may be differences in implementation and enforcement
Efforts to Converge GAAP and IFRS
By: Nina Arant, Matt Backlund, Maria Madera, and Ofelia Villasenor
1. Develop global accounting standards requiring transparency,comparability, and high quality in financial statements
2. To encourage global accounting standards
3. When implementing global accounting standards, to take into account the needs of emerging markets
4. Converge various national accounting standards with the global accounting standards
Goals of IASB
There are three major differences between GAAP and IFRS Balance Sheets:
Generally Accepted Accounting Principles
International Financial Reporting Standards
Sept 2002: FASB and IASB sign Norwalk Agreement
Nov 2008: SEC issues a Roadmap of milestones
May 2011: SEC issues discussion paper describing a "condorsement" approach
Nov 2011: SEC issues two studies comparing GAAP to IFRS
Dec 2011: SEC postpones final determination
FASB's Standard-Setting Process
1. Board receives recommendation
2. FASB Chairman decides whether to add a project to the agenda
3. Board deliberates the issues at public meetings
4. Board issue an Exposure Draft (ED)
5. Board holds a public roundtable meeting on the ED
6. Staff analyzes feedback and the Board re-deliberates the revisions at more public meetings
7. Board issues a Standards Update describing amendments to the Codification
GAAP are set by the Financial Accounting Standards Board (FASB)
FASB is comprised of accountants, financial analysts, and regulators who draw up accounting practices to meet ongoing changes in the markets.
FASB studies new issues, and develops a new proposed accounting procedure.
IFRS were established in 2001 and adopted by the European Union in 2005.
The hope is that all the world's businesses will move to these standards to help investors and financiers all over the world better understand the financial situation of companies they invest in, do business with, or extend credit to.
All accounting systems follow double-entry practices that categorize transactions as revenue or expenses, assets or liabilities.
The two primary accounting systems have a few differences between them that may affect the results.
Emphasize recognition of
revenues and expenses
assets and liabilities recognized as necessary to make the balance sheet reconcile with the income statement.
Emphasis on recognizing assets and liabilities first. Then recognizes revenues, expenses, gains, and losses needed to account for the changes in assets and liabilities from the previous measurement date.
Each country typically uses their own Generally Accepted Accounting Principles (GAAP)
But, what happens when a company does business in multiple countries?
These companies usually adapt the International Financial Reporting Standards (IFRS)
IFRS specifies a
minimum list of items
to be presented in the Balance Sheet. The US GAAP has no minimum requirements
International Accounting Standards (IAS) changed the name of the Balance Sheet to
Statement of Financial Position
. However, companies are not requires to use this term. Some US companies use this title, as well.
Under GAAP, current assets and liabilities are presented before non-current assets and liabilities.
IAS does not recommend the format
of the Balance Sheet, but those prepared using IFRS often report non-current items first.
This "Accounting Constitution" provides an underlying foundation for the US accounting standards.
GAAP and IFRS Conceptual Frameworks are very similar, but in GAAP, the framework is primarily for guiding standard setting, while IFRS focuses on providing a "true and fair representation" of the company.
Recognition and Measurement Concepts
To provide financial information that is useful to capital providers
(Assets, liabilities, equity, revenues, expenses, gains, losses, etc.)
(economic entity, going concern, periodicity, monetary unit)
(revenue recognition, expense recognition, mixed-attribute measurement, full disclosure)
(Relevance, Faithful, Representation)
(Comparability, Verifiability, Timeliness, Understandability)
(Balance Sheet, Income Statement, Statement of Comprehensive Income, Statement of cash flows, etc.)