Financial Accounting
International
Financial
Reporting
Standards
Appendix E
Spiceland | Thomas | Herrmann
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App E-2
Learning Objectives
• Explain the reasons for differences in accounting
practices across countries
• Understand the role of the International
Accounting Standards Board (IASB) in the
development of International Financial Reporting
Standards (IFRS)
• Recognize the major differences between U.S.
GAAP and IFRS
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-3
Learning Objective 1
Explain the reasons for differences in accounting
practices across countries
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-4
The Globalization of Accounting
Standards
• SEC voted to accept IFRS financial statements
from “foreign private issuers” without
reconciliation
• US is moving toward converging U.S. GAAP with
IFRS
• Convergence: process by which U.S. GAAP and
IFRS will eventually merge to become a single set
of accounting standards.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-5
Learning Objective 2
Understand the role of the International Accounting
Standards Board (IASB) in the development of
International Financial Reporting Standards (IFRS)
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-6
International Financial Reporting
Standards (IFRS)
ISAC
ISAB
IFRS
• International Accounting Standards Committee
• Created a standard-setting body, (IASB)
• International Financial Reporting Standards
• More countries base their account standards on
IFRS
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App E-7
Principles- vs. Rules-based
Standards
• IFRS—principles-based accounting standards
• U.S. GAAP—rules-based accounting standards
• Future international accounting standards will
need to be more principles-based
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App E-8
Norwalk Agreement
• Signed by FASB & IASB—2002
• Formalizing convergence of U.S. GAAP and IFRS
• Arguments against convergence to IFRS
• U.S. standards to remain customized to fit U.S.
business environment
• Differences in implementation and enforcement
could make accounting appear more uniform than
it is
• Norwalk Agreement did not specify a timetable
• but active efforts are ongoing
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-9
Learning Objective 3
Recognize the major differences between U.S.
GAAP and IFRS
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App E-10
Chapter 1: Accounting Information
and Decision Making
• United States—FASB’s conceptual framework
• Guide to standard setters
• Internationally—IASB’s conceptual framework
• Serves to indicate GAAP when more specific
standards are not available
• FASB and the IASB are working together to
develop a common conceptual framework
• Uniform set of standards internationally
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-11
Chapter 2: The Accounting
Information System
• Timing and measurement of revenue recognition
• U.S. GAAP and IFRS provide similar general
guidance
• U.S. GAAP includes many additional rules and
other guidance promulgated by FASB, SEC, and
others
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App E-12
Chapter 3: The Financial Reporting
Process
• FASB and IASB are working on a project to
establish a common standard for presenting
information in financial statements
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App E-13
Chapter 4: Cash and Internal
Controls
• Accounting for cash is the same under both
U.S.GAAP & IFRS
• Internal controls:
• U.S.GAAP: Section 404 of the Sarbanes-Oxley Act
(SOX) requires management to document and
assess the effectiveness of all internal control
processes that could affect financial reporting
• IFRS: burden of documenting effective internal
controls is much less, or even nonexistent
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App E-14
Chapter 5: Receivables and Sales
• Accounting for receivables and uncollectible
accounts same under both U.S. GAAP and IFRS
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App E-15
Chapter 6: Inventory and Cost of
Goods Sold
LIFO method
Market value in
lower-of-costor-market
Reversal of
inventory
write-downs
• U.S.GAAP
• IFRS
: allowed
: not allowed
• U.S GAAP
• IFRS
: similar
(market value – replacement cost)
: similar
(market value – net realizable
value)
• U.S GAAP
• IFRS
: not allowed
: allowed
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
App E-16
Chapter 7: Long-Term Assets
Valuation of
property, plant,
and equipment
Valuation of
intangible
assets
Research and
development
expenditures
• U.S.GAAP: Cost less accumulated depreciation
• IFRS: Cost less accumulated depreciation (or)
Fair value(revaluation)
• U.S GAAP: Revaluation prohibited
• IFRS: Cost less accumulated amortization (or)
Fair value(revaluation)
• U.S GAAP: Expensed in the period incurred
• IFRS:
• Research: expensed in the period incurred
• Development—that meet specified criteria:
capitalized
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App E-17
Chapter 8: Current Liabilities
• Contingencies
• U.S. GAAP: accrue if it is probable and can be
reasonably estimated
• IFRS: threshold for “probable” is defined as “more
likely than not” (greater than 50%)
• Valuation of long-term contingencies
• U.S.GAAP: present value—only when timing of
cash flows is certain
• IFRS: present value—time value of money is
material
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App E-18
Chapter 9: Long-Term Liabilities
• Treatment of convertible debt
• U.S. GAAP: entire issue price is recorded as a
liability
• IFRS: convertible debt is divided into its liability
(bonds) and equity (conversion option) elements
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App E-19
Chapter 10: Stockholders’ Equity
• Distinction between debt and equity for preferred
stock
• U.S. GAAP: most preferred stock is included in
stockholders’ equity, with the dividends reported as
a reduction in retained earnings
• IFRS: most preferred stock is reported as debt,
with the dividends reported in the income
statement as interest expense
• Reacquired shares: IFRS does not permit
retirement of shares
• All buybacks are treated as treasury stock
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App E-20
Chapter 11: Statement of Cash
Flows
• Classification of cash flows
• Cash outflows for interest payments
• U.S. GAAP—operating cash flows
• IFRS—either operating or financing cash flows
• Cash inflows from interest and dividends received
• U.S. GAAP—operating cash flows
• IFRS—either operating or investing cash flows
• Direct or indirect method
• FASB and IASB both require direct method rather
than permitting either the direct or indirect method
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App E-21
Chapter 11: Statement of Cash
Flows (continued)
• Disclosure of noncash activities
• U.S. GAAP:
• Reported either on the face of the statement of cash
flows or in a disclosure note
• IFRS:
• Disallows presentation on the face of the statement
and requires reporting in a disclosure note
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App E-22
Chapter 12: Financial Statement
Analysis
• Discontinued operations
• U.S. definition is broader than its international
counterpart
• IFRS considers a component to be primarily either
a major line of business or geographical area of
operations
• Extraordinary items
• U.S. GAAP
• IFRS
: provides separate reporting
: recording or disclosure not allowed
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App E-23
End of Chapter Appendix E
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.