CA Garima Mittal
The two primarily standard setting bodies are the International Accounting Standard Board (‘IASB’) and the Financial Accounting Standard Board (‘FASB’). IASB establishes International Financial Reporting Standard (‘IFRS’) and in US, FASB establishes US General Accepted Accounting Principles (‘US GAAP’). Now, when we are talking about standard setting bodies, it is necessary to know regulatory authority too. Regulatory authorities are the government agencies that have the legal authority to enforce compliance with financial reporting standard. In US, it is Securities and Exchange Commission (‘SEC’) and in UK, it is Financial Services Authority (‘FSA’). Some of the SEC required fillings are Form S-1 (registration statement prior to sale of new securities to public), Form 10K (for Annual Filling), Form 10Q (for Quarterly filling), Form DEF-14A (for Proxy Statement), Form 8K (for disclosure of material events), etc.
The idea on which the IASB bases its standards is expressed in “Conceptual Framework for Financial Reporting”. The objective of financial reporting as per IASB Conceptual Framework for Financial Reporting 2010 is to provide information about the firm to current and potential investors and creditors that is useful for making its decisions about investing in or lending to the firm. Further, these frameworks are used in the development of accounting standards.
IFRS is based more on principles when compared with US GAAP which is more rule based standard. One of the reasons for convergence to IFRS is the need for a business to present its financial statements on the same basis as its foreign competitors in order to make comparisons easier. IFRS is inevitable and will be the final destination for public companies in the U.S. and for most companies around the globe.
Key Differences- IFRS vs US GAAP
- Presentation: Under IFRS, income statement can be combined with other comprehensive income and presented as a single statement of comprehensive income. Alternatively, income statement and comprehensive income can be presented separately. Presentation is similar under US GAAP except the firm may choose to report comprehensive income in statement of shareholder’s equity.
- Balance Sheet Format: Both IFRS and US GAAP requires the firm to report in current/non current format, known as classified balance sheet. However, IFRS followers can choose to use liquidity based format if presentation is more relevant and reliable. Liquidity based format is more frequently seen in banking industry.
- Framework: IASB framework list income and expenses as elements related to performance, however, FASB framework includes revenue, expenses, gains, losses and comprehensive income.
- Asset Valuation: IASB allows upward valuation of most assets where FASB prohibits upwards valuation of assets.
- Construction Accounting: With respect to construction accounting, if the firm can’t measure outcome of the project, as per IFRS, revenue is recognised to the extent of contract cost, cost are expensed when incurred, and profit is recognised only at completion. However, as per US GAAP, completed contract method is used in the said case and accordingly, revenue, expenses and profits are recognised only when contract is complete.
- Barter Transaction: In accordance with IFRS, revenue from barter transactions must be based on fair value of revenue from similar non barter transactions with unrelated Whereas as per US GAAP, revenue from barter transactions can be recognised at fair value only if the firm has historically received cash payment for such goods and services and can use this historical experience to determine fair value. Otherwise, revenue is recorded at the carrying value of asset surrendered.
- Installment Sale : Interest is recognised as per IFRS by computing the difference between instalment payment and discounted present value. If the outcome of the project cannot be reliability measured, revenue recognition is similar to cost recovery method. US GAAP bifurcates recognition criteria into three parts: whether collectability is certain, cannot be reasonably estimated or highly uncertain. If certain, then normal revenue recognition criteria are applied. If cannot be reasonable estimated, instalment method is used and if highly uncertain, cost recovery method is used.
- Inventory Method: LIFO is permitted only in US, not as per IFRS. Please note, LIFO is very popular in US especially in inflationary conditions as it helps to save taxes by reporting higher COGS in income statement. Higher COGS reduces the taxable income, hence save taxes.
- Inventory Valuation: As per IFRS, inventory is reported on the balance sheet at lower of cost or NRV, however, as per US GAAP, inventory is reported at lower of cost or market.
- Extraordinary Item Treatment: As per US GAAP, extraordinary items need to be reported separately after income from continuing operations where IFRS requires it to be part of operating results in income statement.
- PP&E Reporting: IFRS uses cost or revaluation model for reporting PP&E, however, US GAAP allows only cost model.
- Cash Flow Statement Impact: Though there are many impacts on cash flow statement but most basic one which must be known is with respect to dividend and interest. Dividend paid are reported as financing activity as per US GAAP, however, dividend paid is reported as either operating/financing activity as per IFRS. Interest paid or received and dividend received all classified under operating activity as per US GAAP, however, IFRS provides more flexible and principle based approach in this regard.
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