Presentation - Brown

8/10/2019 Presentation - Brown

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D A N I K A G R A C E B R O W N

F A L L 2 0 1 4

US GAAP vs. IFRS

Conceptual Framework


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Agenda

US GAAP Conceptual Framework

IFRS Conceptual Framework:

The Similarities and Differences Between GAAP and IASBConceptual Frameworks

Sources: Kieso, FASB


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DevelopmentFASB began designing the framework in 1976.

Financial Accounting Concepts:

SFAC 1: Objectives of Financial Reporting by Business Enterprises SFAC 2: Qualitative Characteristics of Accounting Information SFAC 3: Elements of Financial Statements of Business Enterprises

SFAC 4: Objectives of Financial Reporting by Non-businessOrganizations

SFAC 5: Recognition and Measurement in Financial Statements of

Business Enterprises SFAC 6: Elements of Financial Statements (Replaced SFAC 3) SFAC 7: Using Cash Flow Information and Present Value in

Accounting Measurements

Sources: Kieso, FASB


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US GAAP Conceptual Framework(Overview)

Definition:

A coherent system of interrelated objectives and fundamentals thatcan lead to consistent standards and that prescribes the nature,function, and limits of financial accounting and financial statements.(FASB)

Its Needed Because:

1) In order to be useful, any standards must be built on an underlyingestablished body of concepts and objectives

2) In order to allow the profession to react to and solve new andemerging practical problems encountered on a daily basis


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US GAAP Conceptual FrameworkSFAC 1 Objectives of Financial Reporting

SFAC 1 Premise:

Useful information should help users make rational decisions in regards toinvestments and credit, assessing future cash flow prospects to the enterprise, andprovide evidence as to whether economic resources exist and obligations orchanges to them.

External Users

Creditors

Customers

Governmental Agencies

Investors Vendors

Other users impacted by the enterprise


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US GAAP Conceptual FrameworkSFAC 2 Qualitative Characteristics

User Specific Understandability

Information Specific:

Primary Relevancy timely, predictive, feedback value Reliability verifiable, unbiased, correct

Secondary Comparable between business enterprises Consistency between periods


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US GAAP Conceptual Framework SFAC3/6 Elements of Financial Statements

Elements: Assets Comprehensive Income Distributions to owners Equity Expenses Gains Investments by owners

Liabilities Losses Revenues


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SFAC 5 Recognition & Measurement

Full Set of Financial Statements: Assumptions

Balance Sheet

Comprehensive Income

Cash Flow

Changes in Owners Equity

Concepts

Income Statement Principles

Constraints


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SFAC 7 Using CF and PV

It was issued on February 2000.

SFAC Addresses:

Future Cash Flows (Asset and Liability Measurement)

Present Value (Uncertainties: amount and timing)


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COMPARISON OF STRUCTURE

Board of Trustees Govern FAF

Foundation (FAF) 15 Trustees Duties:Appoint, Oversee, and Raise Funds to operate

FASB.

Council (FASAC) At least 20 members canbe appointed; Advises the FASB and assists inorganization of task force.

Board (FASB) 7 members; Accounting

standard-setter

SFASStatement of Financial AccountingStandards considered to be GAAP

Trustee Appointments Advisory Group Advises the IASC

Foundation (IASC) 22 Trustees Duties:

Appoint, Oversee, and Raise Funds for IASB.

Council (IFRIC) 14 members; Issuesinterpretations that are approved by IASBinterpretations have same authority as standard.

Council (SAC) Advises the IASB

Board (IASB) 14 members from 9 countries;Accounting standard-setter

IFRSInternational Financial ReportingStandards

GAAP IFRS


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DUE PROCESS

IASB exercises similar due process of FASB:

1. Agenda

2. Discussion Paper (DP) not mandatory

3. Public Hearing4. Exposure draft issued

5. Public Hearing

6. Pre-ballot draft (usually reviewed by IFRIC)7. IASB members ballot in favor of publication

8. Published IFRS


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SPECIAL NOTE

October 2004 IASB contributed to its agenda todevelop a new framework. It was conducted with theassistance of FASB.

July 2006 Published draft of enhanced framework Roundtable talks are still in the process of being

conducted on this topic.

A complete framework was not expected before

2010.


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OBJECTIVES

IFRS To provide information about the financialposition, performance, and changes in financialposition of an entity that is useful to a wide range ofusers in making economic decisions.

Similar to GAAP Emphasis is providing usefulinformation to users.


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UNDERLYING ASSUMPTIONS

Accrual Basis the effects of transactions arerecognized when they occur.

Going ConcernNote: IAS 1, requires management to make an assessment of anentitys ability to continue as a going concern when preparingfinancial statements.


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QUALITATIVE CHARACTERISTICS

GAAP

1. Relevance

2. Reliability

3. Comparability

4. Consistency

IFRS

1. Understandability

2. Relevance

3. Reliability (prudence)

4. Comparability(Includes consistency)

Basic agreementbetween GAAP and IFRS:


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1. Understandabilitythe information must be

understandable to users who have a reasonableknowledge of business and economic activities andaccounting.


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2. Relevanceinformation must be relevant to the

decision-making needs of the users.

Related to materialitythe threshold of cut-off point for information whose omission or

misstatement could influence the economicdecisions of users taken on the basis of the

financial statements. (Gleim, 2014)


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3. Reliability

(a) Free from error

(b) Neutrality

(c) Representational Faithfulness economicreality.

Related to prudencepreparers of financial statements

should exercise caution in making judgments about estimates(assets or income are not to be overstated and liabilities orexpenses are not to be understated).


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4. Comparabilityinformation should becomparable through time and across entities. Liketransactions should be accounted for in a similar

way by entities.

Related to consistencyspecifies that the presentation andclassification of items in the financial statements, as a generalrule, shall be retained from one period to the next, with

specified exceptions. (AICPA)


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CONSTRAINTS

In the IFRS framework constraints are included

with qualitative characteristics:

Cost-benefit and timeliness: Constraints related toRelevance and Reliability.

Materiality: Related to Relevance


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ELEMENTS

ASSETA present economic resource controlledbythe entity as a result of past events from which futureeconomic benefits are expected to flow to the entity.

Difference with FASB: Emphasis placed on a

present asset (economic resource) from which

there will be a future economic benefit.


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ELEMENTS

EQUITYis the residual interest in the assets of

the entity after deducting all its liabilities.

Same as GAAP definition


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ELEMENTS

EXPENSESdecreases in economic benefits duringthe accounting period in the form of outflows ordepletions of assets or incurrences of liabilities thatresult in decreases in equity, other than those relatingto distributions to equity participants.

Incorporates GAAP definition of Expenses and

Losses


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MEASUREMENT BASIS

FASB: Usually historical cost

Allows fair value

Concept # 7 addresses present value measure

IFRS:

Historical most common

Current cost / Replacement cost

Realizable or settlement value

Present value


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CONCEPTS OF CAPITAL

PHYSICAL CAPITAL MAINTENANCE

A PROFIT IS EARNED..IF:

Physical productive capacity of the entity, at the end of

the period > Physical productive capacity at the beginningof the period

After excluding any distributions to, and contributions

from, owners during the period.


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CONCEPTS OF CAPITAL

Physical Capital Maintenance:

Physical productive capacity at a point in

time is equal to the current value of theassets employed to generate earnings.

Current value embodies expectationsregarding the future earning power of thenet assets.


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CONCEPTS OF CAPITAL

Main difference between financial and physical capitalmaintenance:

Holding gains and losses January 1 Item of inventory is purchased for

$50,000

December 31 The price of the item is $70,000, but

the item is not sold at the end of the year.

Holding gain = $20,000


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CONCEPTS OF CAPITAL

Reporting:

Financial capital

1. Measured in dollars

2. Holding gain/loss are included in income

Physical capital

1. Measured in physical capacity2. Holding gain/loss reported as a direct

adjustment to equity (separate line item)


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FINANCIAL STATEMENTS

1. A statement of financial position (balance sheet) at theend of the period.

2. A statement of comprehensive income for the period.3. A statement of changes in equity for the period.

4. A statement of cash flows for the period.5. Notes, comprising a summary of significant accountingpolicies and other explanatory information.

6. A statement of financial position as at the beginning ofthe earliest comparative period when an entity applies

an accounting policy retrospectively or makes aretrospective restatement of items in its financialstatements, or when it reclassifies items in its financialstatements.


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References

AICPA. (n.d.).IFRS Resources. Retrieved 10 30, 2014, fromIFRS: http://www.ifrs.com/index.html

FASB. (n.d.).FASB Standards. Retrieved 10 31, 2014, fromFASB :

http://www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350

Gleim, I. N. (2014). CMA Review.Gainesville, FL: Gleim.

Kieso, D. E. (2010).Intermediate Account.Hoboken, NJ:

Wiley. Plumlee, M. (2010).International Financial Reporting

Standards.Boston, MA: Prentice Hall.

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