US GAAP vs. IFRS

Difference in the treatment of dividend and interest
Under U.S. GAAP, SFAS 95:

• Dividends paid by a company to its shareholders are classified on the cash flow statement under cash flow from financing.
• The dividends received by a company from its investments are classified as cash flow from operations.
• All interests received and paid by or to a company are classified as cash flow from operations.
  
  Under IFRS:
  Dividends paid by a company to its shareholders, dividends received by a company from its investments and all interests received and paid by or to a company can be classified as either cash flow from financing or cash flow from operations.
  
  

	IFRS	U.S. GAAP
Dividends paid by a company to shareholders	Cash Flow from Financing or Operations	Cash Flow from Financing
Dividends received by a company from investments	Cash Flow from Financing or Operations	Cash Flow from Operations
All interest received and paid by or to a company	Cash Flow from Financing or Operations	Cash Flow from Operations

Other Difference between IFRS and US GAAP

	IFRS	U.S. GAAP
Inventory	LIFO is allowed	LIFO is allowed
Inventory	LIFO is allowed; Recovery of value is allowed if certain criteria are met.	LIFO is allowed; Recovery of value is NOT allowed
Property and Equipment	Upward revaluation is allowed; The increase in value is reported in the income statement to the extend of previous downward valuation. Otherwise it is reported as a direct adjustment to equity.	Reported on balance sheet at original cost less accumulated depreciation; Upward revaluation is NOT allowed.
Intercorporate investment	Use voting control % to determine the need of consolidation: Less than 20% (no significant influence)=> market method; 20%-50% (Significant influence) => Equity method; More than 50% (Control) => Consolidation; Shared (Joint control) =>Proportionate consolidation* or equity method; *Proportionate consolidation - report pro-rata share of the assets, liabilities and net income of the investee.	Use voting control % and economic control to determine the need of consolidation Less than 20% (no significant influence) => market method; 20%-50% (Significant influence) => Equity method; More than 50% (Control) => Consolidation; Shared (Joint control) => equity method; Proportionate consolidation is not permitted.
Goodwill	Not systematically amortized but subject to an impairment test at least annually. The timing of impairment judgment of goodwill can be used to mange earnings Analyst can make adjustments: Deduct goodwill when computing ratios; Exclude goodwill impairment charges ; from income statement when analyzing trends; Evaluate acquisitions in terms of the price paid relative to the earning power of the acquired assets.
Identification intangible assets	Reported on the balance sheet at acquisition cost less accumulated amortization; The costs of internally developed intangibles are generally expensed as insured; Do allow upward revaluations.	Same reporting as IFRS. Do NOT permit upward revaluations
Provision	Non-financial liabilities that are uncertain about their timing and amount.	Use “contingency” instead of “provision”

Valuation and measurements

Valuation

• Trade-off between relevance and reliability.
• Historical cost tend to be more reliable but less relevant.
• Market cost tend to be more relevant but less reliable.

Measurements
Financial reporting standards can be established taking an asset/liability approach or a revenue/expense approach.

Asset/liability approach

• It requires a definition of what constitutes an asset and what constitutes a liability. It values the elements at one point in time.

Revenue/expense approach

• It focuses more on the income statement. It relies on concepts such as the matching principle to determine profit. It values the changes between points in time.

Analyst need to do:

• Analyst need to keep up-to-date on how financial reporting standards are changing by:
• Monitoring professional journals and other sources eg IASB and FASB websites
• Use the disclosures about financial standards in the footnotes of financial statement.
  

Characteristics and barriers of coherent financial reporting frameworks

Characteristics of coherent financial reporting frameworks

• Transparency – full disclosure and fair presentation
• Comprehensiveness – encompass the full spectrum of transactions that have financial consequences.
• Consistency – similar accounting across companies, geographic areas, and time periods for similar transaction

Barriers to create a coherent financial reporting framework

• Effective standards can have conflicting approaches on valuation, the bases for standard setting, and resolution of conflicts between balance sheet and income statement focus.

Barriers to developing one universally accepted set of financial reporting standards

• Different standard-setting bodies and regulatory authorities have different opinion
  Political pressures faced by regualatory bodies from business groups and others
  
  

General Requirements for Financial Statements

The required financial statements

• Balance sheet
• Income statement
• Cash flow statement
• Statement of changes in owner's equity
• Explanatory notes

Fundamental principles for preparing financial statements under IAS:

• Fair presentation
• Going concern - unless management intends to /must liquidate it
• Accrual asis
• Consistency
• Materiality - free of misstatemetns or omissons that will influence decision

Principles for presenting financial statements

• Aggregation of similar items and separation of dissimilar items
• No offsetting of assets against liabilities or income against current unless permitted
• A classified balance sheet
• Minimum information is required on the face of each financial statement and in the notes
• Comparative information for prior periods is included.

Note:

• At present, IASB and FASB have differences in serveral aspects under their frameworks. Company may need to present a reconciliation statement by using an alternative reporting system.
• SEC requires company to reconcile their financial statements to US GAAP if they want to issue securities in US.

Objective of Financial Statements and Qualitative characteristics, Constraints and Assumptions

Objective of financial reporting (IFRS)
To provide a fair presentation of a company’s financial performance, that should be useful to a wide range of users for making their economic decisions.

Qualitative characteristics

• Understandable- users having basic knowledge of business and accounting are able to understand the infomation.
• Relevant -should be timely and sufficiently detailed so that can make a difference in decision making
• Reliable - should reflect economic reality (faithful representation), is unbaised (neutrality), free of material errors.

Factors support reliability

• Faithful repesentation
• Substance over form
• Neturality
• Prudence
• Completness
• Comparable - consistent among firms and across time periods.

Notes:

• The market value of an investment can be highly relevant but may be accurate only to a certain extent. On the other hand, the historical cost, while reliable, may have little relevance.

Constraints

• Balance between relevancy and reliability
• Costs
• Cannot capture intangible and non-quantifiable information

Assumptions:

• Accrual basis
• On-going assumption

Standard-setting bodies and regulatory authorities

Standard-setting bodies

• Professional organization of accountants and auditors to set financial reporting standards
• Financial Accounting Standards (FASB) – in US, FASB sets Generally Accepted Accounting Rules (US GAAP);
• International Accounting Standard Board (IASB) – outside US, IASB set International Financial Reporting Standards (IFRS)

Notes:

• Many other national standard-setting bodies (including FASB) are working toward convergence with IFRS.

Regulatory authorities

• Government agencies with legal authority to enhance compliance with financial reporting standard
• Securities and Exchange Commission (SEC) in US
• Financial Services Authority (FSA) in UK

The International Organization of Securities Commissions (IOSCO)
An international association of securities regulators to create a co-operative environment between different countries aiming at:

• Promoting high standards of regulation in order to maintain just, efficient and sound markets
• Exchanging information on respective experiences in order to promote the development of domestic markets
• Uniting efforts to establish standards and effective surveillance of international securities transactions
• Providing mutual assistance to promote the integrity of the markets by a rigorous application of the standards and by effective enforcement against offences.

The Financial Accounting Standards Board (FASB)
A non-governmental body sets the accounting standards for all companies that issue audited U.S. GAAP-compliant financial statements.

The International Accounting Standard Board (IASB)
This organization was created to set international accounting standards in an effort to bridge the gap between the accounting standards of different nations.

GAAP comprises a set of principles that are patterned over a number of sources including the FASB, the Accounting Principles Board (APB) and the AICPA research bulletins.

Prior to the creation of the FASB, the Accounting Principles Board (APB) set the accounting standards. As a result some of these standards are still in use.

Securities and Exchange Commission (SEC)
The form and content of the financial statements of public companies are governed by the SEC. Even though the SEC delegates most of the authority to the FASB, it frequently adds its own requirements, such as the requirement for a company to provide a management discussion and analysis with its financial statements, quarterly financial statements (10-Q) and current reports (8-K). These discussions indicate things like changes in control, acquisition and divestitures, etc.)

3 approaches to standard setting:
Principles-based

• Provide a conceptual basis for accountants to follow instead of a list of detailed rules.

Rules-based

• Characterized by a list of specific rules, numerical tests for classifying certain transactions, exceptions, and alternative treatments.
  
  Objective-oriented
  · blends the other two approaches
  
  IFRS – largely principle based
  US GAAP – traditionally rules-based. FASB is now moving toward to objectives-oriented.