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Spiceland | Thomas | Herrmann
Financial AccountingInternational
FinancialReporting Standards
Appendix E
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
App E-2
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
Explain the reasons for differences in accounting practices across countries
App E-3
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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.
App E-4
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 2
Understand the role of the International Accounting Standards Board (IASB) in the development of
International Financial Reporting Standards (IFRS)
App E-5
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International Financial Reporting Standards (IFRS)
• International Accounting Standards Committee• Created a standard-setting body, (IASB)
• International Financial Reporting Standards• More countries base their account standards on
IFRS
ISAC ISAB IFRS
App E-6
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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
App E-7
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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
App E-8
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Learning Objective 3
Recognize the major differences between U.S. GAAP and IFRS
App E-9
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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
App E-10
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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
App E-11
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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
App E-12
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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
App E-13
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Chapter 5: Receivables and Sales
• Accounting for receivables and uncollectible accounts same under both U.S. GAAP and IFRS
App E-14
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Chapter 6: Inventory and Cost of Goods Sold
LIFO method• U.S.GAAP : allowed• IFRS : not allowed
Market value in lower-of-cost-
or-market
• U.S GAAP : similar(market value – replacement
cost)• IFRS : similar
(market value – net realizable value)
Reversal of inventory
write-downs
• U.S GAAP : not allowed• IFRS : allowed
App E-15
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Chapter 7: Long-Term Assets
Valuation of property, plant, and equipment
• U.S.GAAP: Cost less accumulated depreciation
• IFRS: Cost less accumulated depreciation (or) Fair value(revaluation)
Valuation of intangible
assets
• U.S GAAP: Revaluation prohibited• IFRS: Cost less accumulated amortization (or)
Fair value(revaluation)
Research and development expenditures
• U.S GAAP: Expensed in the period incurred• IFRS:
• Research: expensed in the period incurred• Development—that meet specified criteria:
capitalized
App E-16
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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
App E-17
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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
App E-18
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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
App E-19
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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
App E-20
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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
App E-21
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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 : provides separate reporting• IFRS : recording or disclosure not allowed
App E-22
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End of Chapter Appendix E
App E-23
