IFRS AND US GAAP UNIT 5 – US GAAP

TOPICS INCLUDED

 FASB and IASB Convergence

 Origin of ASC (Codification), ASC and standards issued by Securities and
Exchange Commission (SEC), ASU, FASB Conceptual Framework
 Comparison between IFRS and US GAAP
 Statement of Financial Positions
 Specific Items of Profit / Loss
 Financial Instruments
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FASB and IASB Convergence

The Financial Accounting Standards Board (FASB) in the United States and the International Accounting
Standards Board (IASB) globally have been working towards convergence in accounting standards for
several years. The objective is to harmonize accounting standards to create a more consistent and
comparable financial reporting framework across different countries. This convergence effort is
particularly significant for multinational companies, investors, and other stakeholders who deal with
financial information from various jurisdictions. Here are some key points regarding FASB and IASB
convergence:
1. **Reasons for Convergence:**
- **Globalization:** As businesses operate internationally, there is a need for
consistent financial reporting standards to facilitate cross-border comparisons.
- **Investor Confidence:** Convergence aims to enhance the quality and transparency
of financial reporting, which, in turn, can boost investor confidence.
- **Reduced Complexity:** A common set of accounting standards can simplify
financial reporting for multinational companies, making it easier to comply with
requirements in different jurisdictions.

2. **Joint Projects:**
- The FASB and IASB have engaged in joint projects to converge specific accounting
standards. Some of the notable joint projects have included areas like revenue
recognition, leasing, and financial instruments.

3. **Completed Convergence Projects:**

- **Revenue Recognition:** The FASB and IASB jointly developed the converged
standard on revenue recognition, providing a single, principles-based model for
recognizing revenue from contracts with customers.
IFRS AND US GAAP UNIT 5 – US GAAP

- **Leases:** Both boards collaborated on a converged standard for lease accounting to

improve transparency and comparability in financial reporting.

4. **Differences and Challenges:**

- Despite efforts toward convergence, differences between U.S. Generally Accepted
Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)
still exist in some areas.
- Challenges include different stakeholder preferences, legal and regulatory
environments, and varying conceptual frameworks.

5. **Ongoing Cooperation:**
- The FASB and IASB continue to cooperate on projects and regularly communicate to
address emerging issues and maintain convergence momentum.

6. **Post-Convergence Era:**
- While full convergence has not been achieved, there has been progress in aligning
certain standards. The focus has shifted towards ongoing cooperation and maintaining
compatibility between U.S. GAAP and IFRS.
IFRS AND US GAAP UNIT 5 – US GAAP

Origin of ASC (Codification), ASC and standards issued by Securities and Exchange
Commission (SEC), ASU, FASB Conceptual Framework

1. **Origin of ASC (Codification):**

- The Accounting Standards Codification (ASC) was created by the Financial Accounting
Standards Board (FASB) as a comprehensive system to organize and present U.S. generally
accepted accounting principles (GAAP) into a consistent structure.
- Prior to the ASC, accounting standards in the United States were scattered across various
sources, making it challenging for users to navigate. The ASC was established to bring together
these standards in a systematic and accessible manner.

2. **ASC and Standards Issued by SEC:**

- The U.S. Securities and Exchange Commission (SEC) has statutory authority to prescribe
accounting principles under the Securities Act of 1933 and the Securities Exchange Act of 1934.
- The SEC delegates this standard-setting authority to private-sector bodies, primarily the
FASB. While the FASB sets accounting standards, the SEC has the authority to recognize or
reject them.
- The ASC incorporates SEC guidance along with FASB's standards, creating a centralized
source for U.S. GAAP.

3. **ASU (Accounting Standards Update):**

- An Accounting Standards Update (ASU) is a document issued by the FASB to communicate
changes to the ASC. It serves to update, modify, or improve existing standards or to introduce
new ones.
- ASUs are part of the FASB's ongoing efforts to keep U.S. GAAP current and relevant. They
are usually issued after a thorough due process that involves public consultation and feedback.

4. **FASB Conceptual Framework:**

- The FASB Conceptual Framework is a foundational document that provides the conceptual
underpinnings for financial accounting and reporting standards. It guides the FASB in developing
consistent and logically sound accounting principles.
- The framework addresses fundamental concepts such as the objectives of financial reporting,
qualitative characteristics of accounting information, and the elements of financial statements
(e.g., assets, liabilities, income, and expenses).
- It serves as a basis for standard-setting decisions, helping the FASB ensure that accounting
standards are conceptually sound and aligned with a common set of principles.
IFRS AND US GAAP UNIT 5 – US GAAP

Comparison between IFRS and US GAAP

Aspect IFRS US GAAP

Standard-Setting International Accounting Standards Financial Accounting Standards Board

Body Board (IASB) (FASB)

Adopted by many countries globally,

Adoption including the EU, Canada, and others Used primarily in the United States

Principles-based approach with less Rules-based approach with more detailed

Framework detailed guidance guidance

Emphasis on substance over form; Emphasis on specific industry guidance;

Revenue IFRS 15 - Revenue from Contracts ASC 606 - Revenue from Contracts with
Recognition with Customers Customers

IFRS 16 brings major changes, US GAAP (ASC 842) also requires lessees
requiring lessees to recognize most to recognize most leases on the balance
Leases leases on the balance sheet sheet

Order not specified; common to Order specified; common to present the

present the statement of income statement before the statement of
Financial comprehensive income before the comprehensive income and the statement
Statement Order statement of financial position of financial position

Research and
Development More specific guidance; some costs
Costs Generally, expensed as incurred capitalized and others expensed

Inventory
Valuation LIFO (Last In, First Out) not allowed LIFO permitted as a cost flow assumption

Research costs expensed;

development costs capitalized in Research and development costs expensed
Intangible Assets certain circumstances unless meeting specific criteria

Goodwill Impairment tested at reporting unit

Impairment level Impairment tested at reporting unit level

No specific guidance; capitalize if Specific guidance provided; capitalize

Borrowing Costs meeting criteria during certain periods of asset construction
IFRS AND US GAAP UNIT 5 – US GAAP

Statement of Financial Positions

The "Statement of Financial Positions" is a financial statement that provides a snapshot of an entity's
financial position at a specific point in time. It is commonly known as the "Balance Sheet" in the United
States under Generally Accepted Accounting Principles (US GAAP). The statement is a key component
of a company's financial reporting and is used by investors, creditors, and other stakeholders to assess the
company's financial health. Here's an overview of what the Statement of Financial Positions typically
includes:

### Components of the Statement of Financial Positions:

1. **Assets:**
- **Current Assets:**
- Cash and Cash Equivalents
- Accounts Receivable
- Inventory
- Prepaid Expenses

- **Non-Current Assets:**
- Property, Plant, and Equipment (PP&E)
- Intangible Assets (e.g., patents, trademarks)
- Investments
- Long-term Receivables

2. **Liabilities:**
- **Current Liabilities:**
- Accounts Payable
- Short-Term Debt
- Accrued Liabilities
- Current Portion of Long-Term Debt

- **Non-Current Liabilities:**
- Long-Term Debt
- Deferred Tax Liabilities
- Pension Obligations
- Other Long-Term Liabilities
IFRS AND US GAAP UNIT 5 – US GAAP

3. **Equity:**
- Common Stock
- Retained Earnings
- Additional Paid-in Capital
- Treasury Stock (if applicable)
- Other Comprehensive Income (if applicable)

### Key Concepts:

- **Assets = Liabilities + Equity:**

- This accounting equation must always balance. The assets represent what the company owns,
and the liabilities plus equity represent how the assets are financed.

- **Current vs. Non-Current:**

- Current assets and liabilities are those expected to be converted to cash or settled within one
year, while non-current items have a longer time horizon.

- **Equity:**
- Represents the residual interest in the assets of the entity after deducting liabilities. It includes
contributions by shareholders and accumulated profits or losses.

### Presentation:
- **Order of Presentation:**
- Typically, assets are presented in order of liquidity, with the most liquid assets listed first.
Liabilities are listed in order of maturity.

- **Comparative Information:**
- Financial statements often include comparative figures from the previous period for better
analysis and trend assessment.

- **Notes to the Financial Statements:**

- Additional details and explanations about specific items are usually provided in the
accompanying notes.
IFRS AND US GAAP UNIT 5 – US GAAP

### Purpose:
- **Financial Position Assessment:**
- It provides a snapshot of what the entity owns (assets), owes (liabilities), and the residual
interest of the owners (equity) at a specific date.

- **Creditworthiness:**
- Creditors use the balance sheet to assess a company's ability to meet its obligations.

- **Investor Decision-Making:**
- Investors analyze the balance sheet to evaluate the financial health and stability of a company
before making investment decisions.
IFRS AND US GAAP UNIT 5 – US GAAP

Specific Items of Profit / Loss

**1. Revenue (Sales):** - **Definition:** The total amount of money
generated by the sale of goods or services.
- **Impact on Profit/Loss:** Increased revenue
generally contributes to higher profits.

**2. Cost of Goods Sold (COGS):** - **Definition:** The direct costs attributable to
the production of the goods sold by a company.
- **Impact on Profit/Loss:** Higher COGS
reduces gross profit.

**3. Gross Profit:** - **Definition:** Revenue minus the cost of

goods sold.
- **Impact on Profit/Loss:** Indicates the
profitability of core business operations.

**4. Operating Expenses:** - **Definition:** Costs incurred in the day-to-

day operations of the business, such as salaries,
rent, utilities, and marketing.
- **Impact on Profit/Loss:** Higher operating
expenses reduce operating profit.

**5. Operating Profit (Operating Income):** - **Definition:** Gross profit minus operating
expenses.
- **Impact on Profit/Loss:** Indicates
profitability from core operations.

**6. Net Profit (Net Income):** - **Definition:** Total revenue minus total
expenses.
- **Impact on Profit/Loss:** The bottom line of
profitability after all expenses.

**7. EBITDA (Earnings Before Interest, Taxes, - **Definition:** A measure of a company's

Depreciation, and Amortization):** operating performance, excluding certain expenses.
- **Impact on Profit/Loss:** Provides a clearer
picture of operational efficiency.

**8. Depreciation and Amortization:** - **Definition:** The allocation of the cost of

tangible and intangible assets over time.
- **Impact on Profit/Loss:** Reduces reported
profit but doesn't involve actual cash outflow.

**9. Interest Expenses:** - **Definition:** The cost of borrowing

money.
- **Impact on Profit/Loss:** Reduces net profit.
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**10. Taxes:** - **Definition:** The amount of money owed to

tax authorities.
- **Impact on Profit/Loss:** Reduces net profit.

**11. Other Income/Expenses:** - **Definition:** Non-operating gains or losses,

such as investment income or foreign exchange
losses.
- **Impact on Profit/Loss:** Can significantly
affect net profit.
IFRS AND US GAAP UNIT 5 – US GAAP

Financial Instruments
Financial instruments are contracts that give rise to a financial asset of one entity and a financial
liability or equity instrument of another entity. They encompass a wide range of financial assets,
financial liabilities, and equity instruments, and they can be both simple and complex. Financial
instruments play a crucial role in the global financial system, facilitating the flow of funds
between investors and borrowers. Here are some common types of financial instruments:
### 1. **Cash Instruments:**
- **Cash:** The most basic and straightforward financial instrument, representing
money.

### 2. **Derivative Instruments:**

- **Options, Futures, Forwards, and Swaps:** Financial contracts whose value is
derived from an underlying asset or index. They are used for hedging, speculation, and
managing risk.

### 3. **Equity Instruments:**

- **Common Stock:** Represents ownership in a company, with shareholders entitled
to dividends and voting rights.
- **Preferred Stock:** Combines features of debt and equity, often paying fixed dividends.

### 4. **Debt Instruments:**

- **Bonds:** Debt securities that represent a loan made by an investor to a borrower,
typically a corporation or government.

### 5. **Loans and Receivables:**

- **Bank Loans:** Loans provided by banks to individuals or companies.
- **Trade Receivables:** Amounts owed to a company for goods or services provided.

### 6. **Financial Liabilities:**

- **Bank Deposits:** Represent liabilities for banks.
- **Debentures:** Unsecured debt instruments.
IFRS AND US GAAP UNIT 5 – US GAAP

### 7. **Hybrid Instruments:**

- **Convertible Bonds:** Bonds that can be converted into a predetermined number of
common stock shares.
- **Preferred Stock with Debt Characteristics:** Preferred shares that have debt-like
features.

### 8. **Investment Funds:**

- **Mutual Funds, Exchange-Traded Funds (ETFs):** Pooled funds that invest in
various financial instruments on behalf of investors.

### 9. **Foreign Exchange Instruments:**

- **Currency Swaps:** Agreements to exchange one currency for another at a future
date.
- **Forward Contracts:** Agreements to buy or sell a currency at a future date for a
specified rate.

### 10. **Structured Products:**

- **Collateralized Debt Obligations (CDOs):** Securities backed by a pool of debt
obligations.
- **Asset-Backed Securities (ABS):** Securities backed by a pool of assets such as
mortgages or auto loans.

### Key Concepts and Considerations:

- **Fair Value Measurement:**
- Many financial instruments are reported at fair value, reflecting their market value at
the reporting date.

- **Risk Management:**
- Financial instruments are often used for risk management purposes, such as hedging
against interest rate or currency fluctuations.
IFRS AND US GAAP UNIT 5 – US GAAP

- **Amortized Cost:**
- Some financial instruments, especially debt instruments, may be measured at
amortized cost, reflecting the cost adjusted for amortization of premiums or discounts.

- **Impairment:**
- Financial instruments are assessed for impairment, recognizing a loss in value if their
carrying amount exceeds their recoverable amount.