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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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US GAAP Conceptual Framework
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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US GAAP Conceptual Framework
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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US GAAP Conceptual Framework
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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QUALITATIVE CHARACTERISTICS
Basic agreementbetween GAAP and IFRS:
1. Understandabilitythe information must be
understandable to users who have a reasonableknowledge of business and economic activities andaccounting.
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QUALITATIVE CHARACTERISTICS
Basic agreementbetween GAAP and IFRS:
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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QUALITATIVE CHARACTERISTICS
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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QUALITATIVE CHARACTERISTICS
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.