IASB vs FASB

Table of Contents

IASB:.............................................................................................................................................04

Introduction…………………………………………………………….…………………….04

History………………………………………………………………………………………..05

IASB Timeline……………………………………………………………………………….05

. Purpose……………………………………………………………………………………….06

Structure of IASB……………………………………………………………………………06

Copnceptual Framework of IASB…………………………………………………………..08

FASB.............................................................................................................................................11

Introduction…………………………………………………………………………………11

History………………………………………………………………………………………11

Purpose……………………………………………………………………………………...12

Structure of FASB…………………………………………………………………………13

Conceptual Framework...............................................................................................................15

Similarities between FASB and IASB:.......................................................................................16

Differences between FASB and IASB:......................................................................................17

Conclusion…………………………………………………………………………………….18

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IASB

Introduction

The United States of America has a huge influence on the accounting standards in use around the world. The USA follows the Financial Accounting Standards Board (FASB), which has many standards that are disseminated by the international accounting standards committees. The rest of the world follows the International Accounting Standards Board (IASB). The IASB is head-quartered in London, England and is an independent and privately-funded accounting standard-setter(International accounting standards, 2010). The board consists of representatives from nine different countries and is designed to achieve convergence in accounting standards around the world.

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).

The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting. 

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Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances. 

Currently, over 100 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. Proponents of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the potential for compliance to improve credit ratings.

History

The International Accounting Standards Board was established on April 01, 2001 to replace the International Accounting Standards Committee (IASC). The IASB is expected to develop International Financial Reporting Standards (IFRS), which are accounting standards promulgated after 2001, and to enforce the use of each standard (International accounting standards, 2010). The IASC operated fromJune of 1973 until April 01, 2001. It was established as a result of an agreement by accountancy bodies in Australia, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands, the United Kingdom, and the United States. In 1977, the International Federation of 15 Accountants (IFAC) was established, and in 1981, the IASC and the IFAC agreed that all standards would be completely issued by the IASC autonomously (International accounting standards, 2006).

IASB Timeline

1966 Proposal to establish an International Study Group comprising the Institute of Chartered Accountants of England & Wales. 1967 In February the Accountants International Study Group (AISG) was founded. 1973 In June the International Accounting Standards Committee (IASC) was established

1973- Between these years, the IASC released a series of standards known

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2000 as the International Accounting Standards

1997 Standing Interpretations Committee was established to consider contentious accounting issues2000 International Accounting Standards were finally recognized in the Stock Exchanges around the world

2001 The International Accounting Standards Board (IASB) came into effect on April 01, 2001

2003 The first IFRS was published in June

2005 Companies in the UK were required to present their financialStatements using the international accounting standards adopted by the European Union

Today, the International Accounting Standards Board (IASB) is an independent group that consists of fifteen board members. The members are appointed by a Board of Trustees, and by 2012, an additional board member will be added, following a decision made in January 2009 (Members of the IASB, 2007).

PurposeIn April 2001, Framework was adopted by the International Accounting Standards Board (IASB) to serve as a guide to the Board in developingaccounting standards. Framework has four main purposes: defining theobjectives of financial statements; identifying characteristics that makethe information useful; defining the basic elements of financial statements; and providing concepts of capital maintenance (Summaries of international financial reporting standards, 2010). The objective of financial statements is to provide information on financial position, changes in financial position, and an organization’s financial performance (The IASB framework, 2008).

Framework maintains two major assumptions about International Financial Reporting Standards (IFRS). The first is the accrual basis which assumes that a transaction will be recorded when it occurs, not when the cash from that transaction is received. The second is going concern, which assumes that a company or business entity will remain in existence for the foreseeable future (International financial reporting, 2010).

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For many years, each country has had its own system of accounting standards and principles; however, as many companies became international, the workload to report financial statements multiplied. Not only were companies required to report financial statements using their home country’s standards; but the company would also be required to report financial statements using the standards of all countries that were listed as exchanges (The unification of international accounting standards, 2007).

Structure of IASB

The International Accounting Standards Board (IASB) is organised under an independent foundation named the IFRS Foundation. The Foundation is a not-for-profit corporation which was created under the laws of the State of Delaware, United States of America, on 8 March 2001.

The components of the overall structure of the IFRS Foundation are set out below. The obligations and high-level operating procedures for most components are established under the IFRS Foundation Constitution.

State of Delaware, United States of America, on 8 March 2001

 

Group Role FormedGovernance

IFRS Foundation Oversees the work of the IASB, the structure, and strategy, and has fund raising responsibility. 8 March 2001

Due Process OversightCommittee (DPOC)

Trustee committee responsible for the Trustee's oversight function under the IFRS Foundation Constitution.

2006

Monitoring BoardOversees the IFRS Foundation Trustees, participates in the Trustee nomination process, and approves appointments to the Trustees.

1 February 2009

TechnicalInternational Accounting Standard Board (IASB)

Sole responsibility for establishing IFRS 1 April 2001 (1)

IFRS interpretationCommittee

Develops interpretations for approval by the IASB, and undertakes under tasks at the request of the IASB

1 April 2001 (2)

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Working Group Expert task forces for individual agenda projects Formed as neededAdvisoryAccounting StandardAdvisory Forum (ASAF)

Advises on the technical standard-setting activities of the IASB

Announced 1 February 2013

IFRS AdvisoryCouncil Advises the IASB and the IFRS Foundation 25 June 2001

Specialized advisory groups

Capital Markets Advisory Committee (4) 2003Effects Analyses Consultative Group 2012Emerging Economies Group 26 July 2011Financial Crisis Advisory Group (jointly with FASB) 30 December 2008

Global Preparers ForumIFRS Taxonomy Consultative Group 29 April 2014Joint Transition Resource Group for Revenue Recognition June 2014

SME Implementation Group (SMEIG) 2010

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Conceptual Framework of IASB

The revised Framework distinguishes between two types of qualitative characteristics that are necessary to provide useful financial information:• Fundamental qualitative characteristics (Relevance and faithful representation) And • Enhancing qualitative characteristics (comparability, timeliness, verifiability And understandability) Fundamental qualitative characteristics:

1. Relevant financial information is capable of making a difference to the decision made by users. In order to make a difference, financial information has predictive value, confirmatory value or both.

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The revised Framework carries forward the notion of materiality as an element of ‘relevance’. However, the Boards have clarified that materiality is an entity-specific aspect of relevance based on the nature or magnitude of items to which the information relates, which cannot be specified in general terms to encompass every situation.

2. Faithful representation replaces the previously used term ‘reliability’, as the Boards determined there is a lack of common understanding of reliability. Financial information that faithfully represents economic phenomena has three characteristics: it is complete

it is neutralfree from error

The revised Framework acknowledges limitations in achieving a faithful representation, e.g., due to inherent uncertainties, estimates and assumptions. Accordingly, financial information might not always be entirely free from error. Faithful representation, however, is achieved if no errors or omissions affect the description of economic phenomena and the process applied to produce reported information has been selected and applied without errors.

Enhancing qualitative characteristicsComparability, timeliness, verifiability and understandability are directed to enhance both relevant and faithfully represented financial information. Those characteristics should be maximized both individually and in combination.

1. Comparability enables users to identify similarities and differences among items, both between different periods within a set of financial statements and across different reporting entities. Consistent application of methods to prepare financial statements helps to achieve comparability.

2. Verifiability is a new concept in the revised Framework. Financial information is verifiable when it enables knowledgeable and independent observers to reach a

consensus on whether a particular depiction of an event or transaction is a faithful representation.

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3. Timeliness of financial information is a qualitative characteristic under the existing framework. However, rather than stressing the balance between

timely reporting and reliable information, the revised Framework refers more broadly to timeliness as being able to influence decision makers

4. Understandability has been carried forward from the existing Framework. Financial information that is classified, characterised and presented in a clear and concise way is understandable.

In

FASB

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Introduction

The FASB's mission is "to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports." The FASB accomplishes its mission "through a comprehensive and independent process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the Financial Accounting Foundation's Board of Trustees."

The Financial Accounting Standards Board (FASB) is one branch of the Financial Accounting Foundation(FAF), an independent, nonprofit corporation currently based in Norwalk, Connecticut. The Financial Accounting Standards Board bears responsibility for establishing generally accepted accounting principles (GAAP) for the private sector.

History

The impetus for the Financial Accounting Standards Board dates back to the economic boom of the 1920s, the stock market crash of 1929, and the Great Depression that followed. By the mid-1930s, both the financial community and the federal government had responded to the obvious need for uniform accounting standards, particularly for the of corporations. The New York Stock Exchange and what is now the American Institute of Certified Public Accountants ventured preliminary guidelines in the jointly published Audits of Corporate Accounts of 1934. The congressional Securities Act of 1933 and the Securities Exchange Act of 1934 threatened to supersede such efforts by establishing the U.S. Securities and Exchange Commission (SEC), which was authorized, among other functions, to prescribe standards for the preparation of financial reports. In 1938, however, the SEC voted to forgo this prerogative and allow the private sector to regulate its accounting practice—a policy that the commission has maintained to date.

The AICPA's committee on acc procedure (CAP) assumed the financial accounting standard-setting role in 1939. The AICPA shifted this responsibility to its acc principal board equipped with its own research staff, in 1959. Even so, the APB's main contribution— Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, published in 1970—was criticized as

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achieving too little, too late. In 1971, a special committee of the AICPA suggested that the association turn over the standard-setting role to an autonomous body. In 1973, therefore, the Financial Accounting Standards Board within the Financial Accounting Foundation was established. Soon thereafter, the SEC ratified the FASB's role in promulgating financial accounting and reporting "principles, standards, and practices."

Purpose

The Financial Accounting Standards Board is responsible for establishing, updating, clarifying, and publishing both the broad principles and the specific practices that constitute acceptable private-sector financial accounting. Individual businesses, accounting and industry associations, and government agencies, among other sources, request findings from the FASB on issues ranging from the consolidation of subsidiaries to post-employment benefits. The FASB operates through a process of research projects, discussion memoranda, public hearings, comment letters, and proposal drafts. The FASB's ultimate findings on agenda items are published as Statements of Financial Accounting Standards, which businesses are required to adhere to. As of 1999, there were on record 134 such statements, some of which had been subsequently amended or superseded.

An extensive research and technical staff, along with special task forces generally appointed by the chair, assist the FASB in its standard-setting function. The Financial Accounting Standards Advisory Council (FAS AC), a separate branch of the FAF, routinely advises the FASB on fulfilling its complex mission, particularly in the setting of agenda priorities. For public-sector accounting, the FASB and the FASAC are complemented within the FAF by the Governmental Accounting Standards Board (GASB) and the Government Accounting Standards Advisory Council (GASAC). Pronouncements by various government agencies (particularly the SEC) and professional bodies (particularly the AICPA's Accounting Standards Division) also supplement the work of the Financial Accounting Standards Board.

Structure of FASB

The Financial Accounting Foundation's 16-member board of trustees appoints the chair and members of the Financial Accounting Standards Board. For the sake of efficiency, the FASB is restricted to seven members. These board members are

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drawn from the professional community of certified public accountants; financial analysts, executives, and educators; and government bureaucrats. To ensure objectivity, members are employed exclusively by the FAF at professional salaries, and are subject to strict conflict-of-interest standards (including the termination of all prior business affiliations). Board members serve staggered five-year terms, and may be reappointed for a consecutive term.

The Financial Accounting Foundation (FAF) is a nonprofit organization that comprises the Financial Accounting Standards Board (FASB). The structure of the FAF is outlined below.The Financial Accounting Foundation (FAF) is a nonprofit organization that comprises the Financial Accounting Standards Board (FASB). The structure of the FAF is outlined below.

Group Role Formed

Governance

Financial AccountingFoundation(FAF)

Oversees the work of the FASB, GASB, and their advisory councils — structure, strategy, administration, and finances.

1972

TechnicalFinancial AccountingStandard Board(FASB)

Establishes standards of financial accounting and reporting for private-sector entities, including business and not-for-profit organizations.

1973

Government Accounting Standard Board(GASB)

Establishes standards of financial accounting and reporting for state and local governmental entities. 1984

Emerging Issues TaskForce(EITF)

Assists the FASB in improving financial reporting through the timely identification, discussion, and resolution of financial accounting issues.

1984

Private Company Council(PCC)

Determines alternatives to existing nongovernmental U.S. GAAP to address the needs of users of private company financial statements, based on criteria mutually agreed upon by the PCC and the FASB.

2012

AdvisoryFinancial Accounting Standards Advisory Council (FASAC)

Consults with the FASB on technical issues, project priorities, and other matters likely to concern the FASB. 1973

Governmental Accounting Standards Advisory Council (GASAC)

Consults with the GASB on technical issues, project priorities, and other matters likely to concern the GASB.

Selected advisory groups Investor Advisory Committee (IAC) 2007Not-for-Profit Advisory Committee (NAC) 2009

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Small Business Advisory Committee (SBAC) 2004Joint Transaction Groupfor Revenue Recognation

Consults with the FASB and IASB on implementation issues when applying ASC 606 and IFRS 15. 2014

Conceptual Framework

FASB and the International Accounting Standard Board are working closely together to develop a common Conceptual Framework. The goal is develop standards that are objectives-based, internally consistent, and internationally converged. Currently Statement of Financial Accounting Concepts No. 8

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“Conceptual Framework for Financial Reporting” is being used in the United States. The Conceptual Framework include: measurement attributes used to measure and report economic transactions, events, and arrangements in financial statements; and accounting principles and assumptions that guide recognition, DE recognition, and disclosure, as well as the classification and presentation of information in financial statements.

Fundamental qualitative characteristics, relevance and faithful representation allow for decision usefulness. Information that is capable of making a difference in decisions made by financial statement users is relevant. The three components of relevance are:

Predictive Value – information that should help users form expectations about the value

Confirmatory Value – information that provides feedback to confirm or correct prior predictions and expectations

Materiality – refers to the nature and magnitude of an omission or misstatement of accounting information that would influence the judgment of a reasonable person relying on that information

Faithful representation is when the words and numbers accurately predict the economic substance of what they purport to represent. The three components of faithful representation are:

Complete representation – provides a user with full disclosure of all information necessary to understand the information being reported, with all necessary facts, descriptions, and explanations

Neutral representation – not biased, slanted, emphasized or otherwise manipulated to achieve a pre-determined result or to influence users’ behavior in a particular direction

Free from error – the information is measured and described as accurately as possible, using a process that reflects the best available input

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Similarities between FASB and IASB

An important similarity between Generally Accepted Accounting Standards (GAAP) and International Financial Reporting Standards (IFRS) is the manner in which they recognize stock-based compensation. The model followed by both Boards maintains that the fair value of shares and options available as compensation to employees should be recognized over the employees’ service dates (Putra, 2009). On May 23, 2002, the International Accounting Standards Board (IASB) issued the Preference to International Financial Reporting Standards, which addresses the Board’s due process for developing and issuing IFRS. The due process is very similar to the FASB’s due process, which involves accountants, financial analysts, and other users of financial statements (Gornik-Tomaszewski & McCarthy, 2003). In April 2004, both the Financial Accounting Standards Board(FASB) and the International Accounting Standards Board (IASB) agreed to combine their projects on the reporting and classification of items of revenue, expenses, gains, and losses. This agreement led both Boards to examine the presentation of information in the financial statements (The unification of international accounting standards, 2007). A further similarity of both Boards states that equity-like instruments giving the holder rights to demand cash settlements must be classified as liabilities (Epstein, 2008). Figure 3 illustrates the

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agreement regarding the reporting of financial information for both GAAP and IFRS that was implemented on June 30, 2008.

Differences between FASB and IASBThere are both minor and major differences between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Some minor differences are as follows: The FASB came into existence in 1973 and is based in the United States, while the IASB was established on April 01, 2001 and is based inLondon, England. The FASB replaced the Accounting Principles Board (APB) and the Committee on Accounting Procedure (CAP), while the IASB replaced the International Accounting Standards Committee(IASC). Additionally, the FASB is a non-profit organization that develops Generally Accepted Accounting Principles (GAAP), while the IASBdevelops International Financial Reporting Standards (IFRS) (Differences between IASB and FASB, 2009).One specific example of the differences is that the International Financial Reporting Standards (IFRS), produced by the IASB, prohibits the use of Last-In-First-Out (LIFO) for inventory purposes (The unification of international accounting standards, 2007). LIFO is an asset-management and valuation method that assumes that all assets acquired last are the ones that are used, sold, or disposed of first. Selling an asset for less than its initial cost constitutes a capital loss; selling an asset for more than its initial cost constitutes a capital gain. Using LIFO to manage inventory can be tax advantageous but may also increase taxliability Another concept the IFRS prohibits is the use of extraordinary items. Because this has been prohibited, the way earnings per share EPS) are reported on income statements is quite different. These differences affect the way investors, analysts, creditors, government agencies, and businesses analyze financial statements (The unification of international accounting standards, 2007). Although the calculation of EPS between the two Boards is similar, there are some minor differences. While GAAP gives companies a choice between whether to settle contracts in either cash or shares, IFRS requires companies to settle contracts with shares only (Putra, 2009). A further major difference between IFRS and GAAP are characteristics defining equity and debt. GAAP requires entities to reassess whether an embedded derivative should be separated at the end of each reporting period, while IFRS only requires this if there is a change in the terms that significantly modifies the cash flows. Also, GAAP requires non-current presentation of defaulted debt if a waiver is granted before the settlement issuance date, while the IFRS requires this after the

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balance sheet date only (Epstein, 2008). GAAP allows convertible debt to be recorded as long-term debt; while the IFRS records convertible bonds separately into the equity component and the debt component,

Why the US Should Not Adopt IFRSAlthough the Securities and Exchange Commission (SEC) believes in making the United States follow the IASB and IFRS, the majority of American business people do not share this belief. In 1999, the FASB conducted a study which concluded that FASB is not a lower quality standard than IFRS. According to Yohn, GAAP is just as good, if not better, than the IFRS and many believe that there is no reason to switch now. According to Coffee, European scandals are very different than American scandals due to significant differences in ownership structure; therefore, the IASB and IFRS will not work as well as the FASB andGAAP (The Accounting onion: top ten reasons why us adoption of IFRS is a terrible idea, 2008). Another negative aspect in changing to IFRS from GAAP is the possibility that market values for stocks and bonds would go down drastically (Albrecht, 2008). The Securities and Exchange Commission (SEC) originallyCalled for improvements to funding and governance of the IASB; however, in most recently released statements, the SEC has stated that the IFRS is highly inadequate. According to MIT and Wharton professors, the United States economy and capital markets will not be served well by the IFRS because different countries have different goals with respect to financial reporting regulations (McKay, 2009).

CONCLUSION

Though both the IASB and the FASB have the goal of establishing accounting and financial reporting standards, the FASB focuses on accounting standards in the United States, while the IASB focuses on global standards. Since many companies operate businesses globally, the IASB and the FASB often work together, with both entities contributing toward global accounting standards. The FASB also sets standards and rules for individual certified public accountants practicing in the United States.

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