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ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
CONCEPT: GAAP VS IFRS – INTRODUCTION
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
● The need for a single, global set of accounting standards is becoming more and more relevant:
□ Multinational Corporations earn revenue in different countries with different reporting standards.
- Examples: Coca Cola, McDonald’s, Toyota, Nestle, Sony
□ Mergers and Acquisitions (business combinations) are happening between international companies more often
□ Information Technology, notably the Internet, has made international trade seamless and affordable
□ Financial Markets for stocks, bonds, and currencies happen on an global scale everyday
Accounting Fundamentals
Similarities between GAAP and IFRS: ● The basic techniques for recording: _______________ ● Meeting the needs of investors ________________ ● Business organizations: - Proprietorships - Partnerships - Corporations
Differences between GAAP and IFRS: ● IFRS tends to be simpler in its requirements:
IFRS ___________________ GAAP ___________________ ● Sarbanes-Oxley (SOX) apply only to public companies listed on U.S Exchanges - Stringent guidelines for auditing and financial statement preparation
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 2
CONCEPT: GAAP VS IFRS – CLASSIFIED BALANCE SHEET
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Classified Balance Sheet
Similarities between GAAP and IFRS: ● A classified balance sheet is required. ● Guideline for current/long-term classification ________
Differences between GAAP and IFRS: ● Name of the financial statement:
GAAP: ______________________________
IFRS: ______________________________
● IFRS tends to show equity before liabilities ● Under IFRS, assets are shown in reverse order
> Least liquid to most liquid (i.e. cash listed last) ● Some general differences in terminology used > GAAP Investments > IFRS Share Investments ● IFRS applies the fair value principle more broadly > Long-term Assets can be measured using FV
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 3
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 4
CONCEPT: GAAP VS IFRS – RECORDKEEPING DIFFERENCES
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Recordkeeping Process
Similarities between GAAP and IFRS: ● The basic techniques for recording: _______________ ● Dollar signs (or similar) are only used in the trial balance and financial statements ● Trial Balances follow the same format
Differences between GAAP and IFRS: ● IFRS uses the Fair Value Principle more often
> GAAP uses fair value for short-term investments
> IFRS allows for all long-term assets
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 5
CONCEPT: GAAP VS IFRS – ADJUSTING ENTRIES
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Adjusting Entries
Similarities between GAAP and IFRS: ● Accrual accounting is required ● Periodicity assumption leads to use of adjusting entries ● Rules for revenue recognition are generally the same
Differences between GAAP and IFRS: ● IFRS can use the Fair Value principle for long-term assets
> Depreciation can be based on higher revaluation
● Under IFRS, expenses include:
> Normal course of business ________ (GAAP)
> Outside normal course ________ (GAAP)
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 6
CONCEPT: GAAP VS IFRS – MERCHANDISING
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Merchandising
Similarities between GAAP and IFRS: ● Perpetual and periodic inventory systems ● Basic definition of inventory ● Multiple years comparable income statements:
> GAAP ______ years
> IFRS ______ years
Differences between GAAP and IFRS: ● IFRS doesn’t mention single/multi-step income statement ● IFRS allows revaluation of long-term assets to fair value
> These gains and losses are part of
comprehensive income (not net income)
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 7
CONCEPT: GAAP VS IFRS – INVENTORY
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Inventory
Similarities between GAAP and IFRS: ● Initial purchase Historical Cost ● Subsequent valuation Lower of Cost or Market ● Ownership of goods (FOB Shipping Point/Destination)
Differences between GAAP and IFRS: ● IFRS prohibits LIFO for inventory valuation ● Lower of Cost or Market calculation:
> GAAP Market = Replacement cost
> IFRS Market = Net Realizable Value
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 8
CONCEPT: GAAP VS IFRS – FRAUD, INTERNAL CONTROL, AND CASH
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Fraud, Internal Control, and Cash
Similarities between GAAP and IFRS: ● The need for internal controls ● Internal control procedures over cash (bank reconciliation) ● Reporting of cash along with cash equivalents
Differences between GAAP and IFRS: ● SOX applies only to companies on US stock exchanges
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 9
CONCEPT: GAAP VS IFRS – RECEIVABLES
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Receivables
Similarities between GAAP and IFRS: ● Recordkeeping for: > Receivables (including allowance for bad debts) > Sales Returns, Allowances, and Discounts ● Impairing of receivables unlikely to be collected
Differences between GAAP and IFRS: ● IFRS has no strict rules for separate recording of receivables
● Criteria for the factoring of receivables
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 10
CONCEPT: GAAP VS IFRS – LONG LIVED ASSETS
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Long Lived Assets
Similarities between GAAP and IFRS: ● Definitions are generally the same (PPE and Intangible) ● Date of acquisition Historical Cost Principle ● Interest costs during construction are capitalized ● Ordinary Repairs vs Capital Improvements ● Depreciation Methods and Changes in Method Used ● Asset Disposals (Gains and Losses on Sale) ● Nonmonetary exchanges of assets
Differences between GAAP and IFRS: ● Remaining value at end of useful life:
> GAAP: Salvage Value
> IFRS: Residual Value ● IFRS allows subsequent revaluation to fair value
> Allowed for PPE and Intangible Assets ● IFRS uses component depreciation if any portion of an asset has a different estimated useful life ● IFRS allows the capitalization of R&D costs when they reach the development phase.
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 11
CONCEPT: GAAP VS IFRS – LIABILITIES
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Liabilities
Similarities between GAAP and IFRS: ● General definition of liability ● Liabilities are presented in order of liquidity ● Calculation of Bonds Payable liabilities ● Effective-interest method for amortization of bond premium/discount
Differences between GAAP and IFRS: ● Accounting for conversion of convertible bonds into equity ● Companies using IFRS often calculate working capital on the face of the statement of financial position.
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 12
CONCEPT: GAAP VS IFRS – STOCKHOLDERS’ EQUITY
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Stockholders’ Equity
Similarities between GAAP and IFRS: ● Recordkeeping of equity (share issuance/repurchase) ● Prior period adjustments through retained earnings ● Earnings per share calculations ● Statement of Comprehensive Income
Differences between GAAP and IFRS: ● IFRS uses the term reserves to describe equity accounts other than paid-in capital accounts > Examples: Retained Earnings, Revaluation accounts ● Terminology differences (see below) ● IFRS allows revaluation of long-term assets > These revaluations are included in general reserves
Terminology differences:
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 13
CONCEPT: GAAP VS IFRS – STATEMENT OF CASH FLOWS
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Statement of Cash Flows
Similarities between GAAP and IFRS: ● Statement of Cash Flows is required ● Operating, Investing, and Financing sections ● Indirect or Direct Method for Operating section ● Definition of cash equivalents
Differences between GAAP and IFRS: ● Significant noncash investing and financing activities
> GAAP reports on Statement of Cash Flows > IFRS reports in the notes to the financial statements ● Classification of interest, dividends and taxes (see below) ● IFRS allows the operating section to be presented as one line. If this method is used, a reconciliation is shown in the notes to the financial statements.
Classification differences:
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 14
CONCEPT: GAAP VS IFRS – ANALYSIS AND INCOME STATEMENT PRESENTATION
Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________
Analysis and Income Statement Presentation
Similarities between GAAP and IFRS: ● Tools of financial analysis (horizontal, vertical, ratios, etc.) ● Distinguishing operating and unusual items in income ● Accounting for discontinued operations ● Changes in accounting principle Retroactive ● Changes in accounting estimate Prospective ● Reporting comprehensive income
Differences between GAAP and IFRS: ● No significant differences!
ACCOUNTING - CLUTCH
CH. 15 - GAAP VS IFRS
Page 15