Transcript Chapter 8

Chapter 8
Financial Reporting in the US
Main topics
Conceptual framework
Balance Sheet
Income Statement
Conceptual Framework
1. Conceptual frameworks define the fundamental accounting
principle and theories for formulation of accounting standards. They
also decide : Elements of Financial statements,qualitative
characteristics, fundamental assumptions , other concepts etc.
2. Framework statements have been issued in IFRS. In US GAAP,
Statement of Financial Accounting Concepts (SFAC) act as framework
statement which are detailed and rule oriented .
3. Framework assist in- Standard Setting process, interpretation and
application of Accounting standards, harmonisation with other
standards, enabling Auditors in forming an opinion wherever there are
no standard or standards are silent etc.
Conceptual Framework ..IFRS
• IFRS framework was issued in April, 1989. This Framework deals with
Objective of Financial statement, Qualititative characteristics, elements
of financial statement, Concept of Capital and capital maintenance.
• Qualitative characteristics- Understandability, Relevance, materiality,
Reliability, faithful representation, substance over form, neutrality,
prudence, completeness, Comparability and true and fair view
• Measurement criteria includes PV in addition to Historical Cost,
Current cost and Realisable Value
• Concept of Financial and Physical Capital as well their maintenance
enunciated in framework which have also been incorporated in IGAAP.
• IFRS is required or permitted for use in over 90 Countries for
Financial reporting, EU has recently mandated application of IFRS for all
listed Companies affecting over 7000 companies .
Conceptual Framework ..US GAAP
Under US GAAP, detailed framework for pronouncing accounting
standards are contained in SFAC- Statement of Financial Accounting
Concepts .Total seven SFAC have been issued, out of which SFAC-3 is
replaced.
SFAC forms the basis of pronouncement of FAS. SFAC is not
authoritative GAAP, but can be used if no GAAP exists. There are 6
SFAC in force on Objective , Quality Characteristics, Recognition and
measurement, Elements and Cash flow.
GAAP /SFAC pronouncement are made by FASB which is not an
accounting Body like ICAI. AICPA does not pronounce GAAP.
Over 150 FAS announced till date, many of which are amendment /
replacement.
Separate Accounting Board for Government Companies called GASB.
US GAAP Hierarchy
SFAC
GASB
FAS & FIN, APB
Opinion, ARB Bulletin
FASB Tech Bulletin, AICPA
guides, SOP (AICPA)
AICPA AcSEC Practice Bulletins( FASB Cleared)
, FASB EIFT Consensus Positions
AICPA Accounting interpretation, FASB Q&A,
other Industry literature and Practices
Conceptual Framework ..Comparison
• Historical Costing –IFRS permits revaluation in contrast to Historical
Cost convention, while US GAAP does not permit revaluation. Only
securities and derivatives can be valued at Fair Value under IFRS and
US GAAP.
• True & Fair View: Under IFRS framework , there is an assumption that
adoption of IFRS leads to a true and fair presentation, there is no such
assumption under US GAAP.
• Prudence Vs Rules: There is a common allegation against US GAAP,
that they are rule oriented and based on specific cases. However this is
not true, as FAS are also more detailed and lay down detailed principles
for application. No such allegation is leveled against IFRS.
• Comparative Position : under IFRS, comparative financial figures are to
be provided for one previous years, whereas under USGAAP (SEC
requirement for listed companies ) comparatives are to be provided for
two previous years except for Balance Sheet.
Conceptual Framework ..comparison
• Over-riding of Standards – IFRS permits that a company may withhold
application of IFRS in extremely rare situation, where it is felt that
application of IFRS would defeat the very objective of Financial
reporting. Disclosure must be made for reason for override. No such
override is generally permitted under US GAAP.
• Reporting Elements : IFRS prescribes the minimum structure and
content of financial statement including Statement of Changes in equity
(in addition to Balance sheet, Income statement, Cash flow statement ,
notes comprising significant accounting Policy and other explanatory
notes). Under US GAAP in addition to statement of changes in Equity,
Statement of Comprehensive Income is required.
Balance Sheet……...IFRS (IAS1)
• IFRS does not prescribe any format, but stipulates minimum line
items like PPE, Investment property, Intangible assets, Financial assets,
Biological assets, inventory, receivables etc. Additional line items,
subheadings and subtotals shall be presented on the face of BS if
relevant. The order of presentation within the group or otherwise in not
mandatory.
• An organisation has an option to adopt Current or Non current
classification of assets and liabilities . Deferred Tax Assets not to be
shown as Current assets, if Current /non current classification adopted.
( IAS 1.53 )
• While many items of disclosure are common, the following items must
be disclosed on the face of balance sheet : Biological assets, Tax
Liability, Minority Interest etc (IAS 1.66 )
• IFRS permits an enterprise to disclose any long term interest bearing
liability due for settlement within 12 months,as long term liability’ if the
same is likely to be refinanced and can be supported by adequate
documentary evidence.
Balance Sheet……...US GAAP
• US GAAP also does not prescribe any format , but Rule S-X of SEC
stipulates for listed companies minimum line items to be disclosed
either on face of Balance sheet or Notes to Accounts like Current Assets
( Cash and cash items, marketable securities, allowance for Bad debts,
prepaid expenses, other current assets) and Non Current Assets on
asset side and current and non current liabilities on liabilities side.
• While many items of disclosure are common, the following items must
be disclosed like Unearned Income, Securities of related parties,
Minority Interest in consolidated subsidiaries, non current indebtedness
to related parties.
Balance Sheet……..comparison
• Format : IFRS and USGAAP do not prescribe any format ,
• Order of line items: Under US GAAP, items in assets and liabilities are
presented in decreasing order of liquidity, whereas under IFRS (if
Current and non current order followed ).
• Consolidation : Under IFRS consolidation of Financial statements of
subsidiaries is not compulsory until it is required under some other
law or regulation, whereas under US GAAP consolidation of results of
Subsidiaries and Variable interest entity (FIN 46R) is compulsory. A VIE
is an entity in which the organisation does not hold majority interest
but is responsible to provide necessary funding support.
Income statement……... IFRS
• IFRS does not prescribe any standard format for income statement
but prescribes minimum disclosure includes revenue, finance costs,
share of post tax results of JV and associates using equity method,
pre tax gain/loss on asset disposal, discontinued operation tax
charge, and Net profit or loss etc.
• Under IFRS , the reporting entity has an option to prepare income
statement either by nature of expenses or by Function (Cost of sales
method ) (IAS 1.84)
• Under IFRS , Income is defined as Revenue and gains and expenses
are defined to include losses and are decreases in economic activity
that result in decrease in equity.
• Additional disclosure under IFRS include amount of dividend and
DPS declared or proposed (IAS 1.95) , Share in profit /loss of associates
under equity method, profit/loss attributable to minority interest (IAS
1.82) .
Income statement……...US GAAP
• Under US GAAP as well there is no prescribed format, SEC guidelines
Rule S-X prescribe minimum line items to be shown on the face of
income statement. SEC rules also suggest 2 alternatives a) a single
step format where expenses are classified by function and b) a Multiple
step format where Cost of sales is deducted from Sales .
• Income can be classified as from net sale of tangible products,
operating revenue of public utilities, rentals ,services & other revenue.
Revenue from any class which is less than 10% of total revenue can be
clubbed with other class.
• Costs and exp include cost of tangible goods sold, operating exp of
public utility, exp relating to rental income, Selling general and admn
exp,Provisions .
• Non operating income like dividend, interest on securities, net profit
on securities, misc income as well as non operating exp like loss on
securities, misc income ,deductions can be shown in notes to accounts
Income statement……... Comparison
IFRS requires retroactive application for the earliest
period practical and adjustment of opening retained
earning.
•
• US GAAP – 1) requires prospective application of change in
accounting policy and proforma disclosure of effect on income
before extraordinary items on the face of income statement as
separate section.
• US GAAP -2) In case of specific situations like change from LIFO
method of valuation of stock,accounting for long term construction
contract, change from/ to full cost method in extractive Industry and
Change in depreciation Policy, retrospective application required to
restate opening retained earning. Effect of changes on income before
extraordinary items, net income and EPS should be disclosed for all
periods on the face of Income statement in the period of change.
Income statement……... Comparison
• US GAAP (FAS 16) also mandates retrospective application of
error and requires restatement of comparative opening balance
with suitable footnote disclosure.
• IFRS requires that a prior period item/error should be
corrected by retrospective effect by restatement of opening
balance of assets, liabilities or equities for the earliest period
practicable. Entity should also disclose nature of error and the
amount of correction for each financial line item. IFRS also
requires that such disclosure should not be repeated in
subsequent period.
Income statement……... Comparison
• Discounting : IFRS provides that where the inflow of cash is
significantly deferred without interest, discounting is needed. US
GAAP also permits discounting in certain cases.
• Persuasive evidence: US GAAP requires availability of a
persuasive evidence for revenue recognition with several
elements while there is no such requirement in IFRS .
• Consolidation : US GAAP mandates consolidation of results
of subsidiaries and VIEs, whereas IFRS do not mandate
consolidation as such except as required under law.
SUMMARY
• Conceptual framework: While IFRS have conceptual framework
statement, US GAAP has SFAC. Broadly similar principles except
Revaluation , True and fair view override, comparative financial
statements, statement of changes in equity and comprehensive
income.
• Balance sheet : IFRS and US GAAP do not provide any format,
but suggest minimum line items.
• Income statement : No format suggested in the 3 GAAP but
minimum line items suggested.difference in definition of
Income, expenses, treatment of change in accounting Policy,
prior period items and miscellaneous items leading to
reconciliation issues.
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