US GAAP vs. IFRS

US GAAP set by FASB vs. IFRS(IASB) –

·         GAAP, different objectives for business and non-business firms. IFRS same objective.

·         GAAP emphasizes on going concern basis.

·         GAAP relevance and reliability, IFRS also includes comparability and understandability.

·         GAAP uses revenues, gains, losses, expenses and comprehensive income. IFRS uses revenue and expense.

·         GAAP, asset as future economic benefit, IFRS asset as a resource through which economic benefit is expected.

·         GAAP does not allow values of most assets to be adjusted upward.

·         Both require discontinued operations to be reported separately from continuing operations in Income Statement net of tax. Both allow capitalizing interest.

·         Fixed assets can be revalued in IFRS but not under US GAAP.

GAAP- % of completion method, IFRS recognizing after completion.

GAAP Does not use provision if contingency is probable and cost can be estimated loss in IS and liabilities in BS. IFRS allows.

Extraordinary Items- GAAP reported in IS, net to tax below income from continuing operations. No provisions in IFRS.

IFRS, disclosure in separate recurring and non-recurring items.

Management Discussion and Analysis

The Securities Exchange Commission (SEC) requires this section to be included with the financial statements of a public company and is prepared by management.
This includes description of the company's primary business segments and future trends.

• A review of the company's revenues and expenses
• Discussions pertaining to the sales and expense trends
• Review of cash flow statements and future cash flow needs including current and future capital expenditures
• A review of current significant balance sheet items and future trends, such as differed tax liabilities, among others.
• A discussion and review of major transactions (acquisitions, divestitures) that may affect the business from an operational and cash flow point of view.
• A discussion and review of discontinued operations, extraordinary items and other unusual or infrequent events.
• Investors should keep in mind that this section is unaudited.

  Footnotes- US GAAP and SEC wants footnotes for-

·         Non Cash transactions

·         Provide information about accounting methods, assumption and estimates used by management. They are audited.

·         Conversion of bonds into common stock.

·         Accounting policies used.

·         Management discussion and analysis.

·         Should disclose change in accounting policies. Public companies should also disclose impact of newly adopted policies.

  International Accounting Standards IAS 1

International Accounting Standard (IAS) No. 1 defines which financial statements are required and how they must be presented. The required financial statements are:

• Balance sheet.

• Income statement.

• Cash flow statement.

• Statement of changes in owners’ equity.

•      Explanatory notes, including a summary of accounting policies.

•      Disclosures of material events that affect and accounting policies of the company are required by the Securities and Exchange Commission (Form 8-K) not by IAS 1 for firms that are publicly traded in the United States.

Board Of director Duties-

·         In general, the board makes decisions on shareholders' behalf.

·         Board of directors should be a fair representation of both managementand shareholders' interests.

·         Making decisions on issues include the hiring/firing of executives, dividend policies, options policies and executive compensation.

            Cash Flows Operations, Investing and Financing-

Asset expensed at time of purchasehigh OCF and low CFI.

Cash Flow from Operations=Inflows and Outflows of cash affecting Net Income.

Net sales – purchases – change in accounts receivables – other operating expenses.

US GAAP – CFO - Interest, Dividends Received, coupon payments and taxes paid.

IFRS – CFO- Interest, Dividends received.

           CFI- Interest, Dividends received

      Interest, Dividends paid CFO or CFF.

    Deferred tax liability- reversing in future liability if not than equity.

  Net Realizable Value= Price – Estimated selling price

NRV, less than,in Balance Sheet inventory is written down to NRV and loss in Income Statement.
Write up of inventory not allowed in US GAAP.

   Lease- inOperating lease entire lease PMT is operating cash outflow. In Financing or capital lease only depreciation is subtracted. Operating Income in Capital lease is greater than operating lease. Net Income initially is greater for operating lease than capital lease. Capital lease has low CFF as compared with operating lease.

Both IFRS and US GAAP require both type of leases requires disclosure of minimum lease payment more than 5 years in future. No effect on cash flow statements by both leases.

  Asset Impairment- Acquisition Cost – Accumulated Depreciation

When, useful life and salvage value of equipment is cut short, leads to change in accounting estimates not in accounting principle. No need to restate loss or gain. Right down to itsreconciled value and should be reported as operating loss.US GAAP asset is impaired if the book value is greater than sum of its undiscounted cash flows.

 Foreign Currency translation affects owners’ equity not the Income statement.

 FIFO ending inventory = LIFO ending inventory + LIFO reserve

FIFO after-tax profit = LIFO after-tax profit + (change in LIFO reserve)(1 – t)