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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

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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

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ACCOUNTING - CLUTCH

CH. 15 - GAAP VS IFRS

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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

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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

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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)

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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

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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

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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

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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

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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.

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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:

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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:

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CH. 15 - GAAP VS IFRS

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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

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