IFRS and US GAAP

A Comprehensive Comparison

Steven E. Shamrock

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118239063
• Edition: 1
• Topic: Business
• Subtopic: Accounting Standards
• Index: Business

A practical comparison of—and expert guidance on—IFRS and GAAP written by a practicing controller

International Financial Reporting Standards (IFRS) are used in over 120 countries. US companies will inevitably encounter IFRS when evaluating the financial health of suppliers and customers. IFRS and US GAAP: A Comprehensive Comparison provides instruction in accounting under IFRS within the context of US accounting standards. Practical and easy-to-use, this book includes a case study of a first time IFRS adoption, emphasizing the much greater degree of professional judgment that is needed for IFRS.

• Provides a heavy emphasis on practical examples
• Includes an online companion website with downloadable spreadsheets and templates
• Reflects current financial reporting trends
• Addresses accounting requirements of which today's auditors, accountants and preparers of financial reports need to be aware

Clarifying IFRS, its impact on US companies, and where to start in understanding it, IFRS and US GAAP prepares US accountants to be knowledgeable with day to day financial accounting issues using IFRS's substantial similarity with US GAAP as a context.

Chapter 1

STANDARD SETTING

Just as the Financial Accounting Standards Board (FASB) creates and maintains US GAAP Codification, the International Accounting Standards Board (IASB) does the same for International Financial Reporting Standards (IFRS™). Both are overseen by a group of trustees. The FASB reports to the Financial Accounting Foundation. The IASB is accountable in the first instance to the International Accounting Standards Committee (IASC). Both have interpretive bodies. The FASB has the Emerging Issues Task Force (EITF) in addition to many nonauthoritative bodies such as the American Institute of Certified Public Accountants (AICPA). The IASB/IASC have the International Financial Reporting Interpretations Committee (IFRIC).

Where the standard-setting apparatus diverges is with the role of the Securities and Exchange Commission (SEC) with regard to US GAAP. The SEC delegates its day-to-day rule-making authority to the FASB. The SEC also can supersede US GAAP for public companies. Regulations S-X and S-K define the form and content of financial statement reports, as well as disclosures that are not required under the US GAAP Codification.

Since IFRS is not owned by any one country, the IASB is the top-level authoritative body for IFRS standards. In 2008, recognizing the potential shortcomings of not having a rule-making oversight body such as the SEC, the IASC formed the Monitoring Board (MB). The MB’s role is to provide an extra layer of independence from political influence. The need to protect the IASB from the political winds was underscored when in 2008, David Tweedie, chairman of the IASB at the time, temporarily suspended parts of the IFRS statements regarding classification of the fair market value effects on financial instruments. This directive allowed companies to take the large losses from the 2008 global financial crisis out of net income and into comprehensive income. The public fallout was swift and severe. Critics of IFRS pointed to this as an example of the highly political nature of the IFRS standard-setting process as a result of the multinational mix of board members.

However, what these critics did not mention is that the US GAAP has for decades been shaped by corporate lobbying via the exposure draft process. The most egregious example is the number of years and slow evolution of the accounting for pension and postretirement benefits. It took 17 years for the US GAAP to require companies to reflect in their financial statements the full value of these liabilities. Early comments on the first statement brought laments of doom and gloom as companies would become insolvent overnight. This did not happen. The investor community regularly adjusts the financial statements they are analyzing for off-balance-sheet items. Analysis also typically adds future minimum lease payments that are disclosed for operating leases to the liabilities of an entity when assessing financial condition.

Both bodies employ rigorous process in forming standards. Both have position papers, exposure drafts, and specific instructions and the timing of transition from prior standards. In fact, the two bodies have been jointly developing standards since the 2002 Norwalk Agreement, which creates a roadmap to convergence. The broad outline of the plan is that the two boards converge standards where they have mutual interests. Its objective does not include the synchronization of every standard.

The Norwalk Agreement has been prolific. The two boards have produced many joint standards. However, despite these efforts, jointly issued statements, while substantially identical, still have persistent, if not pervasive, differences. Recent standards have included sections that detail the differences between the two statements.

The governance of the IASB also includes a constitution that establishes the overall objectives of IFRS, the integrity of the standard-setting process, funding of the board, and consultations that are required as part of the process. The constitution is reviewed every five years, and the most recent update was in 2009. The board takes a vote to decide which issues are on the standard-setting agenda. Conversely, the FASB chairman decides on issues to undertake after consultation.

INTERPRETATIONS

Both the IASB and FASB provide interpretations of their standards. The FASB, primarily via the EITF, issues many more interpretations than IFRS. The number since the founding of the FASB in 1972 easily reaches into the hundreds. These together with other bodies, including SEC FRM updates, FASB staff positions, and AICPA Statements of Position likely add at least 200. In contrast, IFRS has only 17 active interpretations and a few amendments. Some prior IFRS interpretations (perhaps a dozen) have been subsumed into updated or new standards. It should be noted, however, that when a standard is reconsidered, the IASB, as a matter of process, attempts to incorporate the interpretations (IFRICs) in the main standard. The number of interpretations is still orders of magnitudes less than US GAAP.

While the FASB ratifies interpretations and does reject considering matters, the IFRIC routinely rejects issuing interpretations. Instead, it issues a monthly update that summarizes the interpretations sought by the user community and usually points out paragraphs of existing standards that the board feels provides adequate guidance with which to account for the matters in question. This approach is indicative of the principle-based nature of IFRS. When the IFRIC identifies an issue where there is an obvious gap in guidance or strong possibility of divergence in practice, the matter is placed on the agenda. Additionally, each year the IASB sets an IFRS improvements agenda that is sourced from constituent requests. The improvements typically result in statement amendments.

STATEMENT NUMBERING

In 2008, the FASB released the US GAAP Codification. The Codification summarized and organized into topics the substance of all prior standards such as Statements on Financial Accounting Standards (SFAS), EITFs, AICPA Statements of Position, and standard updates. Updates to the Codification are announced and put into a temporary section of the Codification until they are inserted into the proper sections as they become effective. The topics are numbered as follows.

IFRS uses sequential numbers as the FASB did prior to the Codification. There are two “sets” of IFRS standards. The first begin with IAS which stands for International Accounting Standards. These statements originated before the IASB came into existence and standard setting fell completely on the IASC. In 2000, when the IASB was founded, subsequent statements began with IFRS (and still do).

Similar to the change management of the US GAAP Codification, when standards are changed, the statement retains its number and title, but has a date appended to it to distinguish between prior versions. This convention means that there still are, and will continue to be IASs in effect. However, when a standard is fundamentally rewritten, or a new subject matter is undertaken, the statement begins with IFRS (with the former IAS number standard retired).

Currently there are 29 IASs, 13 IFRSs, 16 IFRICs, and 11 SICs.

Chapter 2

THE FRAMEWORK

The most significant difference between US GAAP and IFRS for a practitioner is the role that the underlying concepts play in day-to-day accounting and reporting. In simple terms, effective practice of US GAAP compels the user to find the best paragraph that fits a transaction or balance. Under IFRS, users are expected to apply the principles in a way that faithfully represents economic reality.

A visual representation could be envisioning US GAAP as a great wall of cubbies in which one finds the one that best fits the transaction at hand and places it in that space. Following this depiction, IFRS is more like an orderly shelf of jars which are taken out as needed, and the contents of those containers combined to create the best mixture that faithfully represents the transaction.

This is not to say that US GAAP does not aim to create financial statements that faithfully represent the combination of transactions that an entity is made up of. The two standards just take different paths to the same destination.

In order to use IFRS effectively, it helps to understand the different political environments under which the statements are designed and interpreted. The Securities and Exchange Commission alone has the statutory responsibility to promulgate accounting rules in the United States. While the SEC has delegated most of this authority to the Financial Accounting Standards Board, the commission can and does supplement accounting rules of public companies. Because the SEC’s commissioner is appointed by the president of the United States, it is influenced by politics, specifically the politics of the United States.

Conversely, the International Accounting Standards Board has no equivalent authority, but must answer to users and investors in over 100 countries. This diffusion of influence gives the IASB the freedom to hew statements close to the theory because using the objective platform of The Framework is an effective way for the IASB to eliminate the perception of favoritism.

This is not to say that the IASB does not need to heed the concerns of its constituents. The European Union (EU), for example, has created the European Financial Reporting Advisory Group (EFRAG) to endorse IFRS standards. The EU was able to effect changes favorable to EU countries in 2003 when IFRS was adopted for those countries. A 2008 decision by the chairman of the IASB to allow companies in the EU to effectively defer losses regarding some financial instruments by allowing them to reclassify losses to Other Comprehensive Income (OCI) demonstrates how broad political issues can affect the IFRS.

The IFRS Framework is a stand-alone statement that defines the elements of financial statements and their qualitative characteristics. In summary, it provides a seminal description of assets, liabilities, equity, revenue, and income. The qualitative characteristics define the boundaries of these financial statement elements. It also considers the tensions and trade-offs between the characteristics. IAS 1 directs practitioners to use The Framework for accounting decisions if IFRS does not address otherwise.

The FASB, however, uses the Concepts Statements as the edifice upon which statements, interpretations, and updates are based. It is clear that preparers are not to use Concepts Statements to decide upon the presentation and accounting for a given transaction. Following is an excerpt from Statement of Financial Accounting Standards No. 6:

Statements of Financial Accounting Concepts do not establish standards prescribing accounting procedures or disclosure practices for particular items or events, which are issued by the Board as Statements of Financial Accounting Standards. Rather, Statements in this series describe concepts and relations that will underlie future financial accounting standards and practices and in due course serve as a basis for evaluating existing standards and practices.

This body of knowledge is only used to provide a fabric from which standards are cut—by the standard setters. As a consequence, US GAAP is very prescriptive compared with IFRS.

This is not to say that uncommon transactions surface frequently for accountants using US GAAP, but these are usually “vanilla” issues, such as an up-front payment to a retail customer for setting up displays and shelves. More complex subjects are dealt with very differently in the two standards.

The IASB through its interpretative arm, the International Financial Reporting Interpretation Committee (IFRIC), often responds to requests for interpretations by pointing out certain paragraphs that should be used to address the accounting or reporting issue. In other words, the IFRIC often refuses to interpret.

Here is an example: A constituent submitted a request to determine if part of the Foreign Currency Translation Adjustments (FCTA) in equity should be recycled through profit and loss if either the absolute investment in an investee changed but not the relative ownership, or if the investment remained the same but the relative ownership in the investee changed. The IFRIC, through its periodic newsletter (issued several times per year) responded that judgment must be used to determine if there “has been a change in interest.” The IFRIC refused to opine.

Conversely, the FASB responds to inquiries only through Accounting Standards Updates (ASU) that have been through due process. These are narrow and specific. One case (2011) concerned determining when a creditor had a “troubled debt” in order to apply the accounting for troubled debt restructuring. The guidance defined a specific mathematical test that must be applied to determine this.

The IASB is disciplined in always referring to The Framework and existing standards when creating official interpretations (IFRICs) or new standards. This practice is aimed at not creating divergence among accounting for similar transactions. The FASB and the SEC have and continue to diverge from the established body of US GAAP.

In 2011, the FASB rejected including potential voting rights when determining control of an investee (and thus the determination of whether to consolidate), even though IFRS does. The potential voting rights of an investor can be used to wield influence and even control over an investee even though the investor does not own a majority of the voting interests. The FASB disagreed and kept its condition that potential rights are not considered. This brings about a trend I will call divergence.

Since the Norwalk Agreement of 2002, the FASB and IASB have issued many joint statements that are in almost all respects identical. However, there are differences, and some statements note these in the appendices. After the converged standard is released, interpretations by the FASB and refusals to interpret by the IASB create divergences in practice and standard. An ASU issued in 2011 proposed to allow companies to not perform Step 1 of the Goodwill Impairment Test if it is more likely than not (greater than 50%) that the reporting unit is not impaired. This increases the tolerance for not perf...