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									              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

 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 /

  Separate Accounting Board for Government Companies called GASB.
US GAAP Hierarchy


   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

  • 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

  • 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
• 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.
 • 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

• 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.
Thank you

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