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A-1
Appendix A
International Financial
Reporting Standards
After studying this chapter, students should be able to:
◼ Explain why accounting standards currently differ among countries around the world (LO1).
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Chapter Outline
LO 1
Why Do Accounting Standards Differ?
Accounting standards currently differ among countries around the world for several reasons:
◼ Legal system
• Common law system – fewer statutes written into the laws and thus more reliance on
interpretation by the courts.
◼ Taxation – some countries have significant differences between book income and taxable income
(U.S.) while others have fewer differences (most of Europe).
◼ Financing
• Corporations in some countries get financing from outside sources (creditors and
stockholders) and accountability is important.
◼ Relationships Between Countries – countries that have strong political and economic ties often
share similar accounting practices (Canada and Australia).
◼ State of Economic Development- more developed countries have detailed accounting rules to
deal with complex business arrangements, while developing countries are developing their
accounting standards.
APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS
LO 2
Benefits from a Single Set of Standards
Many U.S. publicly traded companies are global companies. Advantages to these companies of a single set
of accounting standards include:
◼ Save on Accounting Costs – A single set of accounting standards would save companies
considerable money in accounting fees.
◼ Make It Easier to Acquire Foreign Companies – a single set of standards would make it much
easier to make a decision on whether to acquire a foreign company.
LO 3
Who Is Responsible for Developing Global Accounting Standards?
The International Accounting Standards Board (IASB) establishes worldwide standards.
◼ Headquartered in London.
◼ IFRS Foundation includes among its principal objectives “to develop a single set of high quality,
understandable, enforceable and globally accepted international financial reporting standards
(IFRSs) through its standard-setting body, the IASB.”
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In 2007, SEC dropped rule that required foreign companies who filed financial
statements with it had to adjust the statements to GAAP. Only stipulation is that the
LO 4
Major Differences Between U.S. GAAP and IFRS
◼ Chapter 1: Accounting as a Form of Communication
• Since IFRS is more principle based and its standards are less detailed than the FASB, the level
of disclosure required in the footnotes to the financial statements will be more detailed.
◼ Chapter 2: Financial Statements and the Annual Report
• FASB and IASB issued a joint statement “Conceptual Framework for Financial Reporting.”
Objective of financial reporting and the qualitative characteristics that make accounting
◼ Chapter 3: Processing Accounting Information
• Processing of accounting information is a function of technology available rather than the
result of any standards.
◼ Chapter 4: Income Measurement and Accrual Accounting
◼ Chapter 5: Inventories and Cost of Goods Sold
• IASB strictly prohibits the use of LIFO.
U.S. has LIFO conformity rule.
Talk in the U.S. of repealing LIFO for tax purposes.
APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS
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If this were to happen, it is likely that its use for financial reporting purposes would
be eliminated as well.
• Both use lower-of-cost-or-market rule to value inventory, but standards differ:
◼ Chapter 6: Cash and Internal Control
• SOX requirements for internal control do not exist under IFRS.
◼ Chapter 7: Receivables and Investments
◼ Chapter 8: Operating Assets: Property, Plant, and Equipment, and
Intangibles
• Estimates of residual values and the depreciable lives of assets may be assessed differently.
IFRS requires these estimates to be reviewed at least annually and any changes treated as
a change in estimate.
• Methods of evaluating impairment of goodwill differ.
• Research and development costs:
Must be expensed under GAAP.
◼ Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
• Although not required under GAAP, most companies prepare a balance sheet presenting
current and noncurrent classifications for assets and liabilities. IFRS requires the classified
balance sheet.
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Standards differ on what is considered probable.
◼ Chapter 10: Long-Term Liabilities
• Criteria concerning whether a lease is a capital lease are similar for IFRS and GAAP.
Criteria are considered more like “guidelines” for IFRS reporting and companies may
◼ Chapter 11: Stockholders’ Equity
• Financial instruments that have both debt and equity characteristics (convertible bonds).
IFRS requires the portion of the instrument that represents debt to be reported as a
liability and the portion that represents equity to be reported in stockholders’ equity.
◼ Chapter 12: The Statement of Cash Flows
• Under GAAP, interest (paid or received) is always considered an operating activity.
Under IFRS, can be either operating or financing (payments) or investing (receipts).
◼ Chapter 13: Financial Statement Analysis
• IFRS does not recognize extraordinary items. U.S. GAAP now prohibits any items to be
classified as extraordinary.
LO 5
Format and Terminology Differences
◼ Significant differences exist in how financial statements are presented and the names given to
various accounts. (Refer to the Daimler AG partial financial statements in Exhibit A-1).
APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS
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◼ Under IFRS, the differences in ordering include:
• Many statement items are referenced to notes to the financial statements since IFRS is less
rule based.
◼ Under IFRS, the differences in terminology include:
• Share Capital is used instead of Capital Stock.
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Lecture Suggestions
LO 2
As the globalization of business continues, and people invest in companies from all over the
world, the need for a single set of standards becomes more critical. Discuss with students the need
for unified standards. How can there be comparability between companies if the financial
statements aren’t prepared using the same set of rules. Compare to playing a sport with one team
playing under one set of rules and the other team playing under a different set of rules. How could
you even keep score?
LO 4
All of the Big 4 accounting firms have excellent resources available on their websites to help you
keep current with IFRS. You may want to review these websites before presenting the material in
the chapter.
APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS
Projects and Activities
LO 2
LO 4
In-class discussion: Is Conversion to IFRS really going to happen?
The discussion about the U.S. adopting IFRS has been ongoing for well over 10 years. During this
period, the move towards IFRS has gained and lost momentum. Do you think the U.S. will
abandon GAAP and adopt IFRS?
Solution
The answer to this will depend in a large part on when this topic is addressed. A recent article
states:1
to identify and quantify the material differences they reported under IFRS in terms of U.S.
GAAP.)
However, he added, “there does seem to be continued support for the objective of a single set of
high-quality globally accepted accounting standards.” The chief accountant stressed that the U.S.
Financial Accounting Standards Board and the International Accounting Standards Board continue
to communicate and keep each other’s views very much in mind when each considers its own
actions.
Outside assignment: Where does the U.S. stand with IFRS now?
FASB and IFRS have worked together over the last several years to develop a plan of convergence
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Solution
