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largely rules based. While both standards have a conceptual framework, IFRS
leans heavily on the conceptual framework in lieu of making rules (largely to
enhance adoption across countries with different
political/legal/regulatory/business environments); in contrast, the conceptual
framework under US GAAP is considered when rules are being promulgated
or modified, but the conceptual framework is itself not GAAP. US GAAP is
codified in the Accounting Standards Codification, and this is the only source
for authoritative direction in accounting issues.
Example
The first conceptual framework for financial reporting was developed in the
1970s by the Financial Accounting Standards Board (FASB) in the US. Since
then, most standard-setting bodies in developed economies have sought to
develop their own conceptual framework to help guide the standard-setting
process. Accordingly, the International Accounting Standards Board (IASB)
developed its own conceptual framework that describes the basic concepts
underlying financial statements prepared in conformity with International
Financial Reporting Standards (IFRS). Preparers and auditors cannot ignore
the IASBs framework when applying IFRS (see IAS 8 Revised).
In September 2010, after working closely with the FASB, the IASB issued a
revised version of its conceptual framework (Conceptual Framework for
Financial Reporting 2010). According to this revised document, the two
primary objectives of financial statements prepared under IFRS are economic
decision-making and stewardship. The main users of financial statements are
considered to be equity investors, lenders and other creditors, while the
primary characteristics that make financial reporting information useful to
these groups are relevance and fai]thful representation
The U.S. is moving toward IFRS. Unlike what happened with other countries,
IASB and FASB have been working on convergence for many years. Are the
two standards still very different?
For many years, countries developed their own accounting standards. They
were rules-based, principle-based, business-oriented, tax-oriented in one
word, they were all different. With globalization, the need to harmonize these
standards was not only obvious but necessary.
By the end of the 90s, the two predominant standards were the U.S. GAAP
(Generally Accepted Accounting Principles) and IFRS (International Financial
Reporting Standards). And, both standard setters, IASB (International
Accounting Standards Board) and FASB (Financial Accounting Standards
Board), initiated a convergence project even before IFRS was actually
adopted by many countries.
Now, that the U.S. is clearly moving toward IFRS, as re-emphasized by the
recent SEC (U.S. Securities and Exchange Commission) proposal, one
wonders what the potential impacts of the differences between these two
frameworks on the financial statements will be? And how financial executives
can anticipate the adoption of IFRS in order to minimize the last-minute
adjustments?
Historical Reminder
Since 1999, the FASB has undertaken six initiatives in order for the GAAP to
converge with IFRS:
In November 2008, SEC issued its proposed roadmap to the adoption of IFRS
for public companies. This proposal came about one year after the ending of
the reconciliation to GAAP for foreign registrants that issue IFRS financial
statements. These two initiatives revealed the importance of international
standards and concluded, to a certain extent, about 30 years of convergence
between the two standard setters.
Once the convergence effort is acknowledged and its results identified, are
both standards still different?
One of the major differences lies in the conceptual approach: U.S. GAAP is
rule-based, whereas IFRS is principle-based.
As a first step, the transition phase has to be segregated from the going-
forward application of IFRS. A reconciliation approach (i.e. identification of
differences and work only on those) may be effective for the transition (less
time, less cost), but going forward, this approach may create a lot of
unexpected difficulties, since the tools will not be in place.
Some of the questions to consider before the start of the project are:
Due to the broad impact of the transition, your company should put in place
a scalable training plan on IFRS not limited to the accounting department,
even before the actual transition.
Final Thought