US GAAP: Accounting Principles

• Generally Accepted Accounting Principles (US GAAP) are a set of accounting standards used in the United States.
• The purpose of US GAAP is to ensure uniformity and transparency in financial reporting for companies operating in the U.S., particularly those listed on the NYSE and NASDAQ.

Key Principles of US GAAP

• Economic Entity Principle: Financial statements should only reflect the transactions of the company, not those of its owners or other entities.
• Going Concern Principle: It is assumed that the company will continue to operate in the foreseeable future, unless there are indications to the contrary.
• Monetary Unit Principle: All transactions should be expressed in a stable currency, which is typically U.S. dollars in the United States.
• Periodicity Principle: Financial information should be presented in defined time periods, such as monthly, quarterly, or annually.
• Historical Cost Principle: Assets and liabilities are recorded at their original acquisition cost, not their market value.
• Revenue Recognition Principle: Revenue is recognized when it has been earned and is likely to be collected, according to ASC 606 standards.
• Matching Principle: Expenses should be recorded in the same period as the related revenues they helped generate.
• Full Disclosure Principle: All circumstances that could affect the interpretation of financial statements should be disclosed in the notes to the statements.
• Consistency Principle: The same accounting methods should be used in each period to facilitate comparison of financial information.
• Objectivity Principle: Accounting information should be based on verifiable data and not subjective judgments.
• US GAAP provides detailed rules to ensure financial transparency and comparability in the United States.
• Compliance with US GAAP is essential for companies listed on Wall Street and regulated by the SEC.

International Financial Reporting Standards (IFRS)

• IFRS are a set of international accounting standards issued by the IASB (International Accounting Standards Board).
• The aim of IFRS is to standardize the presentation of financial statements for companies globally.

Conceptual Framework

• The Conceptual Framework serves as the theoretical foundation for preparing and presenting financial statements and provides guidance for developing new standards and interpreting existing ones.
• It provides a coherent basis for resolving accounting issues.
• Its main components include:
  • Objective of financial information: Provide useful information for investors, lenders, and other creditors in making economic decisions.
• Qualitative characteristics of useful financial information:
• Relevance: Information must influence users' economic decisions.
• Faithful Representation: Information must be complete, neutral, and free from error.
• Elements of financial statements: Definition of assets, liabilities, equity, income, and expenses.
• Recognition and Measurement: Criteria for recognizing and measuring elements in financial statements.
• Concepts of capital and capital maintenance: Definition of financial and physical capital, and how capital is maintained in financial terms.

Specific IFRS Standards

• IASB issues current standards, and they include examples such as:
  • IFRS 1: First-time Adoption of IFRS
  • IFRS 9: Financial Instruments
  • IFRS 15: Revenue from Contracts with Customers
  • IFRS 16: Leases
  • IFRS 17: Insurance Contracts
• These standards seek to standardize financial information globally and focus on specific areas of accounting.

Key Relevant IFRS Standards

• IFRS 1 aims to ensure that an entity's first IFRS financial statements and related interim financial reports contain high-quality information.
• The information needs to be transparent to users and comparable across all periods presented.
• It applies to entities adopting IFRS for the first time when preparing financial statements.
• IFRS 9 sets principles for financial reporting on financial assets and liabilities, including classification, measurement, impairment, and hedge accounting.
• It applies to all entities and covers all types of financial instruments, except those specifically excluded.
• IFRS 15 establishes principles that an entity applies to report useful information about the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with customers.
• It applies to all contracts with customers, except those within the scope of other specific IFRS standards.
• IFRS 16 sets principles for the recognition, measurement, presentation, and disclosure of leases.
• It applies to all leases, including subleases, with certain exceptions.
• IFRS 17 establishes principles for recognition, measurement, presentation, and disclosure of insurance contracts issued.
• It applies to all types of insurance contracts, regardless of the issuing entity.

International Accounting Standards (IAS)

• IAS were issued before 2001, and some are still in effect.
• Examples include:
  • IAS 1: Presentation of Financial Statements
  • IAS 2: Inventories
  • IAS 16: Property, Plant and Equipment
  • IAS 36: Impairment of Assets
  • IAS 37: Provisions, Contingent Liabilities and Contingent Assets

Interpretations (IFRIC and SIC)

• These provide clarifications on applying accounting standards.
• Types include IFRIC (International Financial Reporting Interpretations Committee) and SIC (Standing Interpretations Committee).
• Examples:
  • IFRIC 23: Uncertainty over Income Tax Treatments
  • SIC 32: Intangible Assets – Web Site Costs

Summary of IFRS Structure

• The structure includes a Conceptual Framework underpinning general IFRS principles.
• Current IAS standards are older standards still in effect, along with Interpretations (IFRIC/SIC).
• Specific applications are then implemented.

Conclusion About IFRS

• IFRS ensures uniformity and transparency in financial information, which is crucial for decision-making in a globalized environment.
• Its correct application depends on understanding its structures.