IFRS | US GAAP

IFRS and US GAAP have around for a while.

The acronym IFRS stands for International Financial Reporting Standards.

International Financial Reporting Standard comprise the standards and interpretations promulgated by the International Accounting Standards Board and International Financial Reporting Interpretations Committee (link: ifrs.org).

IFRS is used in various jurisdictions worldwide (link: ifrs.org).

The acronym GAAP stands for Generally Accepted Accounting Principles.

Unfortunately, despite the name, there is no general consensus as to what exactly those principles are or even how many exist.

Depending on the source, there can be either nine or ten, or even a combination of assumptions, principles and constraints.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (abbreviated GAAP), are the general rules, regulations and guidelines that are followed in the United States by accountants to ensure their practices are legal and ethical. It sets out the standard for managing accounts, preparing financial statements and accounting methods and techniques. GAAP are issued and governed by the Financial Accounting Standards Board (abbreviated FASB) and the International Accounting Standards Board (IASB) to provide equal and comparable standards the world over.

The main principals that ensure fair and accurate, free from inconsistencies accounting are listed and explained below:

1) Regularity: to ensure books and accounts are updated in a timely manner, but more importantly that tax returns and information is provided within the time given.

2) Consistency: accounting methods and techniques must remain the same throughout the financial year to remain consistent.

3) Sincerity: accountants should remain truthful and accurately express the true financial stability of their client(s) without excessive window dressing and PR.

4) Permanence of Methods: financial information and the methods used must be clear and presented coherently.

5) Non Compensation: all financial information must be present and therefore a negative must not be compensated by a positive; both must be shown in full.

6) Prudence: accounts should know reality and shouldn't list financial data that is based on probability or assumption.

7) Continuity: it is accepted that over time an assets value changes and it is fair to represent this with depreciation.

8) Periodicity: revenue should be allocated over the entire span of its income/expenditure and not just on the final date of a transaction. For example a subscription has several payments.

9) Full Disclosure & Materiality: absolutely everything financially related to the business must be presented in the records.

All countries have their own variation of these guidelines, but are generally the same.

Source: link: financialdictionary.net.

WHAT IS GAAP?

Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.

U.S. law requires businesses that release financial statements to the public and companies that are publicly traded on stock exchanges and indices to follow GAAP guidelines, which incorporate 10 key concepts:

Principle of regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.

Principle of consistency: Consistent standards are applied throughout the financial reporting process.

Principle of sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.

Principle of permanence of methods: Consistent procedures are used in the preparation of all financial reports.

Principle of non-compensation: All aspects of an organization’s performance, whether positive or negative, are fully reported with no prospect of debt compensation.

Principle of prudence: Speculation does not influence the reporting of financial data.

Principle of continuity: Asset valuations assume the organization’s operations will continue.

Principle of periodicity: Reporting of revenues is divided by standard accounting time periods, such as fiscal quarters or fiscal years.

Principle of materiality: Financial reports fully disclose the organization’s monetary situation.

Principle of utmost good faith: All involved parties are assumed to be acting honestly.

GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons.

Because GAAP standards deliver transparency and continuity, they enable investors and stakeholders to make sound, evidence-based decisions. The consistency of GAAP compliance also allows companies to more easily evaluate strategic business options.

Source: link: accounting.com

Basic Accounting Principles and Guidelines

Since GAAP is founded on the basic accounting principles and guidelines, we can better understand GAAP if we understand those accounting principles. The following is a list of the ten main accounting principles and guidelines together with a highly condensed explanation of each.

1. Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.

2. Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.

Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown) with dollars from a 2017 transaction.

3. Time Period Assumption
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2017, or the 5 weeks ended May 1, 2017. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2016, the amount is known; but for the income statement for the three months ended March 31, 2017, the amount was not known and an estimate had to be used.

It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enough–the reader needs to know if the statement covers the one week ended December 31, 2017 the month ended December 31, 2017 the three months ended December 31, 2017 or the year ended December 31, 2017.

4. Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.

Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements–you need to look elsewhere, perhaps to a third-party appraiser.

5. Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.

As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.

A company usually lists its significant accounting policies as the first note to its financial statements.

6. Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.

The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.

7. Matching Principle
This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2017 revenues as a bonus on January 15, 2018, the company should report the bonus as an expense in 2017 and the amount unpaid at December 31, 2017 as a liability. (The expense is occurring as the sales are occurring.)

Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.

8. Revenue Recognition Principle
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.

For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is done—it does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt.

9. Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial.

An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the five-year period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.

Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company.

10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.

The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.

Source: link: accountingcoach.com

Or as Wikipedia puts it:

Basic concepts

To achieve basic objectives and implement fundamental qualities GAAP has three basic assumptions, four basic principles, and five basic constraints.

Assumptions

Business Entity: The business is separate from its owners and other businesses. Revenue and expense should be kept separate from personal Expense

Monetary Unit: A stable currency is the unit of record. The FASB accepts the nominal value of the US Dollar as the monetary unit of record, unadjusted for inflation.

Periodicity: The economic activities of an enterprise can be divided into artificial time periods.

Principles

Historical cost principle: Companies must account for and report the acquisition costs of assets and liabilities rather than their fair market value. This principle provides information that is reliable (removing the opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend toward the use of fair values. Most debts and securities are now reported at market values.

Revenue recognition principle: Companies should record revenue when earned but not when received. The flow of cash does not have any bearing on the recognition of revenue. This is the essence of accrual basis accounting. Conversely, however, losses must be recognized when their occurrence becomes probable, whether or not it has actually occurred. This comports with the constraint of conservatism, yet brings it into conflict with the constraint of consistency, in that reflecting revenues/gains is inconsistent with the way in which losses are reflected.

Matching principle: Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle.

Full disclosure principle: The amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information.

Constraints

Objectivity principle: the company financial statements provided by the accountants should be based on objective evidence.

Materiality principle: the significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.

Consistency principle: It means that the company uses the same accounting principles and methods from period to period.

Conservatism principle: when choosing between two solutions, the one which has the less favorable outcome is the solution which should be chosen (see convention of conservatism)

Cost Constraint: The benefits of reporting financial information should justify and be greater than the costs imposed on supplying it.

Source: link: wikipedia.org.

Fortunately, no similar confusion surrounds US GAAP, the topic of this web site.

United States Generally Accepted Accounting Principles comprise the standards promulgated by the Financial Accounting Standards Board (link: fasb.gov) and recognized by the US Securities and Exchange Commission (link: sec.gov).

ASC 105-10-05-1 This Topic establishes the Financial Accounting Standards Board (FASB) Accounting Standards Codification® (Codification) as the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. In addition to the SEC’s rules and interpretive releases, the SEC staff issues Staff Accounting Bulletins that represent practices followed by the staff in administering SEC disclosure requirements, and it utilizes SEC Staff Announcements and Observer comments made at Emerging Issues Task Force meetings to publicly announce its views on certain accounting issues for SEC registrants.

ASC 105-10-05-2 If the guidance for a transaction or event is not specified within a source of authoritative GAAP for that entity, an entity shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources. An entity shall not follow the accounting treatment specified in accounting guidance for similar transactions or events in cases in which those accounting principles either prohibit the application of the accounting treatment to the particular transaction or event or indicate that the accounting treatment should not be applied by analogy.

ASC 105-10-05-3 Accounting and financial reporting practices not included in the Codification are nonauthoritative. Sources of nonauthoritative accounting guidance and literature include, for example, the following:

a. Practices that are widely recognized and prevalent either generally or in the industry
b. FASB Concepts Statements
c. American Institute of Certified Public Accountants (AICPA) Issues Papers
d. International Financial Reporting Standards of the International Accounting Standards Board
e. Pronouncements of professional associations or regulatory agencies
f. Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids
g. Accounting textbooks, handbooks, and articles.

The appropriateness of other sources of accounting guidance depends on its relevance to particular circumstances, the specificity of the guidance, the general recognition of the issuer or author as an authority, and the extent of its use in practice.

ASC 105-10-05-4 The Codification contains the authoritative standards that are applicable to both public nongovernmental entities and nonpublic nongovernmental entities. Content contained in the SEC Sections (designated by an “S” preceding the Section number) is provided for convenience and relates only to SEC registrants. The SEC Sections do not contain the entire population of SEC rules, regulations, interpretive releases, and staff guidance. Content in the SEC Sections is expected to change over time, and there may be delays between SEC and staff changes to guidance and Accounting Standards Updates. The Codification does not replace or affect guidance issued by the SEC or its staff for public entities in their filings with the SEC.

ASC 105-10-05-5 The FASB does not consider Accounting Standards Updates as authoritative in their own right. Instead, new Accounting Standards Updates serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. All nongrandfathered non-SEC accounting guidance not included in the Codification is superseded and deemed nonauthoritative.

ASC 105-10-05-6 The provisions of the Codification need not be applied to immaterial items.

Also see FAS 168 (as issued): link: fasb.org.

IFRS first appeared in 1970s, while US GAAP has been around since the 1930s.

The original IFRS, comprising 31 standards known as IAS, was published in 1975 (link: ifrs.org).

It was not, however, widely used until 2005, when it was adopted by the European Union.

In the twentieth century, US GAAP was, by default, the world's only internationally accepted set of accounting principles.

As this did not sit well with the European Commission, in 2002 it decided to adopt IAS (link: europa.eu), which later became IFRS.

"[In 1995, the Commission] recognized that the existing Directives as such were not suitable for the information needs of international capital markets and consequently large companies were increasingly being drawn to use U.S. Generally Accepted Accounting Practices (U.S. GAAP) in addition to their local Generally Accepted Accounting Practices (GAAP). This increased costs and sometimes resulted in confusion when comparisons were made to local GAAP. Furthermore, at a political level, the European Union had no influence on accounting standards adopted under U.S. GAAP, nor were the standards necessarily appropriate in an E.U. context.

"For these reasons, the Commission proposed that the European Union should place its full weight behind the international standards being developed by the International Accounting Standards Committee with the objective of establishing a set of standards that would be acceptable in capital markets world-wide."

Alexander Schaub, The Use of International Accounting Standards in the European Union, 25 Nw. J. Int'l L. & Bus. 609 (2004-2005)

Since then, IFRS has spread to most countries (link: ifrs.org) and listed companies (link: ifrs.org).

The IFRS standards adopted by the EU are available on its server.

Being quasi law, E-IFRS is available from the EU (link: europa.eu).

While the IFRS standards published by the IASB are not law, the IFRS standards republished in the European Union's Official Journal are.

As part of its agreement with the IFRS Foundation, the EU has the make IFRS standards it has adopted (European-IFRS) available for free both in the original and in translation.

IFRS does, however, continue to be the copyrighted property of the IFRS Foundation.

Obviously, the main advantage of accessing IFRS through the EU is that access is free.

But, as always, one gets what one pays for.

Firstly, the EU only publishes those standards it has adopted.

Secondly, it does not publish supplemental ("B") guidance, such as the Basis for Conclusions, nor does its server have any features that make researching IFRS easier.

Thus, anyone who is serious about IFRS uses the full, IASB version (link: ifrs.org).

While not free, subscription has its benefits.

In addition to full access to all standards and all supplemental guidance, plus an archive of all published standards back to 1975, the site's robust search function is especially useful.

More importantly, subscribing bolsters the IASB's independence, helping it further its mission to make IFRS universally accepted throughout the world.

One reason the US SEC has not embraced IFRS is the influence the European political establishment exerts on IASB through its contributions (link: iasplus.com).

Obviously, £200 per year will not pay for the IASB's independence, but every little bit helps.

The first US GAAP comprised 51 standards published over 20 years starting in 1939.

While primarily a US system, it has been used worldwide the 1950s.

US GAAP's development has been somewhat convoluted, so its full text has only been freely available since 2009.

The first GAAP comprised the Accounting Research Bulletins created by the American Institute of Certified Public Accountants' Committee on Accounting Procedure (link: olemiss.edu).

The CAP was followed by the Accounting Principles Board, which took over standard setting in 1959.

The APB's opinions were GAAP (link: olemiss.edu) until 1973, when the current standard setter, the Financial Accounting Standards Board, started issuing its Statements of Financial Accounting Standards.

Unfortunately, the AICPA also issued its own Statements of Position (link: olemiss.edu) and recognized even more guidance.

A summary of US GAAP's pre-codification structure:

A

FAS, FIN: Financial Accounting Standards Board’s Statements of Financial Accounting Standards and Interpretations

APB, AIN: Accounting Principles Board’s Opinions and Interpretation

ARB: Committee on accounting Principles’ Accounting Research Bulletins

EITF: Consensus positions

SEC: SAB Staff Accounting Bulletins, SEC rules and interpretive releases

B

FTB: FASB Technical Bulletins

SOP: AICPA Statements of Position

AICPA: Industry Audit & Accounting Guides

C

EITF: Emerging Issues Task Force Consensus positions cleared by the FASB.

AICPA’s AcSEC Accounting Standards Executive Committee Practice Bulletins

D

FASB Implementation guides and Q&As.

AICPA accounting interpretations

Practices widely recognized and prevalent either generally or in the industry


This structure could only be simplified after the Sarbanes-Oxley Act gave US Securities and Exchange Commission the ability to finally decide who has the right to create US GAAP.

Specifically, SOX.SEC. 108 (link: gpo.gov) gives the SEC the right to designate a standard setter, not ratify individual standards.

This provision was included to prevent the SEC from cherry-picking standards, and so limits the influence of politics and politicians on standard setting.

Before then, it was the AICPA's Council that had this ability.

Unsurprisingly, the AICPA's Council used this ability to also recognize the AICPA's pronouncements (even though they were unavailable to the lay public)

In the past, the AICPA's pronouncements were generally available to AICPA members (family and friends) only.

Like the Liturgical Latin of old, this allowed AICPA members to project an aura of Ecclesiastical like infallibility that not only enchased their prestige, but proved quite lucrative.

Obviously, in a post Enron/WorldCom world, such an approach to standard setting is no longer consistent with standards of transparency and objectivity to which the profession is now held.

As a result, the AICPA no longer sets accounting standards.

Instead, it concentrates on its roles as the guardian of the CPA exam and profession's chief lobbyist (link: aicpa.org).

Unfortunately, some traditions die hard.

Like the AICPA of old, in addition to the FASB's standards, the SEC also recognizes its own pronouncements.

Fortunately, unlike the AIPCA of old, the SEC makes its pronouncements freely available on the ASC.

On July 1, 2009, the Accounting Standards Codification (link: fasb.org) made all US GAAP freely available to the general public.

Being quasi law, US GAAP's full text cannot be sold for profit.

While US GAAP standards are not law, their use is (indirectly) mandated by law.

This implies, like law, they must be available to those they govern at no charge.

Consequently, US GAAP is available for free, even though it is, in fact, a copyrighted work, and the property of the FAF.

However, the FASB is free to charge for premium services (such as search or copy functions).

While not absolutely necessary, these services make researching US GAAP much easier.

More importantly, they give those who use US GAAP the opportunity to directly support a standard setting process that is, without question, second to none.

Yet each year, they are new to someone, leading to a constant demand for training and advisory services.

As a general rule, IFRS and US GAAP only apply to listed companies.

While some countries require or permit some private companies to apply IFRS, in most countries companies apply a national GAAP until they are listed.

While not semantically accurate, "national GAAP" generally refers to the statutory accounts required by law in many countries.

GAAP is an acronym for Generally Accepted Accounting Principles.

This implies that GAAP derives its authority from its being accepted by the profession.

In contrast, "statutory accounts", as their name implies, are law.

As such, they derive their authority from the sovereign power of the state.

Among the implications:

Not applying statutory accounts is generally a crime punishable by incarceration (at minimum of an entity's statutory representative, a.k.a. managing director).

Statutory accounts are generally procedural and legalistic (not judgmental or principles based).

Statutory accounts are generally used for taxation (focus on information useful to tax authorities rather than investors).

On a fundamental level, statutory accounts are generally based on a physical, rather than financial, capital maintenance concept.

While US GAAP has always been based on a financial concept, IFRS has yet to make up its mind.

CON 5.45: The full set of articulated financial statements discussed in this Statement is based on the concept of financial capital maintenance.

CON 5.47: A return on financial capital results only if the financial (money) amount of an enterprise's net assets at the end of a period exceeds the financial amount of net assets at the beginning of the period after excluding the effects of transactions with owners. The financial capital concept is the traditional view and is the capital maintenance concept in present financial statements. In contrast, a return on physical capital results only if the physical productive capacity of the enterprise at the end of the period (or the resources needed to achieve that capacity) exceeds the physical productive capacity at the beginning of the period, also after excluding the effects of transactions with owners. ...

Framework 4.65: The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Conceptual Frameworkis applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.

The reluctance of IASB to exclusively embrace one concept is also one of the fundamental causes of the differences that still exist between IFRS and US GAAP.

Likewise, the logical inconsistency that comes from trying to reflect two, mutually exclusive models at the same time is one reason that US Securities and Exchange Commission is unlikely to adopt IFRS any time soon (perhaps ever).

The two capital maintenance concepts are, in turn, derived from two competing approaches value.

Under one, value is created physically, though labor.

Under the other, value is created financially, through exchange.

Since these two approaches are as immiscible as the economic systems they inspire, US investors and the regulators see no logic in adopting an accounting system that cannot make up its mind.

While politics, especially the influence dirigiste European politicians tend to have on the IASB, have certainly played thier part, the reluctance of the IASB decide, once and for all, what kind of system IFRS is supposed to be is a major reason that, after a decade of convergence, IFRS and US GAAP have again begun to diverge.

That being said, since "national GAAP" has become too ingrained in the vernacular to dislodge, this site has no choice but to use the term, even if it is both inaccurate and misleading.

In the European Union, for example, only companies whose securities trade on a regulated market are obligated to apply IFRS (link: europa.eu).

All others must, as a general rule, apply a national GAAP (link: europa.eu).

While some EU member states allow IFRS for accounting purposes, since no common tax base exists, IFRS accounts must (except in the UK and Ireland) be reconciled to national GAAP, which then serves as the basis for determining taxable income.

While the IASB publishes an IFRS for SME standard for Small and Mid-sized Enterprises (link: ifrs.org), this standard is not accepted for statutory accounting purposes by any EU country except Ireland and the United Kingdom.

Worldwide, the 85 jurisdictions that require or permit the IFRS for SME standard are:

Anguilla, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Bermuda, Bhutan, Bosnia and Herzegovina, Botswana, Brazil, Cambodia, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, Kazakhstan, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya, Kosovo, Lesotho, Liberia, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mauritius, Montserrat, Myanmar, Namibia, Nicaragua, Nigeria, Pakistan, Palestine, Panama, Paraguay, Peru, Philippines, Qatar, Rwanda, Saint Lucia, Saudi Arabia, Serbia, Sierra Leone, Singapore, South Africa, Sri Lanka, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Swaziland, Switzerland, Tanzania, Trinidad & Tobago, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Venezuela, Yemen, Zambia, and Zimbabwe (link: ifrs.org).

In the United States, the Securities and Exchange Commission (link: sec.gov) likewise only requires registered companies to apply US GAAP.

On the other hand, US tax law (link: uscode.house.gov), requires entities with gross receipts of more than $5 million to use an accrual method of accounting.

As a result, more US accountants have experience with US GAAP, if not its full version, than international accountants with IFRS.

Private company GAAP (also known as non-SEC-GAAP or GAAP-Lite) is the GAAP applicable to private companies.

Unlike full GAAP, GAAP-Lite excludes guidance provided by the SEC and SEC Staff, and includes guidance specific to private companies.

While not a separate standard like IFRS-SME (link: ifrs.org), GAAP-Lite does try to make life simpler for accountants working at companies not listed on an exchange (link: fasb.org).

For example, unlike their public counterparts, private company accountants are allowed to amortize goodwill instead of having to regularly test it for impairment (conceivably forever).

As a result, many accountants have no firsthand experience with either IFRS or US GAAP until their company lists on a capital market or is acquired by listed company.

Our company was established in 1994 to provide US GAAP training to subsidiaries of US companies.

In 1999, we added US GAAP advisory services.

We continued to focus on US GAAP until the European Union decided to adopt IFRS (IAS) in 2002.

As the international acceptance of IFRS grew so did demand for IFRS training and advisory until it comprised almost 80% of our business.

After the IASB and FASB completed their respective revenue recognition and leasing standards, began to wind down their convergence project and the US SEC put IFRS adoption in the US on hold, demand for US GAAP resurged.

Today, we divide our time almost evenly between IFRS and US GAAP.

After the fall of the Berlin wall, Central and Eastern Europe were flooded with companies looking to buy local enterprises or establish their own subsidiaries.

Invariably, they all needed help setting up accounting and financial reporting systems.

Although the wave crested in the early 2000s, demand for IFRS and US GAAP training and advisory services has remained strong.

Not only do new companies constantly enter the market, but IFRS companies often sell their subsidiaries to those applying US GAAP (and vice versa).

Though not as often as in the US, some private EU companies also decide their future depends on listing on a stock market.

In a recent trend, Eastern and Central European have also started acquiring or establishing subsidiaries United States, which has led to a resurgence in demand for US GAAP.

But training and advisory is not the purpose of this web site.

Neither is its aim to discuss, interpret or restate IFRS or US GAAP.

A quick search for "IFRS explained" brings up a plethora of websites and publications that explain, comment on or simply reiterate IFRS guidance.

On the other hand, a search for something a more practical (like "IFRS accounting examples") does not yield much more than this handy guide (link: pwc) or manual (link: pwc), neither of which, by the way, include any examples.

With US GAAP, the story is similar.

Perhaps this also explains why training participants and advisory clients request examples of how to apply IFRS or US GAAP in practice more than practically anything else.

Instead, this site aims to show how to apply IFRS and US GAAP in practice.

The world does not need is another site that talks about IFRS or US GAAP.

If you have clicked on this or any other link, you have noticed we do not mean this no talk mantra literally.

While often obvious, IFRS and US GAAP guidance is sometimes quirky and so requires explanation.

We do, however, try to keep the commentary to a minimum and write it as plainly as possible.

And hide it here in these nifty text boxes where it does not clutter up the page.

Since we assume this site will be used by non-native English readers, we try to write in a way that Google will translate without too many errors.

With commentary, we do not always succeed .

While we try to stay away from jargon, plain English to an accountant is often argot to everyone else.

For example, every accountant knows that measurement is a synonym for valuation, recognition means the same as classification, a cash outflow is an expenditure and an inflow a receipt.

Likewise, terms like to accrue, adjust, capitalize, expense, impair or provision are clear, even though they often leave non-accountants scratching their heads.

Similarly, while accountants appreciate why revenue accounts are negative and expense accounts positive, non-accountants get confused.

If clarification is needed, we welcome questions or comments which can either be posted to the forum or sent directly:

Forum / Contact

Fortunately, since debits and credits are universally understood, Google has much more trouble messing those up.

What the world does need is a site that shows how to apply IFRS or US GAAP.

By show, we mean examples.

The reason for this approach is actually quite simple.

Many accountants come to IFRS or US GAAP from a national GAAP.

While not semantically accurate, "national GAAP" generally refers to the statutory accounts required by law in many countries.

GAAP is an acronym for Generally Accepted Accounting Principles.

This implies that GAAP derives its authority from its being accepted by the profession.

In contrast, "statutory accounts", as their name implies, are law.

As such, they derive their authority from the sovereign power of the state.

Among the implications:

Not applying statutory accounts is generally a crime punishable by incarceration (at minimum of an entity's statutory representative, a.k.a. managing director).

Statutory accounts are generally procedural and legalistic (not judgmental or principles based).

Statutory accounts are generally used for taxation (focus on information useful to tax authorities rather than investors).

On a fundamental level, statutory accounts are generally based on a physical, rather than financial, capital maintenance concept.

While US GAAP has always been based on a financial concept, IFRS has yet to make up its mind.

CON 5.45: The full set of articulated financial statements discussed in this Statement is based on the concept of financial capital maintenance.

CON 5.47: A return on financial capital results only if the financial (money) amount of an enterprise's net assets at the end of a period exceeds the financial amount of net assets at the beginning of the period after excluding the effects of transactions with owners. The financial capital concept is the traditional view and is the capital maintenance concept in present financial statements. In contrast, a return on physical capital results only if the physical productive capacity of the enterprise at the end of the period (or the resources needed to achieve that capacity) exceeds the physical productive capacity at the beginning of the period, also after excluding the effects of transactions with owners. ...

Framework 4.65: The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Conceptual Frameworkis applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.

The reluctance of IASB to exclusively embrace one concept is also one of the fundamental causes of the differences that still exist between IFRS and US GAAP.

Likewise, the logical inconsistency that comes from trying to reflect two, mutually exclusive models at the same time is one reason that US Securities and Exchange Commission is unlikely to adopt IFRS any time soon (perhaps ever).

The two capital maintenance concepts are, in turn, derived from two competing approaches value.

Under one, value is created physically, though labor.

Under the other, value is created financially, through exchange.

Since these two approaches are as immiscible as the economic systems they inspire, US investors and the regulators see no logic in adopting an accounting system that cannot make up its mind.

While politics, especially the influence dirigiste European politicians tend to have on the IASB, have certainly played thier part, the reluctance of the IASB decide, once and for all, what kind of system IFRS is supposed to be is a major reason that, after a decade of convergence, IFRS and US GAAP have again begun to diverge.

That being said, since "national GAAP" has become too ingrained in the vernacular to dislodge, this site has no choice but to use the term, even if it is both inaccurate and misleading.

In the European Union, for example, only companies whose securities trade on a regulated market are obligated to apply IFRS (link: europa.eu).

All others must, as a general rule, apply a national GAAP (link: europa.eu).

While some EU member states allow IFRS for accounting purposes, since no common tax base exists, IFRS accounts must (except in the UK and Ireland) be reconciled to national GAAP, which then serves as the basis for determining taxable income.

While the IASB publishes an IFRS for SME standard for Small and Mid-sized Enterprises (link: ifrs.org), this standard is not accepted for statutory accounting purposes by any EU country except Ireland and the United Kingdom.

Worldwide, the 85 jurisdictions that require or permit the IFRS for SME standard are::

Anguilla, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Bermuda, Bhutan, Bosnia and Herzegovina, Botswana, Brazil, Cambodia, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, Kazakhstan, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya, Kosovo, Lesotho, Liberia, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mauritius, Montserrat, Myanmar, Namibia, Nicaragua, Nigeria, Pakistan, Palestine, Panama, Paraguay, Peru, Philippines, Qatar, Rwanda, Saint Lucia, Saudi Arabia, Serbia, Sierra Leone, Singapore, South Africa, Sri Lanka, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Swaziland, Switzerland, Tanzania, Trinidad & Tobago, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Venezuela, Yemen, Zambia, and Zimbabwe (link: ifrs.org).

In national GAAP, examples are the standard way of showing how to apply the standards.

For example, Czech national GAAP, like the national GAAP of many countries, has this to say about recognizing revenue:

"On the basis of accounting documents (such as invoices), Revenues from own performance and merchandise shall be credited to the relevant accounts of Accounting Group 60 with corresponding debits to the relevant accounts of Account Group 31 - Receivables (short and long-term) or the relevant account of Account Group 21 - Cash".

Consequently, practically every accountant applying Cz GAAP owns a "Correlation of Accounts" handbook filled with nothing but examples such as:

5.

Sales of own products paid in cash

211

601


Since the account numbers are defined in law, that account number 211 is "petty cash" and account 601 is "product revenue" need not be mentioned.

Reproduced from the original, not translated:


Correlation of Accounts, Ing. Jaroslav Jindrak, Zaverka v.o.s., 2017, IASB 978-80-904256-8-2

Not being procedural or legalistic, IFRS and US GAAP take a somewhat different approach to guidance:

Since IFRS or US GAAP are not procedural, every company is free to define its own chart of accounts and number it in any way it chooses (or not number it at all).

While not as common, some companies have done away with charts of account altogether, using different technology in their place.

Obviously, if company is free to define its own charts of account, it can also establish its own procedures, debiting and crediting whichever accounts it chooses.

Since IFRS or US GAAP are not legalistic, they do not define (or even mention) "documents" either.

In national GAAP, an accounting entry must be made on the basis of a legally defined document. This document must include legally defined particulars. Making accounting entries that are not supported these legally defined documents is generally a crime.

In the Czech Republic, for example, the punishment can be as much as a 10-year incarceration of the company's registered representative (managing director) and or accountant(s) responsible for the accounts. It is also grounds for dissolution and forced liquidation of the legal entity.

Most other European countries have similar legal requirements.

More importantly, IFRS and US GAAP accounting does not merely reflect the legal form of contracts and agreements, but their economic substance instead.

Generally, the basis for accounting entries under IFRS or US GAAP is the transaction or event itself, not the associated documentation.

While, obviously, source documents are integral to accounting, the absence of a document does not preclude the making of an accounting entry.

For example, although IFRS 15 / ASC 606 emphasize they address Revenue from CONTRACTS with Customers, both acknowledge even implied contracts, not even supported by an oral agreement, can be just as binding as those written on paper.

IFRS 15.10 / 606-10-25-2: A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral or implied by an entity's customary business practices. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries and entities. In addition, they may vary within an entity (for example, they may depend on the class of customer or the nature of the promised goods or services). An entity shall consider those practices and processes in determining whether and when an agreement with a customer creates enforceable rights and obligations.

CF/FAC 8 BC3.26: … Faithful representation means that financial information represents the substance of an economic phenomenon rather than merely representing its legal form. Representing a legal form that differs from the economic substance of the underlying economic phenomenon could not result in a faithful representation.

In another difference, while national GAAP does not specifically address the issue, both IFRS and US GAAP are quite adamant that timing and amount is as important, if not more, as the accounts used.

Finally, since both assume that economic substance takes precedence over legal form, both standards have an inherent procedural flexibility that is generally absent from national GAAP.

"An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation."

Thus, in addition to accounts (in word rather that number form), any example of IFRS or US GAAP must also address timing and amount, and indicate which alternative was selected when alternative methods are available:

In the United States, there is no "national GAAP" other than US GAAP.

However, even there, whenever the FASB publishes a new standard, accountants clamor for examples.

Although FASB often obliges, its examples can be hard to follow and often address only a sample of the issues covered by the standard.

The FASB's direct financing lease example:

842-30-55-31 Assume the same facts and circumstances as in Case A (paragraphs 842-30-55-19 through 55-24), except that the $13,000 residual value guarantee is provided by a third party, not by Lessee. Collectibility of the lease payments and any amount necessary to satisfy the third party residual value guarantee is probable.

Case A-Lessor Accounting-Sales-Type Lease

842-30-55-19 Lessor enters into a 6-year lease of equipment with Lessee, receiving annual lease payments of $9,500, payable at the end of each year. Lessee provides a residual value guarantee of $13,000. Lessor concludes that it is probable it will collect the lease payments and any amount necessary to satisfy the residual value guarantee provided by Lessee. The equipment has a 9-year estimated remaining economic life, a carrying amount of $54,000, and a fair value of $62,000 at the commencement date. Lessor expects the residual value of the equipment to be $20,000 at the end of the 6-year lease term. The lease does not transfer ownership of the underlying asset to Lessee or contain an option for Lessee to purchase the underlying asset. Lessor incurs $2,000 in initial direct costs in connection with obtaining the lease, and no amounts are prepaid by Lessee to Lessor. The rate implicit in the lease is 5.4839 percent.

842-30-55-20 Lessor classifies the lease as a sales-type lease because the sum of the present value of the lease payments and the present value of the residual value guaranteed by the lessee amounts to substantially all of the fair value of the equipment. None of the other criteria to be classified as a sales-type lease are met.
842-30-55-21 Lessor measures the net investment in the lease at $62,000 at lease commencement, which is equal to the fair value of the equipment. The net investment in the lease consists of the lease receivable (which includes the 6 annual payments of $9,500 and the residual value guarantee of $13,000, both discounted at the rate implicit in the lease, which equals $56,920) and the present value of the unguaranteed residual value (the present value of the difference between the expected residual value of $20,000 and the residual value guarantee of $13,000, which equals $5,080). Lessor calculates the selling profit on the lease as $8,000, which is the difference between the lease receivable ($56,920) and the carrying amount of the equipment net of the unguaranteed residual asset ($54,000 - $5,080 = $48,920). The initial direct costs do not factor into the calculation of the selling profit in this Example because they are not eligible for deferral on the basis of the guidance in paragraph 842-30-25-1(c) (that is, because the fair value of the underlying asset is different from its carrying amount at the commencement date).

842-30-55-22 At the commencement date, Lessor derecognizes the equipment (carrying amount of $54,000) and recognizes the net investment in the lease of $62,000 and the selling profit of $8,000. Lessor also pays and recognizes the initial direct costs of $2,000 as an expense.

842-30-55-23 At the end of Year 1, Lessor recognizes the receipt of a lease payment of $9,500 and interest on the net investment in the lease (the beginning balance of the net investment in the lease of $62,000 × the rate implicit in the lease of 5.4839% = $3,400), resulting in a balance in the net investment of the lease of $55,900. For disclosure purposes, Lessor also calculates the separate components of the net investment in the lease: the lease receivable and the unguaranteed residual asset. The lease receivable equals $50,541 (the beginning balance of the lease receivable of $56,920 - the annual lease payment received of $9,500 + the amount of interest income on the lease receivable during Year 1 of $3,121, which is $56,920 × 5.4839%). The unguaranteed residual asset equals
$5,360 (the beginning balance of the unguaranteed residual asset of $5,081 + the interest income on the unguaranteed residual asset during Year 1 of $279, which is $5,081 × 5.4839%).
842-30-55-24 At the end of Year 6, Lessor reclassifies the net investment in the lease, then equal to the estimated residual value of the underlying asset of $20,000, as equipment.

842-30-55-32 None of the criteria in paragraph 842-10-25-2 to be classified as a sales-type lease are met. Lessor classifies the lease as a direct financing lease because the sum of the present value of the lease payments and the present value of the residual value guaranteed by the third party amounts to substantially all of the fair value of the equipment. In accordance with paragraph 842-10-25-4, the discount rate used to determine the present value of the lease payments and the guaranteed residual value (5.4839 percent) assumes that no initial direct costs will be deferred because, at the commencement date, the fair value of the equipment is different from its carrying amount.

842-30-55-33 At the commencement date, Lessor derecognizes the equipment and recognizes a net investment in the lease of $56,000, which is equal to the carrying amount of the underlying asset of $54,000 plus the initial direct costs of $2,000 that are included in the measurement of the net investment in the lease in accordance with paragraph 842-30-25-8 (that is, because the lease is classified as a direct financing lease).
The net investment in the lease includes a lease receivable of $58,669 (the present value of the 6 annual lease payments of $9,500 and the third-party residual value guarantee of $13,000, discounted at the rate implicit in the lease of 4.646 percent), an unguaranteed residual asset of $5,331 (the present value of the difference between the estimated residual value of $20,000 and the third-party residual value guarantee of $13,000, discounted at 4.646 percent), and deferred selling profit of $8,000.

842-30-55-34 Lessor calculates the deferred selling profit of $8,000 in this Example as follows:
a. The lease receivable ($58,669); minus
b. The carrying amount of the equipment ($54,000), net of the unguaranteed residual asset ($5,331), which equals $48,669; minus
c. The initial direct costs included in the measurement of the net investment in the lease ($2,000).

842-30-55-35 At the end of Year 1, Lessor recognizes the receipt of the lease payment of $9,500 and interest on the net investment in the lease of $4,624 (the beginning balance of the net investment in the lease of $56,000 × the discount rate that, at the commencement date, would have resulted in the sum of the lease receivable and the unguaranteed residual asset equaling $56,000, which is 8.258 percent), resulting in a balance in the net investment of the lease of $51,124.
842-30-55-36 Also at the end of Year 1, Lessor calculates, for disclosure purposes, the separate components of the net investment in the lease: the lease receivable, the unguaranteed residual asset, and the deferred selling profit. The lease receivable equals $51,895 (the beginning balance of the lease receivable of $58,669 - the annual lease payment received of $9,500 + the amount of interest income on the lease receivable during Year 1 of $2,726, which is $58,669 × 4.646%). The unguaranteed residual asset equals $5,578 (the beginning balance of the unguaranteed residual asset of $5,331 + the interest income on the unguaranteed residual asset during Year 1 of $247, which is $5,331 × 4.646%). The deferred selling profit equals $6,349 (the initial deferred selling profit of $8,000 - $1,651 recognized during Year 1 [the $1,651 is the difference between the interest income recognized on the net investment in the lease during Year 1 of $4,624 calculated in paragraph 842-30-55-35 and the sum of the interest income earned on the lease receivable and the unguaranteed residual asset during Year
1]).

842-30-55-37 At the end of Year 2, Lessor recognizes the receipt of the lease payment of $9,500 and interest on the net investment in the lease (the beginning of Year 2 balance of the net investment in the lease of $51,124 × 8.258%, which is $4,222), resulting in a carrying amount of the net investment in the lease of $45,846.

842-30-55-38 Also at the end of Year 2, Lessor calculates the separate components of the net investment in the lease. The lease receivable equals $44,806 (the beginning of Year 2 balance of $51,895 - the annual lease payment received of $9,500 + the interest income earned on the lease receivable during Year 2 of $2,411, which is $51,895 × 4.646%). The unguaranteed residual asset equals $5,837 (the beginning of Year 2 balance of the unguaranteed residual asset of $5,578 + the interest income earned on the unguaranteed residual asset during Year 2 of $259, which is $5,578 × 4.646%). The deferred selling profit equals $4,797 (the beginning of Year 2 balance of deferred selling profit of $6,349 - $1,552 recognized during Year 2 [the $1,552 is the difference between the interest income recognized on the net investment in the lease during Year 2 of $4,222 and the sum of the interest income earned on the lease receivable and the unguaranteed residual asset during Year 2]).

842-30-55-39 At the end of Year 6, Lessor reclassifies the net investment in the lease, then equal to the estimated residual value of the underlying asset of $20,000, as equipment.

We have tried to make our examples as easy to follow as possible and address all the common issues. most accountants face day-to-day.

Our direct financing lease example:

Financing type lease (US GAAP only)

12/31/R0, ABC bought a machine with an economic life of 10 years at a 25% dealer discount from its manufacturer and leased it to XYZ for 5 years at 239 per month. Comparable, new machines cost 24,000 and 5-year-old machines sell for 12,000. The residual value was guaranteed by a third party and ABC applied ASC 842-30-30-2, which requires the net investment to be reduced by the amount of selling profit, and the methodology outlined in ASC 842-30-842-30-55-31 to 39, which reflects the deferred profit in the discount rate. ABC sold the machine at auction for 11,500 on 1/15/Y6.

842-30-30-2

At the commencement date, an entity shall include the periods described in paragraph 842-10-30-1 in the lease term having considered all relevant factors that create an economic incentive for the lessee (that is, contract-based, asset-based, entity-based, and market-based factors). Those factors shall be considered together, and the existence of any one factor does not necessarily signify that a lessee is reasonably certain to exercise or not to exercise an option.

842-10-30-1

An entity shall determine the lease term as the noncancellable period of the lease, together with all of the following:

a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option

b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option

c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.

Case C—Lessor Accounting—Direct Financing Lease

842-30-55-31

Assume the same facts and circumstances as in Case A (paragraphs 842-30-842-30-55-19 through 842-30-55-24), except that the $13,000 residual value guarantee is provided by a third party, not by Lessee. Collectibility of the lease payments and any amount necessary to satisfy the third party residual value guarantee is probable.

842-30-55-32

None of the criteria in paragraph 842-10-25-2 to be classified as a sales-type lease are met. Lessor classifies the lease as a direct financing lease because the sum of the present value of the lease payments and the present value of the residual value guaranteed by the third party amounts to substantially all of the fair value of the equipment. In accordance with paragraph 842-10-25-4, the discount rate used to determine the present value of the lease payments and the guaranteed residual value (5.4839 percent) assumes that no initial direct costs will be deferred because, at the commencement date, the fair value of the equipment is different from its carrying amount.

842-30-55-33

At the commencement date, Lessor derecognizes the equipment and recognizes a net investment in the lease of $56,000, which is equal to the carrying amount of the underlying asset of $54,000 plus the initial direct costs of $2,000 that are included in the measurement of the net investment in the lease in accordance with paragraph 842-30-25-8 (that is, because the lease is classified as a direct financing lease). The net investment in the lease includes a lease receivable of $58,669 (the present value of the 6 annual lease payments of $9,500 and the third-party residual value guarantee of $13,000, discounted at the rate implicit in the lease of 4.646 percent), an unguaranteed residual asset of $5,331 (the present value of the difference between the estimated residual value of $20,000 and the third-party residual value guarantee of $13,000, discounted at 4.646 percent), and deferred selling profit of $8,000.

842-30-55-34

Lessor calculates the deferred selling profit of $8,000 in this Example as follows:

a. The lease receivable ($58,669); minus

b. The carrying amount of the equipment ($54,000), net of the unguaranteed residual asset ($5,331), which equals $48,669; minus

c. The initial direct costs included in the measurement of the net investment in the lease ($2,000).

842-30-55-35

At the end of Year 1, Lessor recognizes the receipt of the lease payment of $9,500 and interest on the net investment in the lease of $4,624 (the beginning balance of the net investment in the lease of $56,000 × the discount rate that, at the commencement date, would have resulted in the sum of the lease receivable and the unguaranteed residual asset equaling $56,000, which is 8.258 percent), resulting in a balance in the net investment of the lease of $51,124.

842-30-55-36

Also at the end of Year 1, Lessor calculates, for disclosure purposes, the separate components of the net investment in the lease: the lease receivable, the unguaranteed residual asset, and the deferred selling profit. The lease receivable equals $51,895 (the beginning balance of the lease receivable of $58,669 – the annual lease payment received of $9,500 + the amount of interest income on the lease receivable during Year 1 of $2,726, which is $58,669 × 4.646%). The unguaranteed residual asset equals $5,578 (the beginning balance of the unguaranteed residual asset of $5,331 + the interest income on the unguaranteed residual asset during Year 1 of $247, which is $5,331 × 4.646%). The deferred selling profit equals $6,349 (the initial deferred selling profit of $8,000 – $1,651 recognized during Year 1 [the $1,651 is the difference between the interest income recognized on the net investment in the lease during Year 1 of $4,624 calculated in paragraph 842-30-842-30-55-35 and the sum of the interest income earned on the lease receivable and the unguaranteed residual asset during Year 1]).

842-30-55-37

At the end of Year 2, Lessor recognizes the receipt of the lease payment of $9,500 and interest on the net investment in the lease (the beginning of Year 2 balance of the net investment in the lease of $51,124 × 8.258%, which is $4,222), resulting in a carrying amount of the net investment in the lease of $45,846.

842-30-55-38

Also at the end of Year 2, Lessor calculates the separate components of the net investment in the lease. The lease receivable equals $44,806 (the beginning of Year 2 balance of $51,895 – the annual lease payment received of $9,500 + the interest income earned on the lease receivable during Year 2 of $2,411, which is $51,895 × 4.646%). The unguaranteed residual asset equals $5,837 (the beginning of Year 2 balance of the unguaranteed residual asset of $5,578 + the interest income earned on the unguaranteed residual asset during Year 2 of $259, which is $5,578 × 4.646%). The deferred selling profit equals $4,797 (the beginning of Year 2 balance of deferred selling profit of $6,349 – $1,552 recognized during Year 2 [the $1,552 is the difference between the interest income recognized on the net investment in the lease during Year 2 of $4,222 and the sum of the interest income earned on the lease receivable and the unguaranteed residual asset during Year 2]).

842-30-55-39

At the end of Year 6, Lessor reclassifies the net investment in the lease, then equal to the estimated residual value of the underlying asset of $20,000, as equipment.

ABC determined the discount rate using a trial an error method.

 

 

 

Lease receivable (net investment in lease)

13,761

Cash

239

 

Inventory: Finished goods

 

14,000


P

Net Investment

Discount rate

Interest income

Payment

Amortization

A

B (B+1) = B - F

C = (1+21.06%)(1/12) - 1

D = B x C

E

F = E - D

0

14,000

1.605%

0

239

239

2

13,761

1.605%

221

239

18

-

-

-

-

-

-

59

12,046

1.605%

193

239

46

59

12,000

2,000

 

 

 

 

 

 


1/31/X1 | 31.1.X1

 

 

Accrued lease payment

239

 

 

Revenue: Interest

 

221

 

Lease receivable (net investment in lease)

18


2/1/X1 | 1.2.X1

 

 

Cash

239

 

Accrued lease payment (Interest)

221

 

Accrued lease payment (principal)

 

18


12/31/X5 | 31.12.X5

 

 

Assets to be disposed of: Machines off lease

12.000

 

Lease receivable (net investment in lease)

12,000


1/15/X6 | 15.1.X2

 

 

Cash

11,500

Receivable (DEF)

500

 

Assets to be disposed of: Machines off lease

12,000


While we have tried to be as complete as possible, it is not possible to provide an example for every conceivable scenario.

Some issues are obvious. For example, no one needs to be shown how to account for a withdrawal from a bank account to replenish petty cash.

Others, on the other hand, are overly complex. For example, the accounting for issues like derivatives, insurance contracts, pension liabilities, or deferred taxes requires specialized knowledge and training and so is not something most accountants need to deal with day in day out.

That does not, however, mean we are not open to suggestions.

If you feel that we should have provided an example where we did not, please let us know, and we will do our best do oblige.

1/1/Y1, XYZ sold merchandise for 1,000 in cash. It uses the periodic inventory method.

1/1/X1 / 1.1.X1

 

 

Cash on hand

1,000

 

 

Revenue: Goods: Merchandise

 

1,000


Or, 1/1/Y1, XYZ sold merchandise for 1,000 on credit. It uses the perpetual inventory method and production costs were 500.

1/1/X1 / 1.1.X1

 

 

Trade accounts receivable

1,000

 

Cost of goods sold

500

 

  Revenue: Goods: Merchandise  

1,000

 

Inventory: Finished Goods

 

500


And, in our experience, even experienced IFRS / US GAAP accountants like examples.

We know we sure do.

As a corollary, this site has also been publishing IFRS and US GAAP compatible charts of account since 2010.

Niether IFRS nor US GAAP define, or even discuss, charts of account.

Thus each company may devise its own accounting structure and define its own account chart of accounts.

While some welcome the opportunity to use tailormade charts, many others have concluded that an off-the-rack alternative is easier, and by far more cost effective.

This likely explains why the most common keyword bringing visitors here has been "chart of accounts" or some variation.

In addition to the standardized, universal charts of account available for download to subscribers, we design bespoke charts for our advisory and outsourcing clients.

These are in especially high demand at companies that must reconcile their IFRS accounts to national GAAP for income tax purposes.

For example, Czech accounting legislation states (translated):

§ 19a Application of International Accounting Standards for Accounting and Compilation of Financial Statements

(1) An entity that is a trading company and is an issuer of investment securities admitted to trading on a European regulated market36) shall apply International Accounting Standards ("International Accounting Standards") for accounting and the preparation of financial statements. ...

Czech tax legislation states (translated):

§ 23 (2) (A) Profit or loss [shall be determined by] always eliminating all influence of International Accounting Standards, for entities who apply [the law on] accounting. A taxpayer who prepares financial statements in accordance with International Accounting Standards as governed by European Community law for the purposes of this Act shall apply special legal regulation [promulgated by the Ministry of Finance] to determine the economic result and to determine other data decisive for determining the tax base. ...


IFRS chart of accounts