US GAAP vs IFRS

Summary

The video script compares US GAAP and IFRS, the two main global accounting standards, highlighting their development by FASB and IASB respectively. It emphasizes the importance of understanding these standards for investors and professionals, noting significant differences that affect financial analysis and comparability. The script also discusses the principles-based approach of IFRS versus the rules-based US GAAP, their evolution, and the challenges of finding companies that report under both standards, using ASML as a rare example of reconciliation.

Takeaways

• 🌐 **US GAAP and IFRS Dominance**: US GAAP and IFRS are the two main global accounting standards used by publicly listed companies, with US GAAP being the standard in the United States and IFRS being the self-proclaimed 'global standard for global markets'.
• 🏢 **Developing Bodies**: US GAAP is developed by the FASB, based in the US, while IFRS is developed by the IASB, based in the UK.
• 📈 **IFRS Adoption**: Over 144 jurisdictions require IFRS for all or most publicly listed companies, and 12 more permit its use, totaling 156 countries.
• 🌍 **EU and Other Countries' Stance**: The European Union requires IFRS for consolidated financial statements of companies whose securities trade in a regulated market in Europe, while Japan allows voluntary adoption, and China and India have standards that are consistent with or based on IFRS.
• 🔍 **Relevance Beyond Accountants**: The script emphasizes that understanding US GAAP and IFRS is not just for accountants but also important for investors, business leaders, stock market analysts, and others involved in business performance evaluation.
• 📚 **Resources for Understanding**: High-quality documents from SEC, Ernst & Young, KPMG, Deloitte, and PWC, as well as the Finance Storyteller video, are recommended for understanding the similarities and differences between US GAAP and IFRS.
• 🚫 **Comparison Challenges**: Direct comparison of financial performance between companies using different standards (e.g., ExxonMobil using US GAAP and Shell using IFRS) is not possible without reconciliation due to differences in calculation methods.
• 💡 **Reconciliation Example**: ASML, a company listed on NASDAQ and Euronext Amsterdam, provides an annual report based on both US GAAP and IFRS, and their reconciliation shows a difference in net income of around 5%.
• 📉 **Dual Listing and SEC Rules**: The SEC allows foreign issuers to use IFRS financial statements in their reports, which reduces the need for dual reporting but also limits global comparability.
• 📊 **Substantive Differences**: While US GAAP and IFRS have many similarities, there are substantive differences in how revenues, expenses, assets, liabilities, and equity are recorded and valued.
• ⚖️ **Rules-Based vs. Principles-Based**: US GAAP is primarily rules-based, providing specific guidance, whereas IFRS is principles-based, allowing more interpretation and potentially leading to different outcomes for similar transactions.
• 🔄 **Convergence and Divergence**: While FASB and IASB have worked on convergence projects, such as the new revenue recognition standard, there are still areas of significant difference, and the full adoption of IFRS by the US seems unlikely.

Q & A

What are the two main accounting standards used by publicly listed companies worldwide?

The two main accounting standards are US GAAP (United States Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).

Which organization develops US GAAP and where is its headquarters located?

US GAAP is developed by the FASB, the US-based Financial Accounting Standards Board, which is headquartered in Norwalk, Connecticut.

What is the primary difference between US GAAP and IFRS in terms of their approach to accounting standards?

US GAAP is mostly rules-based, providing specific guidelines, while IFRS is mostly principles-based, offering more general principles for accounting practices.

How many jurisdictions currently require or permit the use of IFRS Standards for publicly listed companies?

According to the IFRS Foundation, 144 jurisdictions require the use of IFRS Standards, and 12 jurisdictions permit its use, making a total of 156 countries.

Why is it not advisable to directly compare financial statements of companies reporting under US GAAP and IFRS?

Direct comparison is not advisable because different accounting standards can lead to different calculations for financial figures like Net Income, making comparisons akin to comparing apples to oranges without adjustments.

What is an example of a company that provides a reconciliation between their US GAAP and IFRS financial statements?

ASML, a leading supplier of semiconductor manufacturing equipment, is an example of a company that publishes annual reports based on both US GAAP and IFRS, along with a reconciliation between the two.

What are some of the high-quality documents that can help understand the similarities and differences between US GAAP and IFRS?

Some documents include the 52-page SEC document from 2011, Ernst & Young's 51-page document, KPMG's 515-page handbook, Deloitte's 72-page publication, and PWC's 237-page guide.

Why is it difficult to find examples of companies that publish financial results for both US GAAP and IFRS?

It is difficult because under the current SEC rules, foreign issuers are allowed to use IFRS financial statements in their reports, and they are not required to reconcile their financial statements with US GAAP.

What is the difference in net income reporting between US GAAP and IFRS for ASML in 2016 and 2017?

In both 2016 and 2017, IFRS Net Income for ASML was approximately $100 million higher per year than US GAAP Net Income, representing a difference of around 5%.

What are some of the substantive differences between US GAAP and IFRS that could affect financial analysis?

Substantive differences include the way revenues and expenses are recorded on the income statement, how assets, liabilities, and equity are valued on the balance sheet, and how cash flow items are classified on the cash flow statement.

What is the current stance of the SEC and FASB regarding the adoption of IFRS by US public companies?

The SEC and FASB have shown hesitancy to relinquish control over accounting rules, and while there may be more convergence projects in the future, a full transition of US public companies to IFRS is considered unlikely.