The difference is that IFRS is largely principles based, while US GAAP is

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.

IFRS - (International FInancial Reporting Standards), a set of international

accounting standards stating how particular types of transactions and other
events should be reported in financial statements.

GAAP - (Generally Accepted Accounting Principles). A widely accepted set of

rules, conventions, standards, and procedures for reporting financial
information, as established by the Financial Accounting Standards Board.

Definition of conceptual framework

In financial reporting, a conceptual framework is a theory of accounting

prepared by a standard-setting body against which practical problems can be
tested objectively. A conceptual framework deals with fundamental financial
reporting issues such as the objectives and users of financial statements, the
characteristics that make accounting information useful, the basic elements
of financial statements (e.g., assets, liabilities, equity, income, and
expenses), and the concepts for recognising and measuring these elements
in the financial statements.

Benefits of a conceptual framework for financial reporting include:

establishing precise definitions that facilitate discussion of accounting issues;
providing guidance to accounting standard setters when developing and
reviewing financial reporting rules; helping to ensure that accounting
standards are internally consistent; helping preparers and auditors to resolve
financial reporting problems in the absence of an accounting standard; and
helping to limit the volume of accounting standards by providing an
overarching theory of accounting that can be applied to specific reporting
problems.

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

Is IFRS That Different From U.S. GAAP?

Remi Forgeas, CPA Insider | June 16, 2008

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

In September 1999, the FASB published its second edition of an IASC-U.S.

Comparison Project, a comprehensive comparative study of IASC
(International Accounting Standards Committee) standards and GAAP. This
500-page report included comparative analyses of each of the IASC's "core
standards" to their GAAP counterparts. At that time, conceptually and
practically, the differences between the two frameworks were numerous and
significant.

Since 1999, the FASB has undertaken six initiatives in order for the GAAP to
converge with IFRS:

Joint projects conducted with the IASB (Conceptual Framework Project,

Business Combination Project, Revenue Recognition Project, Financial
Statements Presentation),

Short-term convergence project,

Liaison IASB member on site at FASB offices,

FASB monitoring of IASB projects,

Convergence Project and

Explicit consideration of convergence potential in all Board agenda decision.

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?

Principles Based vs. Rules Based

One of the major differences lies in the conceptual approach: U.S. GAAP is
rule-based, whereas IFRS is principle-based.

The inherent characteristic of a principles-based framework is the potential

of different interpretations for similar transactions. This situation implies
second-guessing and creates uncertainty and requires extensive disclosures
in the financial statements.

In a principle-based accounting system, the areas of interpretation or

discussion can be clarified by the standards-setting board, and provide fewer
exceptions than a rules-based system. However, IFRS include positions and
guidance that can easily be considered as sets of rules instead of sets of
principles. At the time of the IFRS adoption, this led English observers to
comment that international standards were really rule-based compared to
U.K. GAAP that were much more principle-based.

The difference between these two approaches is on the methodology to

assess an accounting treatment. Under U.S. GAAP, the research is more
focused on the literature whereas under IFRS, the review of the facts pattern
is more thorough.

However, the professional judgment is not a new concept in the U.S.

environment. The SEC is addressing this topic in order to find the right
balance between the educated professional judgment, that is acceptable,
and the guessed professional judgment.

Differences Between IFRS and U.S. GAAP

While this is not a comprehensive list of differences that exist, these

examples provide a flavor of impacts on the financial statements and
therefore on the conduct of businesses.

Consolidation IFRS favors a control model whereas U.S. GAAP prefers a

risks-and-rewards model. Some entities consolidated in accordance with FIN
46(R) may have to be shown separately under IFRS.

Statement of Income Under IFRS, extraordinary items are not

segregated in the income statement, while, under US GAAP, they are shown
below the net income.
Inventory Under IFRS, LIFO (a historical method of recording the value of
inventory, a firm records the last units purchased as the first units sold)
cannot be used while under U.S. GAAP, companies have the choice between
LIFO and FIFO (is a common method for recording the value of inventory).

Earning-per-Share Under IFRS, the earning-per-share calculation does

not average the individual interim period calculations, whereas under U.S.
GAAP the computation averages the individual interim period incremental
shares.

Development costs These costs can be capitalized under IFRS if certain

criteria are met, while it is considered as expenses under U.S. GAAP.

How to Anticipate the Transition?

Companies have a tendency to focus their attention on the accounting and

financial statements impacts of the transition to IFRS. However, this process
has had a much broader impact than expected.

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:

What will be the consequences on your company or organization?

The Finance department will obviously have to update its processes, as

will Operations, which will face potential impact on how contracts are written
or how the information is gathered and maintained; and Human Resources,
which will have to review the compensation packages, especially when linked
to business performances.

What will be the impact on management reporting and IT?

The transition to IFRS will imply a change in management reporting and, in

some cases, in the format of data required. For example, systems will have
to be upgraded in order to gather information on liquidity risks in accordance
with IFRS 7 Financial Instruments Disclosures. Likewise for R&D costs,
your company will have to define procedures to enable the gathering and
review of costs related to development that may be capitalized.
When will changes have to be looked at?

Long-term transactions should be looked at with the IFRS lenses. If a

company intends to enter into a joint-venture agreement, it should review
the potential IFRS accounting in order to avoid unexpected results at the
time of the transition.

Companies can leverage on the convergence process by implementing new

pronouncements as soon as possible, especially those that are aimed to
converge with IFRS, such as SFAS 141(R) on business combinations or SFAS
160 on the accounting for non-controlling interest.

When should the IFRS training begin?

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

Experiences in other countries, especially in Europe, show that the process is

more complex and lengthier than anticipated. However, since European
countries were the first ones to make the transition, they were unable to
leverage lessons learned from predecessors in the transition process and
most of the time local accounting standards were not converging to IFRS.
U.S. companies can learn from the mistakes of its European predecessors.