Rohitashva Singhvi

Category: Finance & Accounting

Brief Overview of IFRS & How it’s different from US GAAP
“What’s the fuss over IFRS?”

Providing a brief overview of the transition to adoption of IFRS and convergence with US GAAP. While we realize that IFRS will become a future reality, the question lingered regarding the differences between the two accounting standards. I thought it would be useful to assess the areas of major differences. In this short blog post, it will not be impossible to address all the components of IFRS but we’ll try and capture primary differences.

IFRS standards are broader and more principles-based than U.S. GAAP. This represents a hurdle for many U.S. CPA’s because we have been used to narrow “bright line” rules and guidelines on how to apply GAAP. IFRS tends to leave implementation of the principles up to preparation of financial statements and auditors. The regulatory and legal environment in the United States has been primarily responsible for narrower prescriptive interpretation of accounting rules. Adoption of IFRS will require a paradigm shift by accountants in the United States.

Financial statement presentation represents an area where differences exist. For example International Accounting Standards does not provide a standard layout as prescribed by the SEC. One of the big differences is that IFRS requires debt associated with a covenant violation to be presented as a current liability unless there a lender agreement was reached prior to the balance sheet date. US GAAP allows the debt to be presented as non-current if an agreement was reached prior to issuing the financial statements. Another difference in financial statement presentation deals with income statement classification of expenses. The SEC requires presentation of expenses based on function whereas IFRS allows expenses to be presented by either function or nature of expenses. Additional differences exist with presentation of significant items. Variations emerge with disclosure of performance measures such as operating profit. IFRS does not define such items so there can be significant diversity in the items, headlines, and subtotals of the income statement between US GAAP and IFRS.

A big area of divergence is with negative goodwill and research and development. IFRS requires that a reassessment of purchase price allocation be recognized as income while US GAAP allows negative goodwill to be allocated on a pro rata basis and can recognize the excess of the carrying amount of certain assets as an extraordinary gain. US GAAP requires research and development to be expensed immediately in contrast to IFRS which allows it to be capitalized as a finite-lived intangible asset. IFRS allows revaluation to the fair value of intangible assets other than goodwill whereas US GAAP does not permit revaluation.

There are both similarities and differences in the treatment of inventory. US GAAP allows LIFO as an acceptable costing method in contrast to IFRS which prohibits the use of LIFO. There are also some differences in measurement of inventory value. US GAAP states that inventory should be carried at the lower of cost or market. Market is defined as current replacement cost as long as market does not exceed net realizable value. IFRS allows inventory to be carried at the lower of cost or net realizable value which is the best estimate of the amounts which inventories are expected to realize and may or may not be equal to fair value.

While there are differences, the two standards boards are working to bring the two standards closer together. This should make the shift to IFRS easier when it comes time to change. One of the most significant areas where differences are being converged is revenue recognition. Currently US GAAP is more prescriptive than IFRS, especially for application to specific industry situations such as the sale of software and real estate. It will take time and effort to bring the two standards on to the same page. I looked at the two standards with the objective of understanding the key differences. The journey to convergence and adoption of IFRS will be interesting, challenging, and educational to say the least.

The IFRS: History and Purpose

The IFRS is designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade. The IFRS is particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.

The IFRS began as an attempt to harmonize accounting across the European Union, but the value of harmonization quickly made the concept attractive around the world. They are occasionally called by the original name of International Accounting Standards (IAS). The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over the responsibility for setting International Accounting Standards from the IASC. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards the IFRS.

Framework

The Conceptual Framework for Financial Reporting states the basic principles for IFRS. The IASB and FASB frameworks are in the process of being updated and converged. The Joint Conceptual Framework project intends to update and refine the existing concepts to reflect the changes in markets and business practices. The project also intends consider the changes in the economic environment that have occurred in the two or more decades since the concepts were first developed.

IFRS Defined Objective of Financial Statements

A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society/regulators, they need to reflect an accurate view of the financial position of the organization. It is very helpful to check the financial position of the business for a specific period.

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Learn more about US GAAP Click Here: Generally Accepted Accounting Principles – Rohitashva Singhvi

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February 4, 2022
Financial Accounting – Concepts
Accounting Concepts :: Assumptions & Practices
1. Business Entity Concept :
  In accounting, a business or an organization and its owners are treated as two separately identifiable parties. This is called the entity concept. The business stands apart from other organizations as a separate economic unit.
2. Going Concern Concept :
  A going concern is a business that is assumed will meet its financial obligations when they fall due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two). The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.
3. Accounting Period Concept :
  An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared. In management accounting the accounting period varies widely and is determined by management. Monthly accounting periods are common.
4. Matching Concept :
  In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. By recognizing costs in the period they are incurred, a business can see how much money was spent to generate revenue, reducing “noise” from timing mismatch between when costs are incurred and when revenue is realized. Conversely, cash basis accounting calls for the recognition of an expense when the cash is paid, regardless of when the expense was actually incurred.
5. Cost Concept :
  In accounting, the cost principle is part of the generally accepted accounting principles. Assets should always be recorded at their cost, when the asset is new and also for the life of the asset.
6. Money Measurement Concept :
  The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, the local currency monetary unit of measure.
7. Dual Aspect Concept :
  Each transactions has two aspects > Receiving the Benefit or Giving the Benefit
  The dual aspect concept states that every business transaction requires recordation in two different accounts.
  Assets = Liabilities + Equity
8. Revenue Recognition (realization) concept :
  The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. (Ex. Services Rendered / Goods Delivered)
9. Accrual Concept
  Accrual of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. (Ex. Events are recorded as they occur regardless when cash is paid/received)
10. Materiality
  Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy.
11. Consistency
  The concept of consistency means that accounting methods once adopted must be applied consistently in future. That means accounting practices and policies are consistent from one period to the other.
12. Conservatism
  In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to “play safe”. When given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit.
13. Full Disclosure
  The full disclosure requires that all material facts must be disclosed in the financial statements. For example, in the case of sundry debtors, not only the total amount of sundry debtors should be disclosed, but also the amount of good and secured debtors, the amount of good but unsecured debtors and amount of doubtful debts should be stated. This does not mean disclosure of each and every item of information. It only means disclosure of such information which is of significance to owners, investors and creditors.
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February 3, 2022
What is Accounting & how it is classified?
Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or individual.

It serves as the backbone of any financial system, providing a clear picture of an organization’s financial health and guiding decision-making.

Through accounting, businesses can track income and expenses, ensure statutory compliance, and provide investors, management, and regulators with quantitative financial information.

Meaning of Accounting

The primary objectives of accounting include:
- Recording Transactions: Maintaining a detailed record of all financial transactions in chronological order.
- Financial Reporting: Preparing financial statements that depict the business’s financial status.
- Decision Making: Providing data that helps in planning and decision-making for future growth.
- Compliance: Ensuring adherence to laws and regulations.
- Financial Control: Managing resources effectively to avoid overspending or financial shortfalls.
The Role of Accounting in Business:

Accounting not only records financial transactions but also plays a crucial role in budgeting, forecasting, and strategic planning. It allows businesses to evaluate their performance, understand cash flows, and make informed decisions to optimize profitability.

For example, an organization can use accounting data to identify which products generate the most revenue and which areas are incurring higher expenses, thus enabling the company to adjust its strategy accordingly.Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or individual.

It serves as the backbone of any financial system, providing a clear picture of an organization’s financial health and guiding decision-making. Through accounting, businesses can track income and expenses, ensure statutory compliance, and provide investors, management, and regulators with quantitative financial information.

Below are the Branches of Accounting:
1. Financial Accounting:
  Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business.
  It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.
2. Managerial Accounting
  In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
3. Cost Accounting
  Cost accounting is defined as “a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail.
4. Auditing
  An audit is an “independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.
5. Tax Accounting
  For understanding tax accounting, you need to understand tax.
  Tax: A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or national).
  Tax accounting is the subsector of accounting that deals with the preparations of tax returns and tax payments.
6. Fiduciary Accounting
  A fiduciary accounting (sometimes called a “court accounting”) is a comprehensive report of the activity within a trust, estate, guardianship or conservatorship during a specific period.
7. Project Accounting
  Project accounting is a type of managerial accounting oriented toward the goals of project management and delivery.
8. Forensic Accounting
  Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that investigates whether firms engage in financial reporting misconduct. Forensic accountants apply a range of skills and methods to determine whether there has been financial reporting misconduct.
9. Political Campaign Accounting
  Political campaign accounting is a specialty practice area of accounting that focuses on developing and implementing financial systems needed by political campaign organizations to conduct efficient campaign operations and to comply with complex financial reporting statutes. It differs from traditional management and financial consultancy in that it incorporates election law requirements and the unique requirements of political campaigns.
10. Accounting Information System
  An accounting as an information system is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources.
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December 10, 2021
Transfer Pricing – Detail Overview
What is Transfer Pricing?

Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.

How transfer pricing playing role in tax planning?

Transfer pricing is in the cross hairs of tax policy as it relates to the competing objectives of three parties: the revenue-maximizing objective of the domestic tax authority, the revenue-maximizing objective of the foreign tax authority, and the tax-minimizing objective of the taxpayer. Because of the inherent differences in judgment and interpretation of facts when analyzing a company’s transfer pricing, together with the clashing revenue objectives of multiple tax authorities and taxpayers, the risk of adjustments to taxable income, double taxation, and potential for penalties is nontrivial, even for multinationals that make good-faith efforts to comply with Sec. 482.

Disputes between tax authorities and taxpayers may arise in many areas, including:
- Tax authorities may question the choice of the economic method.
- Tax authorities may disagree with the taxpayer’s characterization of the value chain within the group.
Example – As an example of the last type of dispute, in 2006 the IRS and GlaxoSmithKline Holdings (Americas) Inc. (GSK U.S.) settled a transfer-pricing dispute covering 1989 through 2005 for $3.4 billion, the largest settlement ever obtained by the IRS. At issue was the price charged GSK U.S. by its U.K.-based parent, GlaxoSmithKline PLC, through its worldwide operating group (Glaxo Group) for cost of goods sold, royalties, and other expenses, related in part to manufacturing and distributing Zantac and other prescription drugs. The position of GSK U.S. was that the drugs were developed outside the United States, as was the marketing strategy it used to sell them. As such, GSK U.S. was performing routine distribution and was charged prices and royalties based on the “resale price method,” which determines the appropriate arm’s-length range by the markups received by comparable distributors in uncontrolled, arm’s-length transactions. Based on the same facts, however, the IRS considered the marketing functions performed by GSK U.S. to have had a substantial role in creating demand for the drugs, and therefore, GSK U.S. deserved a much higher gross profit margin. The IRS applied the residual-profit-split method, which allocated Glaxo Group profit first between “routine” functions performed by GSK U.S. and GSK Group, then split the remaining profit according to where the largest part of the value was created.

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October 14, 2021
SFAS 78 With Summary

SUMMARY OF STATEMENT NO. 78
CLASSIFICATION OF OBLIGATIONS THAT ARE CALLABLE BY THE CREDITOR—AN AMENDMENT OF ARB NO. 43, CHAPTER 3A (ISSUED 12/83)Summary
This Statement amends ARB No. 43, Chapter 3A, “Current Assets and Current Liabilities,” to specify the balance sheet classification of obligations that, by their terms, are or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date. It also specifies the classification of long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Such callable obligations are to be classified as current liabilities unless one of the following conditions is met:
The creditor has waived or subsequently lost the right to demand repayment for more than one year (or operating cycle, if longer) from the balance sheet date.
For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable.
Short-term obligations expected to be refinanced on a long-term basis, including those callable obligations discussed herein, continue to be classified in accordance with FASB Statement No. 6, Classification of Short-Term Obligations Expected to Be Refinanced. This Statement is effective for financial statements for fiscal years beginning after December 15, 1983 and for interim periods within those fiscal years.

Source: FASB

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October 14, 2021
Generally Accepted Accounting Principles
It is important that you understand the concepts of Generally Accepted Accounting Principles (GAAP), which form the basis of accounting and are part of the language of accounting and business. Third parties who invest in or provide loans to any company must know that they can rely on the financial information provided.
This chapter will introduce the agencies responsible for standardizing the accounting principles that are used in the United States and it will describe those principles in full detail. Once you understand these guiding principles, you will have a solid foundation on which to build a complete set of accounting skills. It is useful and necessary that whether an international company is reporting to its stockholders or a proprietor is presenting information to a bank for a loan, these reports follow a consistent set of rules that everyone understands and agrees to.
Generally Accepted Accounting Principles begin with the three basic assumptions made about each business. First, it is assumed that the business is separate from its owners or other businesses. Revenue and expenses should be kept separate from personal expenses. Second, it is assumed that the business will be in operation indefinitely. This validates the methods of putting Assets on the Balance Sheet, depreciation and amortization. Only when liquidation of a business is certain does this assumption no longer apply. Third, it is assumed a business’s accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new employee or introducing a new product, cannot be quantified in monetary units and, therefore, do not appear in a company’s accounting records.
Financial statements must present relevant, reliable, understandable, sufficient, and practicably obtainable information in order to be useful.

10 GAAP Principles
1. Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
2. Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
3. Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
4. Principle of Permanence of Methods: Consistent procedures are used in the preparation of all financial reports.
5. Principle of Non-Compensation: All aspects of an organization’s performance, whether positive or negative, are fully reported with no prospect of debt compensation.
6. Principle of Prudence: Speculation does not influence the reporting of financial data.
7. Principle of Continuity: Asset valuations assume the organization’s operations will continue.
8. Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal years.
9. Principle of Materiality: Financial reports fully disclose the organization’s monetary situation.
10. Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.
GAAP (Generally Accepted Accounting Principles) is a set of guidelines and rules that govern how companies prepare and present their financial statements. Here are some examples of GAAP:
1. Accrual accounting: Under GAAP, companies must use the accrual method of accounting, which means that revenue and expenses are recognized when they are earned or incurred, rather than when cash is received or paid.
2. Consistency: GAAP requires that companies use consistent accounting methods from one period to another to ensure that financial statements are comparable over time.
3. Materiality: Companies must disclose all material information in their financial statements. Materiality refers to the significance of an item or event to a company’s financial performance.
4. Historical cost: GAAP requires that assets and liabilities be recorded at their historical cost, which is the amount paid for them when they were acquired.
5. Full disclosure: Companies must provide complete and transparent financial statements that include all relevant information, including notes to the financial statements.
6. Matching principle: GAAP requires that expenses be matched with the revenue they help generate. For example, if a company sells a product in one year but incurs the cost of producing it in the following year, the expense must be recorded in the same period as the revenue.
7. Conservatism: GAAP allows companies to be conservative in their financial reporting by recording potential losses and expenses before they occur. For example, companies can create an allowance for bad debts to account for the possibility that some customers may not pay their bills.
8. Going concern: GAAP assumes that companies will continue to operate indefinitely, unless there is evidence to the contrary. This means that financial statements must be prepared with the assumption that the company will continue to exist and operate normally in the foreseeable future.
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October 14, 2021