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Chapter 2: Q5IFRS (page 76)

Financial Reporting CaseIFRS2-5 As discussed in Chapter 1, the International Accounting Standards Board(IASB) develops accounting standards for many international companies. The IASB also has developed a conceptual framework to help guide the setting of accounting standards. While the FASB and IASB have issued converged concepts statements on the objective and qualitative characteristics, other parts of their frameworks differ.

Instructions

Briefly discuss the similarities and differences between FASB and IASB conceptual frameworks as related to elements and their definitions.

Short Answer

Expert verified

The International Accounting Standards Board (IASB) is the one which deals with the development of international financial reporting standards and promoting the application of these standards while Financial Accounting Standards Board (FASB) is non profit organisation which deals with development of Generally Accepted Accounting Principles (GAAP) in the interest of public.

Step by step solution

01

International Accounting Standards Board (IASB)&Financial Accounting Standards Board (FASB) - SIMILARITIES:

Both IASB and FASB are independent, private sector bodies working to develop and enforce financial reporting standards for publicly held companies. They both held in setting of standards to private and public companies regarding reporting of financial statements.

02

International Accounting Standards Board (IASB) & Financial Accounting Standards Board (FASB) - DIFFERENCES:

  • IASB deals with setting and promoting the application of International financial reporting standards while, FASB is non profit organisation which deals with setting of Generally accepted accounting principles (GAAP)
  • IASB came into existence on April 1,2001 while, FASB came into existence in 1973.
  • IASB is based in London and FASB is based in US.
  • IASB is called the successor of International Accounting Standards Committee while FASB replaced the Accounting principles board (APB) and the Committee on Accounting Procedure (CAP)
  • IASC(International Accounting Standard Committee) with a mission to promote convergence on a single set of high quality, understandable, and enforceable global standards. FASB establishes financial accounting and reporting standards for specific public and private companies and for not for profit organisations
  • IASB roles are: It handles all technical matters concerning IFRS:
  1. Developing and pursuing IFRS`s technical agenda, subject to consultation requirements with specific selected trustees and the public
  2. Preparing & issuing IFRS and exposure drafts following due process.
  3. Approving & Issuing interpretations developed by IFRS Interpretation Committee

FASB roles are: Its priority is to improve financial reporting for the benefit of investors and other users of financial information, mainly in US capital markets. They achieve it by:

  1. Striving to achieve the highest quality standards known as GAAP
  2. Providing users with financial statements and information that is clear, useful and relevant to their needs
  3. Weighing up the expected benefits of that information against the costs of providing and using it.
  • FASB is a private, non-governmental division that鈥檚 owned and funded by the US Securities and Exchange Commission. IASB is also private company receives its funding through private donors and corporations.
  • FASB board members mainly work and reside in US while, IASB board members live and work in several nations around the world.

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Most popular questions from this chapter

Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.

Instructions

a) Describe briefly the following characteristics of useful accounting information.

1. Relevance (4) Comparability

2. Faithful representation (5) Consistency

3. Understandability

b)For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other.

1. Relevance and faithful representation.

2. Relevance and consistency.

3. Comparability and consistency.

4. Relevance and understandability.

c) What criterion should be used to evaluate trade-offs between information characteristics?

GROUPWORK (Accounting Principles and Assumptions鈥擟omprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

Instructions

In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.Miscellaneous Expense 29,000Cash 29,000

(b) Merchandise inventory that cost \(620,000 is reported on the balance sheet at \)690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.Inventory 70,000Sales Revenue 70,000

(c) The company is being sued for \(500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.Loss from Lawsuit 500,000Liability for lawsuit 500,000

(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a \)16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entryDepreciation Expense 16,000Accumulated Depreciation Equipment 16,000

(e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at \(800,000 was written off as follows.

(f) Because of a 鈥渇ire sale.鈥� equipment obviously worth \)200,000 was acquired at a cost of $155,000. The following entry was made.Equipment 2000Cash 155,000Sales Revenue 45,000

Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne鈥檚 supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.Instructions

(a) Help Wayne recognize the purpose of and benefit of a conceptual framework.

(b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.

CA2-7 (Expense Recognition Principle) Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs and revenues requires that costs resulting from typical business operations be recognized in the period in which they expired.

Instructions

(a) List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period

.(b) As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss each Item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information.

(1) Receiving and handling costs.

(2) Cash discounts on purchases.

Question: Which of the following statements about the IASB and FASB conceptual frameworks is not correct?

  1. The IASB conceptual framework does not identify the element comprehensive income.
  2. The existing IASB and FASB conceptual frameworks are organized in similar ways.
  3. The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.
  4. IFRS does not allow use of fair value as a measurement basis.
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