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Financial Statement Presentation

Modern financial relations among the companies, investors, creditors, customers and employees are seriously impacted by the developed and still changing sets of accounting standards and ways of presenting the financial reports to the general public by the organizations. The International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP) are the two sets of accounting standards, which are most often used by different nations across the globe. Presentations of the financial statements by the companies according to these standards are rather similar but still have certain differences. The paper overviews the similarities and inconsistencies of the financial statements composed under the IFRS and the U.S. GAAP. It also offers several recommendations for the possible changes in the analyzed sets of standards even though in the past decade, the initiated by the International Accounting Standards Board (that issues the IFRS) Financial Accounting Standards Board (responsible for the U.S. GAAP) convergence projects introduced notable amendments to the standards.


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General Considerations

The financial statements’ presentation process is regulated by the International Accounting Standards 1 (IAS 1) under the IFRS and FASB ASC 200 (ASC 205 through 280) under the U.S. GAAP. Although the composition of a full set of financial statements under both accounting systems is the same, the first difference is in the names of the statements. One should cite these names as they appear in the relevant standards. The following table presents a comparative list of the full sets of the IFRS and U.S. GAAP standards:

Table 1

Names of Financial Statements under the IFRS and the U.S. GAAP

Statement of financial position at the end of the period Balance Sheet
Statement of profit or loss and other comprehensive income for the period Income Statement
Statement of changes in equity for the period Statement of Shareholder Equity
Statement of cash flows for the period Statement of Cash Flows
Notes, comprising a summary of significant accounting policies and other explanatory notes Notes to Financial Statements

Source: International Accounting Standards Board (2011), Financial Accounting Standards Board (2010a).

Another general distinction is associated with the inclusion of the comparative information in the entities’ financial reports. The IFRS specifically states that every company should provide the comparative financial data in the reported statements for at least one previous period. Besides, the standards require an inclusion of the third comparative column of financial statements, at least for the statement of the entity’s financial position, if a company implements any retrospective changes. The statement is presented for the first period of applying such changes in the accounting policy or when a company employs the IFRS as the basis for its financial statements for the first time. In this case, the balance sheet should be presented for the current reporting period and two previous years. Although there are no similar conditions in the U.S. GAAP, the US-traded companies have to follow the SEC regulations that prescribe providing comparative data for the two previous periods, as well.

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Finally, a minor difference concerns the interim financial reporting, which is based on either set of standards. In this case, the U.S. GAAP again provides more flexibility as the Financial Accounting Standards Board considers the interim reports the integral steps in composing the annual financial data. Consequently, the standards allow recognizing the balance sheet and income statement items earlier across the periods if the company believes they are more informative. However, the IFRS appears to be more conservative in this consideration and views the interim reports as the distinct financial statements that should be based on the same accounting principles of measurement and recognition as used in the final reports for the year.

Presentation of the Balance Sheet

Both the IFRS and the U.S. GAAP treat the presentation of the statement of financial position and balance sheet merely equally. There are no critical differences in defining the assets, liabilities, and shareholders’ equity. According to the standards, the assets are the future economic benefits while liabilities are the future sacrifices that occur in the present as the result of the past actions of a company. Nevertheless, the use of the term expected in the IFRS and probable in the U.S. GAAP for defining the notions leads to different recognition and measurement criteria. The result of varying terminology is that the U.S. GAAP seems to be more flexible in recognizing the provisions, reevaluating the assets, or reclassifying the debt from the long-term to current in the case of any violation of the loan agreement terms. On the contrast, the IFRS behave slightly more conservative. For example, the standard requires the contingent liabilities due to irrevocable contracts and relevant losses to be recorded in the reported data based on the expectations while the U.S. GAAP does not consider them probable. Moreover, the IFRS treats the preferred stocks as a part of the equity capital while the U.S. GAAP requires a separate presentation of them without inclusion either in liabilities or in shareholders’ equity sections (Shamrock, 2012). A different treatment is also required for the companies’ stock-based compensations. In most cases, the U.S. GAAP prefers recognition of such compensation on the liabilities’ side while the IFRS requires distinguishing the equity portion since the initial recognition and in the further treatment of such plans.

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Another significant issue is that the U.S. GAAP does not contain any kind of enumeration of the minimum items to be identified and presented in the balances sheet. Much more accurate and specific guidance is provided by the IAS 1 that contains the list of items that should be reported in the statement of financial position, as well as in other statements. Besides, there is no prerequisite to compose a classified balance sheet while the IFRS specifically prescribes grouping the current and noncurrent assets and liabilities into separate sections. This fact contradicts the general practice of the U.S. GAAP of strict regulation of every step in the accounting process. Probably, the issue will be changed during the convergence process between the two sets of standards. However, the companies reporting in the USA have to follow the Regulation S-X that is much more prescriptive than the IAS 1 in terms of content and grouping of the balance sheet items; therefore, the convergence between the standards might not be immediately necessary for the market participants.

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Finally, under the analyzed sets of standards, a serious difference is present in the treatment of the deferred tax assets and deferred tax liabilities. In paragraph 56, the IAS 1 prescribes, “When an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position, it shall not classify deferred tax assets (liabilities) as current assets (liabilities)” (International Accounting Standards Board, 2011). In such a manner, the IFRS does not provide any opportunity to present the deferred taxes as a part of the current assets or short-term liabilities even if they are realized within the next financial period. At the same time, the relevant paragraphs of the FASB ASC 740 Income Taxes directly prescribe the recognition of both the current deferred tax assets and liabilities on the balance sheet of an organization if they were calculated on its current position and non-current deferred tax assets and liabilities if they relate to the respective long-term items (Financial Accounting Standards Board, 2010b).

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Presentation of the Income Statement

The income statement under the U.S. GAAP and statement of comprehensive income under the IFRS differ much more significantly than the balance sheets. The major variance refers to the fact that the U.S. GAAP requires presenting only the income statement with the revenues and costs influencing the current year’s financial result. The IFRS requires providing a two-step statement consisting of the Statement of profit or loss, which is similar to the income statement, and Statement of other comprehensive income, which contains the items that do not influence the current year’s financial result but affect the shareholders’ additional capital (Mackenzie et al, 2013). It is important to note that the U.S. GAAP requires providing a similar statement as a part of the Statement of shareholder equity.

Moreover, there is a quite different treatment to the classification of expenses. The IFRS specifically suggests choosing between the functional and by-nature presentations. Nevertheless, if a company chooses to classify expenses by their function, it has to provide also several obligatory disclosures regarding their nature. At the same time, the U.S. GAAP does not contain any requirements concerning the presentation and grouping of the entity’s costs. Therefore, there is also some space left for the possible convergence. However, one should note that the financial reporting in the USA is also strictly regulated by the SEC norms that require functional presentation of expenses in the published financial statements of the listed companies.

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Moreover, there are some minor differences in the treatment of special types of expenses. For instance, the U.S. GAAP allows recognizing some extraordinary items that contain the unusual costs or very infrequent losses. On the other hand, the IFRS strictly prohibits reporting the line of extraordinary expense. Moreover, under the U.S. GAAP, the treatment regarding the recognition and separate presentation of the income and losses from discontinued operations is more flexible as compared to the rules of the IFRS.

Reporting the revenues and gains does not differ in the two sets of standards. However, there are some differences in their recognition that influence the presentation, as well. It is notable also that the gap had been more significant until 2014 when a new standard on revenues IFRS 15 Revenue from Contracts with Customers was published by the International Accounting Standards Board. Nevertheless, the IFRS allows recording the revenue from the government subsidies and grants, of which in the form of assets; in most cases, it is not allowed by the U.S. GAAP. Moreover, the IFRS joins the revenues and gains in the term income while the U.S. GAAP provides a separate definition on them.

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Lastly, the IFRS allows the companies to include several voluntary and rather judgmental performance measures in the published statement of the profit or loss. Such performance measures might be provided as subtotals of the stepwise profits: gross margin, operating profit, and profit before taxation, and special additional lines containing more information that is useful to the current and potential investors supplemented by the relevant descriptions in the notes. The U.S. GAAP does not contain such requirements while the SEC directly regulates all the possible subtotals to be provided in the income statement and prohibits the inclusion of any voluntary lines in the report.

Presentation of the Statement of Shareholder Equity

As discussed above, the U.S. GAAP requires disclosing the items of the other comprehensive income within the presented statement of shareholder equity as its continuation part but not within the entity’s income statement as it is prescribed by the IFRS. The logic behind this preference is that this statement contains the items that do not directly influence the current year’s profit but affect the company’s additional capital such as changes in the employee benefit plans, reevaluation of certain types of financial investments, and derivatives held for hedging the purposes, revaluation of property, plant and equipment of an entity, and currency translation reserves. The requirement of the IFRS to show such items as a part of the total comprehensive income of an organization is based on the notion that such changes relate to the current year and could have been realized in the profits in the case of the different accounting policies accepted by an entity. The statements do not notably differ in other aspects of the presentation.

Presentation of the Cash Flow Statement

Both sets of standards prescribe providing the cash flow statements with appropriate classification of the cash movements into three groups: cash flows from the operating activities, cash flows from the investing activities, and cash flows from the financing activities. Besides, the IFRS and the U.S. GAAP allow composing this report using either direct or indirect methods. However, the U.S. GAAP contains a note that the direct method is recommended while the IAS 1 has no such suggestion. In fact, most companies that trade in the American market publish the statement of the cash flows that is composed using a direct method while the European organizations and other entities use the IFRS set of standards and often present the indirect cash flow statements.

Presentation of the Notes to the Financial Statements

In general, the IFRS and the U.S. GAAP oblige the companies to compose the notes to the financial reports, which contain some explanations on the selected basis of presentation, a range of obligatory disclosures to the reported items, and several voluntary disclosures that are useful for investors’ making an informed decision concerning the reported entity. There are differences regarding the segment reporting as in any case, the IFRS requires defining the operating segments, if they exist, and disclosing the data on them, including the assets, liabilities, revenues, and expenses. The U.S. GAAP prescribes defining the operating segments for the companies with the matrix structure and does not insist on providing the detailed financial data on them. Besides, there are different specifications regarding the obligatory disclosures to the related parties. While the U.S. GAAP prescribes providing complete information on all the related parties’ transactions that are not within the general business of an organization, the IFRS still contains exceptions for transactions with the government institutions.

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Conclusions and Recommendations for the Further Changes

The IFRS and the U.S. GAAP sets of standards have rather different approaches to the process of accounting and financial reporting but both help companies present the adequate and fair financial data necessary for making the investment decisions in the market. However, although the IFRS is widely believed to be conceptual in nature, it appears to be more prescriptive in terms of the financial statements’ presentation than the specific U.S. GAAP standards. The reason is that the IFRS is created by the rather conservative professionals and rather slowly incorporates new views on the changing environment. Nevertheless, the convergence of the IFRS and the U.S. GAAP conducted with several continuing projects has been very efficient in the past and led to both simplification and better specification of both sets.

Nonetheless, there is a significant space for possible changes left, including the presentation matters. It is critically important to find a similar way of classifying the expenses in the income statement, include preferred stocks’ number in the same part of the balance sheet, and decide on the identical presentation of data on the other comprehensive income in the financial reports. Moreover, it would be useful to choose one way of composing a statement of the cash flows and require its presentation with the use of either direct or indirect method. Besides, the IFRS should remove the privileges for treating operations with the government bodies both when recognizing the revenues and at disclosing the related party transactions in the notes. At the same time, the U.S. GAAP should ensure a more conservative treatment of the long-term obligations where the agreement terms are violated as the existing loyalty might cause wrong decisions made by investors based on such reports.



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