Chapter:2

The major differences between U.S GAAP and IFRS

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Introduction

Starting from a business perspective, accounting in its process of issuing financial information
seeks to satisfy users' information needs, and in their case the capital markets.

Investors and Investment Analysts in the process of channeling and evaluating financial
investments analyze financial information of companies from different countries prepared
according to different criteria that limit the decision analysis of the investment. Also, the
different accounting standards cause that the financial information presented by the same
company varies significantly according to the application of one or other rules, confusing the
investor.

In a globalized world, it makes more sense for an economic transaction to be accounted for in a
similar way, regardless of where it occurs. This would encourage International Investment on a
larger scale and Investors and Investment Analysts will be able to count on more homogenous
financial information and eliminate the high costs for the preparation of financial statements. The
IFRS have been written in the spirit of becoming general principles that guide users in the
accounting of various transactions. US GAAP, although also established with the purpose of
being Guiding Principles, has built on a very extensive set of rules that give a very precise
orientation to the users. increase the comparability of financial statements. The counterpart is
that they also lend themselves more to the structuring of transactions to obtain accounting
results, to reflect expenses for the substance of certain transactions in profit form.

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As described above, the accounting profession has generated an interest in the convergence of
accounting standards between IASB norms and FASB standards, which seeks to standardize
accounting practices internationally and in the United States of America.

The present research article aims to analyze the content of the FASB Framework as an initial
basis for understanding the feasibility of achieving convergence of both normative models, and
what impact has had in our country the supplementary application of FASB standards.

1. Development of the US.GAAP

FASB is acronyms to Financial accounting standards board is the organization designated to
establish financial accounting and preparation of standards of financial statements for companies
in the private sector of the United States).

The FASB is an independent of any type of business structure or professional organization.

Before the current structure was created in 1973, the rules of financial accounting and its
publication were established by (AICPA).

The issue of standards by the FASB for the preparation of financial statements authorized and
officially recognized by the Securities and Exchange Commission (SEC), US government
agency responsible for the protection of investors and market integrity maintenance. These
standards are considered by the SEC as essential to the efficient functioning of the economy
because investors, creditors, auditors and other stakeholders require that financial information
have credibility, transparency and comparability (Traca,2004).

2. Development of IFRS
IAS is acronyms to international accounting standards are developed by the (IASB), a nonprofit
organization in London, responsible for the standardization of accounting standards, the
procedures are called IFRS (International Financial Reporting Standard). The IASB was
established on 1 April 2001 to promote adjustments in the international accounting standards
drawn up by its predecessor (IASC), called IAS (International Accounting Standard).

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The IASC was founded on June 29, 1973 as a result of consensus among an international group
of accounting professionals made up of representatives from Australia, Canada, France,
Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland and the United States. The
group of professionals was organized by the International Federation of Accountants (IFAC) in
1977. In 1981 the IASC and IFAC agreed that IASC would assume complete autonomy over the
development and publication of international accounting standards(Traca,2004)1.

3. Analysis of the conceptual framework of FASB

3.1. Background
The FASB, after twelve years of work, issued its "Statement of Concepts on Financial
Accounting" in 1985, the purpose of which is to demonstrate the objectives and foundations that
form the basis for the development of financial accounting and presentation standards. These
Concept Statements constitute the FASB Conceptual Framework. Declarations can be structured
in several concepts that are addressed but can be structured in the following: users and objectives
of financial statements, basic accounting hypotheses, qualitative characteristics of accounting
information, elements of financial statements, and recognition and Measurement of the elements
of the financial statements.

The FASB defines its Conceptual Framework as a logical deductive framework where objectives
and concepts are interrelated, providing coherence and credibility to the process of
standardization and external information useful for decision making to the external user. This
Committee in 1938, together with the other members of the AIA, was merged into a Committee
called the Accounting Procedures Committee (CAP) to address specific accounting issues
(Alfredson, Pacter and Radford,2005).

1
Tarca, 2004.International convergence of accounting practices: choosing between IAS and US
GAAP. Journal of International Financial Management & Accounting, vol. 15.

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the AICPA in 1971 created a study group to review the controversy established in the
conceptualization of its Normative (positivism vs. normativism) and to evaluate the conflict of
interests, the studies of this group presided over by Francisco Wheat concluded in 1972,
recommended the creation of the Financial Accounting Standards Board (FASB) English). In
1973, in order to compensate for the lack of efficiency of the APB, in relation to the Conceptual
Framework1, this body is replaced by the FASB whose first goal was to formulate a coherent
and interrelated system of fundamental objectives and bases that could lead to the emission Of
consistent standards, indicating the nature, function and limits of the financial information. The
FASB is a Professional Accounting Agency of the United States, with a private sphere
responsible for developing accounting standards, composed of members who are remunerated
and working full time. The FASB is an independent body. It is not part of the AICPA as was its
predecessor.

The normative framework of the FASB, to date is constituted by a Conceptual Framework set
out in FASB concepts, the FASB pronouncements known by the name of Financial Accounting
Standards Declarations and the FASB Interpretations. To date, the following accounting body
has been established: (Amat, and Perramon , 2006).

1. Statements on Financial Accounting Concepts (SFAC).

2. 163 FASB Statement of Financial Accounting Standards (SFAS).
3. 48 FASB interpretations.
4. Various APBs and ARBs that to date are still in force

3.2. Statements of the Framework FASB

The FASB, after twelve years of work, issued its "Statement of Concepts on Financial
Accounting" in 1985, the purpose of which is to demonstrate the objectives and foundations that
form the basis for the development of financial accounting and presentation standards. These
Concept Statements constitute the FASB Conceptual Framework. The Declarations can be
structured in several concepts that are addressed but can be structured in the following: users and
objectives of the financial statements, the basic accounting hypotheses, the qualitative
characteristics of The accounting information, elements of the financial statements, and
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recognition and measurement of the elements of the financial statements (Alfredson, Pacter and
Radford,2005).

The FASB defines its Conceptual Framework as a logical deductive framework where objectives
and concepts are interrelated, providing coherence and credibility to the process of
standardization and external information useful for decision making to external user.

3.3. Users and Objectives of Financial Information

SFAC 1 states that the main users of financial information are those who base their decisions on
their relationships with the entities and the knowledge they possess about them. The list of the
main users of the information indicated are: owners, creditors, suppliers, investors Potential
clients, employees, administrators, directors, financial analysts, lawyers, economists, tax
authorities, controlling agencies, legislators, trade associations, teachers and students, and the
general public. The objectives of the accounting information specified in the FASB statements
are as follows: .

A) Financial information should provide useful data to help present or potential creditors,
investors and other stackholders, so that they can make rational investment decisions, credits
and the like, and the information must be Understandable.

B) The financial information will allow a knowledge of the financial situation of the company
and will help to Investors, creditors and other users to assess their liquidity and solvency; An
understanding of economic performance During a period through the relative information of
performance and results of the company.

C) Financial information should provide data to evaluate the amount timing and uncertainty of
income of prospective funds from contributions, loans, dividends, interests or self-generated
resources, and the correct Use of cash flows so as not to affect their liquidity and solvency.

In this respect, the term "financial information" is broader than the term of financial statements,
but it must be defined and delimited that it is and is not financial information, for example a cash
budget is usually circumscribed to the concept of financial information, But it is not information
subject to the normative field of the FASB.

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The FASB also has a strong focus on meeting the demand for user information on cash flows;
Such as available resources, the effect of cash transactions and the level of funding generated. In
this sense, there is a clear evolution of the concept of financial information relevant to cash flows
to the detriment of equity.

3.4. Main differences between US GAAP and IFRS

1. Income statement, expense classification (IAS 1):

IFRS: classify expenses by nature or by function. In the latter case, a footnote should indicate the
amount of personnel expenses and amortization expenses.

US GAAP: operational expenses should be classified.

2. Stateme1nt of income, extraordinary income and expenses (IAS 1):

IFRS Recognition of extraordinary income or expenses is prohibited.

US GAAP Extraordinary income or expenses may be recognized. Only income or expenses that
are infrequent and unusual will have this name.

IFRS: comprehensive income is defined as the sum of all changes in equity that are not the
result of transactions with owners. Includes income recognized in the income statement plus
income and expenses recognized directly in equity without passing through the income
statement. It is allowed to be presented in the notes or through a breakdown within the statement
of changes in equity.

US GAAP In addition to the aforementioned options for IFRS, It is allowed to be included at the
end of the income statement.

3. Statement of Cash Flows (IAS 7):

IFRS: can be presented through the direct method (relation of collections and payments) or by
the indirect method (part of the result of the fiscal year and adjusted to obtain the treasury
generated by the operations). Interest and dividends paid may be classified as a flow of

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operations or financing. Interest and dividends received can be classified as a flow of operations
or investments. In financial institutions, interest paid and received and dividends received will be
classified as operating flows.

US GAAP: Interest paid or received and dividends received are classified as operating flows.
Dividends paid are classified with financing flows.

4. Changes in accounting policies (IAS 8):

IFRS: Adjustments resulting from changes in accounting policies should be offset against the
initial balances of accumulated reserves. Comparative information should also be corrected.

US GAAP: The effect of adjustments for changes in accounting policies is recorded against
income for the current year.

5. Changes in the method of depreciation of existing assets (IAS 8):

IFRS This is prospectively treated as a change in an accounting estimate.

US GAAP It is accounted for as a change in an accounting policy.

6. Consolidated Financial statements, investment in subsidiaries (IAS 27):

IFRS Investments in controlled companies are accounted for in the individual financial
statements using the historical cost method or by the methods described in IAS 39. The use of
the equity method is prohibited.

US GAAP They must be accounted for using the equity method.

7. Consolidated financial statements, investment in associates (IAS 28):

IFRS Investments in associated companies in which significant inflows are exercised are
accounted for in the individual financial statements using the historical cost method or by the
methods described in IAS 39. The use of the equity method is prohibited.

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US GAAP They must be accounted for using the equity method.

8. Consolidated financial statements, joint ventures (IAS 31):

IFRS can post them using the proportional consolidation method or using the equity method.

US GAAP They must be accounted for using the equity method.

9. Business Combinations, Minority Interest (IFRS 3):

IFRS: Minority interests are recognized on the consolidated balance sheet at fair value based on
their proportion of the fair value of the assets and liabilities acquired. If a goodwill appears, the
rule states that the difference between the price paid on the acquisition less the buyer's fraction of
the fair value of the acquiree's net assets should be calculated. The IASB recognizes that this way
of calculating goodwill is questionable and open to discussion. Basically, what is being done is
to allocate to minority shareholders their proportionate share of the fair value of the assets and
liabilities that correspond to them excluding the affiliated goodwill. The IASB indicated that it
planned to review this method in the second phase of the Business Combinations project ( IFRS
3)

US GAAP: 1 Minority interests are recognized in the initial consolidated balance sheet at book
value.

On 30 June 2005, the IASB and the FASB published a joint draft of the Business Combinations
document, so mergers and acquisitions will be accounted for equally in the EU and the United
States.

10. Property, plant and equipment (IAS 16):

IFRS The amortized historical cost is allowed, using an impairment test at year-end or fair value.

In the latter case, the revaluations are carried against reserves in own resources. If historical cost
is used, the valuation adjustments made following the impairment test may be reversed under
certain circumstances.

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US GAAP Only the amortized historical cost is allowed, with a deterioration test. Valuation
corrections resulting from this test are not reversible even if the circumstances that led to the
reduction in value have disappeared.

11.Assets, investment property (IAS 40):

IFRS The amortized historical cost is allowed, using an impairment test at year-end or fair value.
In the latter case, revaluations are recognized in the income statement. If historical cost is used,
the valuation adjustments made following the impairment test may be reversed under certain
circumstances.

US GAAP Only the amortized historical cost is allowed, with a deterioration test. Valuation
corrections resulting from this test are not reversible even if the circumstances that led to the
reduction in value have disappeared.

12.Assets and liabilities, financial instruments (IAS 32 and 39):

IFRS You can classify any financial asset or liability at fair value with changes in the income
statement when you meet certain circumstances.

US GAAP Only financial assets or liabilities that are part of the trading portfolio can be
classified at fair value through profit or loss

13. inventories (IAS 2):

IFRS The LIFO method is prohibited.

US GAAP The LIFO method is allowed.

14.Biological assets (IAS 41):

IFRS The fair value method should be used; Changes in value are recognized in the income
statement.

US GAAP The historical cost method is usually used. However, the fair value method, net of
costs of sale, is used when biological assets are available for sale.

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15.Assets, prepaid taxes resulting from deductible temporary differences

(IAS 12):

IFRS Only prepaid taxes are recognized for recovery is estimated likely.

US GAAP All anticipated taxes are recognized and adjusted using a valuation allowance if the
probability of recovery is estimated to be less than 50 percent.

16.Liabilities, convertible debt (IAS 32 and 39):

IFRS The amount received is divided between the liability and own resources after estimating
the fair value of the conversion rights.

US GAAP All amounts received as a liability are recognized.

17.Financial leasing (IAS 17):

IFRS Leasing is capitalized by recognizing an asset and the corresponding fi nancial obligation if
most of the benefits and risks derived from ownership of the asset have been transferred.
Otherwise, the transaction is posted Such as an operating lease that does not result in the
recognition of a new asset and a fi nancial obligation in the balance sheet.

Conclusion
listed companies in the Egypt began to use IFRS in their consolidated accounts. This has been
an impressive achievement that will bring multiple benefits in terms of greater quality,
transparency, and comparability of the financial statements. Lead to increased movement of
economic resources.

The Convergence of the Conceptual Frameworks of the IASB standards and the FASB standards
is an important step in the feasibility of converging the accounting standards of both standards
issuers.

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The process of convergence between IASB norms and FASB standards is in the last stage;
However considering the differences still exist we do not believe that before 2012 this process
culminates.

Summary

listed companies in the Egypt began to use IFRS in their consolidated accounts. This has been
an impressive achievement that will bring multiple benefits in terms of greater quality,
transparency, and comparability of the financial statements. Lead to increased movement of
economic resources.

The Convergence of the Conceptual Frameworks of the IASB standards and the FASB standards
is an important step in the feasibility of converging the accounting standards of both standards
issuers.

The process of convergence between IASB norms and FASB standards is in the last stage;
However considering the differences still exist we do not believe that before 2012 this process
culminates.

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