IFRS and GAAP Standards Flashcards

Question 1

What is the main purpose of general purpose financial statements?

Accepted Answer

The main purpose of general purpose financial statements is to provide information about an entity's financial position, performance, and cash flows that is useful to existing and potential investors, lenders, and other creditors when making decisions about providing resources to the entity.

Question 2

What does IFRS stand for and who issues it?

Accepted Answer

IFRS stands for International Financial Reporting Standards, and they are issued by the International Accounting Standards Board, an independent body based in London that sets global standards for financial reporting. Many jurisdictions require or permit their use for listed companies.

Question 3

What is US GAAP and which body establishes it?

Accepted Answer

US GAAP, or United States Generally Accepted Accounting Principles, is the set of accounting rules used by companies in the United States. The Financial Accounting Standards Board is the private body that establishes these standards, subject to oversight by the Securities and Exchange Commission for public companies.

Question 4

What is the main philosophical difference between IFRS and US GAAP?

Accepted Answer

The main philosophical difference is that IFRS is principles-based, giving broad objectives and requiring professional judgment, while US GAAP is more rules-based, providing detailed, specific guidance for many situations. Because each body developed its standards separately and with different priorities, the two sets diverge on numerous specific treatments.

Question 5

What does the accrual basis of accounting require companies to record?

Accepted Answer

The accrual basis of accounting requires companies to record revenues when they are earned and expenses when they are incurred, regardless of when cash changes hands. This approach matches economic activity to the periods in which it occurs, giving users a fuller picture of performance than cash receipts and payments alone.

Question 6

What is the difference between a standard setter and a regulator?

Accepted Answer

A standard setter, such as the International Accounting Standards Board or the Financial Accounting Standards Board, writes the accounting rules and principles that companies follow. A regulator, such as a securities authority, has legal power to enforce compliance with those rules. Keeping the roles distinct helps clarify who sets rules and who enforces them.

Question 7

Why is comparability across companies considered important in financial reporting?

Accepted Answer

Comparability is important because investors and other users make decisions by comparing companies with one another, and that comparison is only meaningful when similar transactions are reported in similar ways. Consistent treatment across entities and across periods lets users spot real differences in performance rather than differences created by accounting choices.

Question 8

What does the going concern assumption presume about a reporting entity?

Accepted Answer

The going concern assumption presumes that an entity will continue operating for the foreseeable future, so it has no intention or need to liquidate or significantly curtail its operations. Because of this, assets are generally recorded at historical cost and depreciated over their useful lives rather than valued at liquidation amounts.

Question 9

What are the two fundamental qualitative characteristics of useful financial information?

Accepted Answer

The two fundamental qualitative characteristics are relevance and faithful representation. Relevant information can make a difference in users' decisions, for example by having predictive or confirmatory value. Faithful representation means information is complete, neutral, and free from error. Both must be present for information to be useful.

Question 10

Which characteristics enhance the usefulness of financial information once relevance and faithful representation are present?

Accepted Answer

The enhancing qualitative characteristics are comparability, verifiability, timeliness, and understandability. Comparability lets users identify similarities and differences across items and periods. Verifiability means different knowledgeable observers could reach similar conclusions. Timeliness reaches decision makers while it can still influence them. Understandable information is presented clearly.

Question 11

What is the purpose of the conceptual framework in financial reporting?

Accepted Answer

The conceptual framework is a set of objectives and principles that guides standard setters when they develop new standards and helps preparers apply rules where no specific standard exists. It defines terms such as assets, liabilities, income, and expenses, and it sets out the qualitative characteristics of useful information.

Question 12

How does the IFRS conceptual framework define an asset?

Accepted Answer

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Control means the entity has the present ability to direct the use of the resource and obtain the benefits that flow from it.

Question 13

How does the IFRS conceptual framework define a liability?

Accepted Answer

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid. Settling a liability typically involves paying cash, transferring other assets, providing services, or replacing an obligation with another.

Question 14

What is the difference between recognition and measurement?

Accepted Answer

Recognition is the process of including an item in the financial statements, meaning it is recorded as an asset, liability, income, or expense with a corresponding amount. Measurement is the process of assigning a monetary amount to that item, such as historical cost or fair value.

Question 15

What is materiality and why does it matter?

Accepted Answer

Materiality is a threshold: information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the economic decisions of primary users. Materiality is entity-specific, so the same amount may be material for a small company but not for a large one. It guides disclosure decisions.

Question 16

What is the cost constraint on useful financial information?

Accepted Answer

The cost constraint recognizes that the benefits of reporting information should justify the costs of providing it. Preparers must weigh the expense of gathering and reporting data against the value users gain from it. Because this judgment is subjective, the constraint is applied on a case-by-case basis by standard setters and preparers.

Question 17

What are the primary components of a complete set of IFRS financial statements?

Accepted Answer

A complete set of IFRS financial statements includes a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, and notes that include accounting policies and other explanatory information. Comparative information for the preceding period is also required.

Question 18

What is the difference between the statement of financial position and the statement of profit or loss?

Accepted Answer

The statement of financial position reports assets, liabilities, and equity at a single point in time, showing what the entity owns and owes. The statement of profit or loss reports income and expenses over a period, showing how much the entity earned or lost during that period. Together they explain financial position and performance.

Question 19

What is the statement of cash flows designed to show?

Accepted Answer

The statement of cash flows shows how an entity generated and used cash during a period, classified into operating, investing, and financing activities. It helps users assess the entity's ability to generate future net cash inflows and to meet its obligations.

Question 20

What is the difference between the direct and indirect methods for operating cash flows?

Accepted Answer

The direct method reports major categories of gross cash receipts and payments from operating activities, such as cash collected from customers and cash paid to suppliers. The indirect method starts with net income and adjusts it for noncash items and working capital changes to arrive at operating cash flow.

Question 21

Where do IFRS and US GAAP differ in classifying interest paid in the cash flow statement?

Accepted Answer

Under US GAAP, interest paid is always classified as an operating activity. Under IFRS, an entity may choose to classify interest paid as either operating or financing, and it may classify interest received as either operating or investing. This flexibility means entities reporting under IFRS can present similar cash flows differently.

Question 22

What are the general requirements for offsetting assets and liabilities in financial statements?

Accepted Answer

Offsetting is generally prohibited unless a standard requires or permits it. Under IFRS, assets and liabilities may be offset only when the entity currently has a legally enforceable right to set off the recognized amounts and intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Question 23

What is the difference between a change in accounting estimate and a change in accounting policy?

Accepted Answer

A change in accounting estimate adjusts a carrying amount or the expected future benefit of an asset or liability, such as revising the useful life of equipment, and it is applied prospectively. A change in accounting policy switches to a different principle and is generally applied retrospectively.

Question 24

What is the difference between a provision and a contingent liability?

Accepted Answer

A provision is a liability of uncertain timing or amount that is recognized because a present obligation exists, an outflow is probable, and the amount can be reliably estimated. A contingent liability is a possible obligation, or an obligation not recognized because it is not probable or cannot be measured reliably.

Question 25

What does historical cost measurement record for an asset at initial recognition?

Accepted Answer

Historical cost measurement records an asset at the amount paid or the fair value of consideration given to acquire it, including directly attributable costs such as transport and installation. Over time, the carrying amount is adjusted for depreciation, amortization, or impairment rather than revalued to current market prices.

Question 26

How do IFRS and US GAAP define fair value?

Accepted Answer

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Both IFRS and US GAAP use this exit price concept, so the definitions are substantially converged.

Question 27

What is the revaluation model for property, plant, and equipment under IFRS?

Accepted Answer

Under the revaluation model, an entity may carry property, plant, and equipment at fair value less subsequent depreciation and impairment, provided fair value can be measured reliably. Revaluation must be made regularly enough that the carrying amount does not differ materially from fair value.

Question 28

Does US GAAP permit upward revaluation of property, plant, and equipment?

Accepted Answer

No, US GAAP generally does not permit upward revaluation of property, plant, and equipment. These assets are carried at historical cost less accumulated depreciation and impairment losses, and impairment losses cannot be reversed. This is a notable measurement difference between the two frameworks.

Question 29

How do IFRS and US GAAP differ regarding LIFO inventory costing?

Accepted Answer

IFRS prohibits the last-in, first-out method, while US GAAP permits it. Under IFRS, entities must use first-in, first-out or weighted average cost for interchangeable inventory. Companies using LIFO for US tax purposes must generally also use it for financial reporting, which is known as the LIFO conformity rule.

Question 30

How do IFRS and US GAAP treat the reversal of an inventory write-down?

Accepted Answer

IFRS permits reversal of an inventory write-down up to the original amount when the circumstances that caused it no longer exist, so the reversal is recognized as a reduction of cost of sales. US GAAP prohibits such reversals, treating the reduced amount as the new cost basis.

Question 31

What does net realizable value mean for inventory measurement?

Accepted Answer

Net realizable value is the estimated selling price of inventory in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Under IFRS, inventory is measured at the lower of cost and net realizable value.

Question 32

What is the main difference in how IFRS and US GAAP treat development costs?

Accepted Answer

Under IFRS, development costs must be capitalized as an intangible asset once specified criteria are met, such as technical feasibility, intention and ability to complete, and reliable measurement of expenditure. Under US GAAP, most research and development costs, including software development costs outside specific exceptions, are generally expensed as incurred.

Question 33

What are the basic steps of the five-step revenue recognition model?

Accepted Answer

The five-step model is applied to recognize revenue: identify the contract with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations, and recognize revenue when or as each obligation is satisfied. Both IFRS and US GAAP share this core model.

Question 34

When does an entity satisfy a performance obligation under the control-transfer model?

Accepted Answer

An entity satisfies a performance obligation when it transfers control of a promised good or service to the customer. Control transfers over time if the customer simultaneously receives and consumes the benefits, or if the entity's work creates or enhances an asset the customer controls.

Question 35

How do IFRS and US GAAP differ in lessee accounting for leases?

Accepted Answer

Under IFRS, nearly all leases are recognized by lessees as right-of-use assets and lease liabilities, with a single lessee accounting model. Under US GAAP, leases are classified as either finance or operating, and operating leases still record a right-of-use asset and liability but present a single straight-line lease cost in the income statement.

Question 36

How does an entity identify an impairment indicator for an asset?

Accepted Answer

An impairment indicator is an external or internal sign that an asset's carrying amount may exceed its recoverable amount. External indicators include a significant decline in market value, adverse changes in the technological, market, or legal environment, and rising interest rates that affect discount rates.

Question 37

How does IFRS measure the recoverable amount of an impaired asset?

Accepted Answer

Recoverable amount under IFRS is the higher of fair value less costs of disposal and value in use. Value in use is the present value of future cash flows expected from the asset or cash-generating unit. If that higher amount exceeds the carrying amount, no impairment loss is recognized.

Question 38

How does US GAAP's approach to asset impairment for held-and-used assets differ from IFRS?

Accepted Answer

Under US GAAP, a held-and-used long-lived asset is first tested for recoverability using undiscounted future cash flows. Only if the asset fails that test, an impairment is measured as the excess of carrying amount over fair value. Under IFRS, the test is a comparison with recoverable amount, which uses discounted cash flows.

Question 39

Why must entities disclose significant judgments and estimation uncertainty?

Accepted Answer

Entities must disclose significant judgments and key sources of estimation uncertainty so users can understand the assumptions behind reported amounts. Disclosure of judgments, such as how control or a lease term was determined, explains where management applied discretion. Estimates, such as impairment test assumptions, reveal the risk of material adjustment.

Question 40

How should an entity approach the transition to IFRS when it first adopts the standards?

Accepted Answer

First-time adoption of IFRS generally requires an entity to prepare an opening statement of financial position at the date of transition, applying all standards effective at the reporting date. The entity retrospectively applies IFRS, subject to certain optional exemptions and mandatory exceptions. Reconciliations explaining how previous amounts changed under IFRS are also required.

IFRS and GAAP Standards Flashcards

1Foundations of financial reporting

2Conceptual framework and qualitative characteristics

3Financial statements and presentation

4Measurement and key framework differences

5Revenue, leases, and impairment

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