Ch6. Financial Reporting Deep Dive — US GAAP, Assets, and Liabilities

US GAAP Financial Reporting Framework

Objective of financial reporting:
General-purpose financial reporting
Decision usefulness for investors, creditors,
and other capital providers

Financial statement components (US GAAP):
Balance Sheet (Statement of Financial Position)
Income Statement (or Statement of Comprehensive Income)
Statement of Stockholders' Equity
Statement of Cash Flows
Notes to the Financial Statements

Qualitative characteristics (FASB Concepts Statements):
Fundamental: relevance + faithful representation
Enhancing: comparability, verifiability,
            timeliness, understandability

Property, Plant & Equipment (PP&E)

Initial measurement:
Purchase price + all costs to bring asset to
intended use (freight, installation, testing)
Capitalized interest on qualifying assets
(ASC 835-20 — assets constructed for own use)

Depreciation methods:
Straight-line: (Cost − Salvage Value) ÷ Useful Life
Double-declining balance (DDB): Book Value × (2 ÷ Useful Life)
Units of production: (Cost − Salvage) ÷ Total Units × Units Produced

Impairment (ASC 360):
Step 1 (Recoverability): If undiscounted future cash flows
  < carrying amount → impairment exists
Step 2 (Measurement): Write down to fair value
  (fair value = PV of future cash flows or market price)
Recovery of impairment: NOT permitted under US GAAP
  (unlike IFRS IAS 36 which allows reversal)

Revaluation model:
NOT permitted under US GAAP (permitted under IFRS IAS 16)
US GAAP uses cost model only for PP&E

Financial Asset Classification (ASC 320 / ASC 326)

Held-to-Maturity (HTM):
Debt securities only; positive intent AND ability to hold
Reported at amortized cost (effective interest method)
Unrealized gains/losses: NOT recognized

Available-for-Sale (AFS):
Debt and equity securities not classified as HTM or Trading
Reported at fair value
Unrealized gains/losses → Other Comprehensive Income (OCI)

Trading Securities:
Active buying and selling intent
Reported at fair value
Unrealized gains/losses → Net Income (immediately)

Expected Credit Losses (CECL — ASC 326):
ALL financial assets measured at amortized cost
require a lifetime expected credit loss allowance
from the date of origination
Stage model (3-stage like IFRS 9) does NOT apply
under US GAAP — lifetime ECL required from Day 1

Contingencies (ASC 450)

Contingent Liability:
Probable (likely to occur) + Reasonably estimable
→ Accrue: debit Loss, credit Liability

Contingent Liability — Disclosure Only:
Probable but NOT estimable → footnote disclosure
Reasonably possible → footnote disclosure
Remote → no disclosure required

Contingent Asset:
Virtually certain → recognize (record asset)
Probable → footnote disclosure only
Reasonably possible or remote → no disclosure

Note on US GAAP vs. IFRS:
US GAAP uses "probable" = likely (interpreted ~75%+ likelihood)
IFRS IAS 37 uses "probable" = more likely than not (>50%)

Key Concept Cards

Five Financial Statements (US GAAP) ★★★★★ : Balance Sheet, Income Statement, Stmt of Stockholders’ Equity, Stmt of Cash Flows, Notes. Memory hook: BS — IS — SE — CF — Notes

Impairment = Two-Step Test Under ASC 360 ★★★★★ : Step 1 (recoverability): undiscounted cash flows vs. carrying amount. Step 2 (measurement): write down to fair value. No recovery of impairment under US GAAP. Memory hook: undiscounted test first → fair value write-down

Contingent Liability — Three-Tier Recognition ★★★★☆ : Probable + estimable → accrue. Probable + not estimable OR reasonably possible → disclose. Remote → nothing. Memory hook: probable+estimable = accrue; possible = disclose

Practice Quiz

Q. Why does US GAAP prohibit the revaluation of PP&E while IFRS permits it?

US GAAP follows a strict historical cost model for PP&E — once acquired, assets are carried at cost less accumulated depreciation and any impairment losses. IFRS IAS 16 offers an optional revaluation model (revalue to fair value with changes to OCI / revaluation surplus). US GAAP’s prohibition is rooted in the conservatism and verifiability principles: market values introduce subjectivity and the potential for income manipulation.

Q. How does the US GAAP approach to contingent liabilities differ from IFRS?

US GAAP (ASC 450): accrue when probable (roughly >75% likely) AND reasonably estimable. IFRS (IAS 37): accrue when probable means simply “more likely than not” (>50%). Additionally, US GAAP uses the term “reasonably possible” for the middle tier requiring disclosure but no accrual — a category IFRS does not explicitly use in the same way. In practice, US GAAP may accrue fewer contingencies than IFRS for the same fact pattern.