Introduction

The International Financial Reporting Standards (IFRS) are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB)1 to provide a common global language for company accounts. IFRS are understandable and comparable across international boundaries even in the context of alternative finance [LEV 15]. They are particularly important for companies that have dealings in several countries. They are progressively replacing the different national accounting standards. They represent rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users, internal or external.

Generally Accepted Accounting Principles (GAAP or US GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC)2. The GAAP are a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements. GAAP is a combination of authoritative standards and the commonly accepted ways of recording and reporting accounting information.

The US GAAP are the accounting standards used in the USA, while IFRS is the accounting standard used in over 110 countries around the world. GAAP is considered a more "rules based" system of accounting, while IFRS is more "principles based".

IFRS standards were proposed to harmonize accounting across the EU, but then these standards quickly became very attractive around the world. While the SEC has stated that it intends to move from US GAAP to the International Financial Reporting Standards (IFRS), the latter differs considerably from US GAAP.

Convergence between IFRS and US GAAP has looked increasingly uncertain over the past few years and now, with the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB)3 pursuing their own, independent agendas and today US GAAP converge more and more to IFRS, the most used accounting standards in the world.

Consequently, it continues to be essential for the US to be involved in the development and application of IFRS because of: (1) the number and significance of foreign private issuers using IFRS in the US capital markets; and (2) the number of US companies investing abroad and having either to issue IFRS financial statements within the group, or use and analyze IFRS financial statements to manage their joint arrangements and other investment opportunities.

Thus, an understanding of the differences between IFRS and US GAAP continues to be important for preparers and users of financial statements. In this book, we attempt to present and analyze financial statements and financial analysis differences. This book does not discuss every possible difference; rather, it is a summary of those areas encountered frequently where the principles differ or where there is a difference in emphasis or specific application guidance.

Following US GAAP, we discuss some of the financial ratios that investors and analysts use to assess a firm's performance and value. Recall that U.S. public companies are required to file their financial statements with the SEC on a quarterly basis on form 10-Q and annually on form 10-K. They must also send an annual report with their financial statements to their shareholders each year. Private companies often prepare financial statements as well, but they usually do not have to disclose these reports to the public. Financial statements are important tools through which investors, financial analysts, and other interested outside parties (such as creditors) obtain information about a corporation. They are also useful for managers within the firm as a source of information for corporate financial decisions. Every public company is required to produce four financial statements: the balance sheet, the income statement, the statement of cash flows and the statement of stockholders' equity. These financial statements provide investors and creditors with an overview of the firm's financial performance.

This review can be read continuously or sequentially according to the needs of the readers.

Each chapter, relatively independent of the others, alternates between theoretical elements, practical elements and corrected application exercises.

In the first chapter, we approach the notion of value, a basic element, essential for a good understanding of the rest of the book.

Chapter 1 - Value: IFRS vs. US GAAP

We will see successively the notions of time, risk and information:

• - Value and time, where the following notions will be addressed:
  • - Costs of money (interest rates);
  • - Value of money according to US GAAP;
  • - Future value and present value (simple interest and compound interest);
  • - Future value and present value under US GAAP;
  • - Annuities and unearned income: IFRS;
  • - Calculation of net and future values in accordance with US GAAP;
  • - Market value (valuation of debt);
  • - Actuarial rate of return;
• - The value and risk of the notions of:
  • - Probabilities and expected returns;
  • - Expected uncertain rate of return;
  • - Profitability-risk couple;
  • - Introduction to diversification;
  • - Diversification and non-diversifiable risks;
  • - Modeling randomized profitability with a two-factor model;
• - Value and information, where the following notions will be addressed:
  • - Information and uncertainty, (financial market, value, information and market price (stocks and bonds);
  • - Information efficiency.

To analyze in detail the financial states used in Corporate Finance (in France with the PGC or abroad with IFRS standards), we will follow the six steps taken by financial analysts that will constitute the different chapters of this book.

Chapter 2 - Diagnosis of Financial Statements: IFRS

The classical approach to an investigation takes place in four stages:

• - the analysis that identifies the nature of a problem, a situation, etc., by interpreting the elements;
• - the diagnosis which consists of a thorough examination of the elements to make them more accessible, determine the content, study their relative autonomy, and assess their purpose and their efficiency;
• - the prognosis that aims to predict the evolution of a situation based on the study of theoretical and practical data and information;
• - a preconization that proposes advice and recommendations for the perpetuation or even the liquidation of an entity.

We shall detail in turn:

• - economic and financial analysis of company data;
• - the financial reading of the balance sheet.

Chapter 3 - Analysis of the Financial Structure: IFRS vs. US GAAP

Functional analysis of financial statements relates to the balance sheet structure and operating flows in the income statement. The asset is presented in an ascending order of liquidity and the liabilities per growing demand.

We will discuss in turn:

• - The main functions in the French chart of accounts (assets and liabilities), Finance, Investment, Operations and Allocation, which are presented in the order of possible liquidity (Financing, Operations).
• - The analysis of working capital requirements (WCR), which can be carried out over one year (static) or over several years (dynamic) and deals with the structural analysis of the balance sheet.
• - The treasury, which consists of cash availabilities and equivalents. The treasury is composed of immediate availability and cash equivalents of highly liquid short-term investments that are readily convertible to cash.
• - Balance sheet analysis in accordance with US GAAP.

Chapter 4 - Analysis of Activity: Analysis of Profit and Loss Account: IFRS vs. US GAAP

The analysis of the company's activity, which is the starting point for any diagnosis, is based on the short term, and allows us to appreciate the growth of the company and measure its profitability.

We shall analyze in turn the following points:

• - The notion of profitability and managerial performance: profitability, the propensity to yield a profit (profit margin), relates to the net accounting result and to performance indicators such as intermediate balances of management of the PCG or the few indicators under IFRS. It should not be confused with efficiency which, in turn, yields the result on invested capital and is strictly based on a balance sheet analysis (balance sheet profit and balance sheet capital).
• - The Banque de France's (Bank of France) management indicators: they are based on the analysis of the behavior of companies grouped together in different sectors of activity, and are therefore closer to the logic of IFRS than to that of PCG.
• - The correspondence of the PGC-Bank of France indicators: the Banque de France complies with the analysis of the PCG for the allocation of accounts, taxes and similar payments and interest which are no longer considered systematically as remuneration of the State in the first case or of personnel in the second.
• - Cash flow: profit sheets consist of two types of cash flows, those having an influence on the cash position during the year and those that have no influence. We will discuss...