Reply to thread

Message: <blockquote data-quote="bmcdaniel" data-source="post: 8892189" data-attributes="member: 1772">This is correct insofar as IFRS is more principles-based, whereas GAAP is more rule-based. However, this can be misleading because (at least for private companies), the US gives much more legal flexibility about whether to do any financial reporting at all, and if so, whether to use IFRS, GAAP or accounting standards of their own making.Let me give you an example that came up in my own practice this week: A Cayman Islands domiciled venture capital fund is obligated by law to prepare and deliver to its investors annual audited financial statements (audited by Cayman Islands auditors). The Cayman Islands fund may choose to adopt GAAP or IFRS accounting in preparing the financial statements, but it must choose and apply them as stated. A US domiciled venture capital fund is not obligated to deliver any financial statements by law. In practice, US domiciled venture capital funds agree with their investors to prepare GAAP audited financial statements, except that they do not consolidate the underlying investee companies with the fund, even if consolidation is required by GAAP (i.e. the fund and fund investors have agreed to audit the fund using modified GAAP principles). The reason that US funds/investors choose non-consolidation is because, in the particular context consolidation is a poor representation of fund investors actual underlying economic interests. Question arises: If Cayman Islands domiciled fund invests in US domiciled fund, can Cayman Islands fund auditors rely on the US domiciled fund audited financial statements?To the principal point: which legal system is more substantive and which is more formal? Cayman Islands law which allows the use of a principles-based auditing (IFRS) but which requires you to use the audit rules without modification; or US law which allows you to choose whether or not to have any audit at all, and if you do choose to have audits, allows you modify auditing rules to match the desires of the people who will benefit from the audit.In my view, in this instance, the more flexible US system is actually more substantive, while the less flexible Cayman Islands system is more formal.I gave the example in the context of venture capital funds, but this also applies to private companies generally. US private companies are not required to prepare audited financial statements; UK/India/Hong Kong/Singapore companies are. Of course, I fully recognize that this is a particular anecdote, and not necessarily an anecdote I would have chose except it specifically responds to the remark about IFRS and GAAP. For listed companies, European companies use principles based IFRS, while US companies use rules-based GAAP (although they may also present additional, non-GAAP financial statements). In this case, I think I would call the US system more formalistic, although its a closer call than you might imagine.</blockquote>

Verification