Edit this essay
only $12.90/page

Comparing IFRS to GAAP Essay Sample

Comparing IFRS to GAAP Pages
Pages: Word count: Rewriting Possibility: % ()

IFRS 8-1: What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed? A fair value measurement gives companies an accurate portrayal of the company’s assets. Both IFRS and GAAP have requirements of specific information that needs to be reported regarding fair value measurement practices. With both systems, companies are required to report assets at book value or fair value. Usually, all assets in the same class are evaluated in the same way (Summary of Statements, 2015) . In component depreciation, depreciation occurs when assets have fundamentally different parts that depreciate in different ways. With IFRS a company is required to use component depreciation if the parts of an asset are varied. The same holds true for GAAP but companies in the US rarely practice in this way. An example of component depreciation would be large machinery consisting of a computerized unit. Each unit is the same part but their useful lives and salvage values differ. The main machinery might have a useful life of 30 years while the computer might only have a useful life of about 10 years.

Under IFRS because they depreciate differently they need to be separately depreciated. IFRS 9-2: What is revaluation of plant assets? When should revaluation be applied? The reevaluation of a businesses assets is defined as the way in which change values from book to fair value. If there is every any considerable economic changes in the market the process is required to compensate for that. If a company bought a building 5 years ago and due to market value there was a real estate boom, the property can be reevaluated to fair market value. Under IFRS, when an asset is reevaluated all assets in that class must be treated with the same valuation method. This process keeps evaluations consistent in the company (Work Plan, 2011). IFRS 9-3: Some product development expenditures are recorded as development expenses and others as development costs. Explain the difference between these accounts and how a company decides which classification is appropriate. When a business uses GAAP standards they are required to expense all research and development costs. This is done when they report those costs on an income statement.

Unlike GAAP, the IFRS does not require the same. It only requires research costs and not the development costs. Once technological viability has occurred a company should start reporting developmental costs as capital expenditures. In this way the developments costs can be depreciated over their useful life that any technology gives. IFRS 10-2: Explain how IFRS defines a contingent liability and provide an example. Contingent liability is an obligation with a strong probability of future occurrence. Contingent liability items are not included on the financial statements but should be disclosed in the notes section. The business should also measure the nature of the liability and the future accounting periods. An example of an IFRS contingent liability would be a company that was involved in an environmental accident. The contingent liability would occur with the impending fines that would be accrued by the states and Feds for the environmental violations. The business might not yet know the amounts of the fines but it should be provided in the notes.

The fines can be predicted therefore it’s required to report that information. IFRS10-3: Briefly describe some similarities and differences between GAAP and IFRS with respect to the accounting for liabilities. The GAAP and IFRS have nearly identical main principles of accounting. There are some differences though. With respect to balance sheets, GAAP requires liabilities to be reported in order of liquidity. With IFRS they require a reverse order of liquidity. With respect to interest expense reporting, GAAP allows effective interest rate method to be used as well as the straight-line method to be used.

With IFRS an interest expense reporting, they only allow effective interest rate method. The IFRS also has special rules for contingent liabilities something that the GAAP does not require. Overall, the differences between IFRS and GAAP is minute. Each requires specifics of reporting assets and liabilities. The results of these differences provides slightly different financial results. Both systems are working on making account rules more modern and changing as the business climate changes. They are both equally important in maintaining accounting standards in the industry.

References

Summary of Statement No. 157 . (2015). Retrieved from
http://www.fasb.org/st/summary/stsum157.shtml
Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers . (2011). Retrieved from http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-gaap.pdf#page=26&zoom=page-fit,-126,792

Search For The related topics

  • depreciation