There are two sets of accounting standards that are used worldwide. One is the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP). There is a huge desire for there to one set of accounting standards worldwide with the increase of companies performing business in many different countries and global expansion.
The International Financial Reporting Standards are issued by the International Accounting Standards Board. These set of accounting standards are international in more than 110 countries and the state how certain transactions and other events should be reported in the preparation of financial statements. This set of standards’ purpose is to make international comparisons easier. This is not an easy task, though, because there is already set rules in every country.
U.S. Generally Accepted Accounting Principles are another set of accounting standards that is adopted by the U.S. Securities and Exchange Commission (SEC) and are the rules followed by companies in the United States when compiling financial statements. These set of standards was originally developed by auditors and regulated by the American Institute of Certified Public Accountants (AICPA) historically. The SEC is now considering changing the standards for the United States and going with the International Financial Reporting Standards in order to create a more constant standard across the globe.
There are many differences in the International Financial Reporting Standards and the U.S. Generally Accepted Accounting Principles. The main difference between the two is that the IFRS is considered to be a more principle based accounting standard. On the other hand, the U.S. GAAP is considered to be a more rule based accounting standard. Due to this consideration, it is believed that the IFRS embodies and captures the finances of a matter better than the U.S. GAAP.
The difference between what documents that are required in a company’s financial statements is another areas where IFRS and U.S. GAAP differ. Under U.S. GAAP, the income statement , balance sheet, changes in equity, statement of comprehensive income, cash flow statement, and footnotes are required. It is recommended under U.S. GAAP that the balance sheet separate noncurrent and current liabilities and assets. It is also recommended that deferred taxes be included with assets and liabilities. Also, on the balance sheet, as a separate line item, deferred taxes are included in liabilities.
Also as a separate line item, minority interest are included in equity. Under IFRS, the income statement, in equity, changes cash flow statement, balance sheet, and footnotes are the only documents required. The separation of noncurrent and current assets and liabilities are is required. Deferred taxes must be shown on the balance sheet as a separate line item. Also as a separate line item, minority interest are included in equity. The two accounting standards also vary in the objectives of the financial statements. Under U.S. GAAP, the general focus of financial statements is to provide pertinent data to a extensive array of investors; however, it affords distinct purposes for corporate and non-corporate entities. Under IFRS, the broad effort is the same as U.S. GAAP, but it affords the same set of intentions for corporate and non-corporate entities.
The definition of an asset under the two accounting standards differs quite a bit. Under the U.S. GAAP, an asset is defined as a forthcoming financial advantage. Under IFRS, and asset is a resource from which forthcoming financial advantage will come to the company. Another difference between the two accounting standards is in the treatment of intangibles and fixed assets. Under the US. GAAP, intangibles are documented at fair value. Under IFRS, the intangible is only recognized if the asset will have a future economic benefit. It is also only documented if it has measured reliability. Intangible assets are assets that are not physical in nature. Such assets include items like research and development, advertising costs, patents, trademarks, and copyrights.
One similarity between the U.S. GAAP and IFRS is that fixed assets are estimated at cost originally under both accounting standards; however, after initial recognition, differences occur between the two accounting standards. Under IFRS, after initial recognition, fixed assets are allowed to be altered to fair value. The revolution method is used to do this. This method uses the fair value on the time of assessment, less any accrued devaluation and impairment losses. This method is not used often though due to the high costs of appraisal that is involved. The U.S. GAAP values fixed assets using the cost model. This values fixed assets at historical cost, less any accrued devaluation. Fixed assets include property, plants, and equipment.
How inventory costs are handled is another area in which the IFRS and U.S. GAAP differ. Under U.S. GAAP, a company can either use the last-in, first-out (LIFO) or the first-in, first-out (FIFO) inventory method. Under IFRS, the LIFO method is not allowed to be used. The advantage to having one accounting standard is enhanced comparability between countries. It also removes the need to have to adjust LIFO inventories to FIFO inventories in comparison analysis between companies that use different accounting standards.
How write downs are handled is another difference between the two accounting standards. A company that uses IFRS, can reverse inventory that is written down in future periods, but only if precise standards is met. Under U.S. GAAP this is not allowed. When inventory has been recorded, reversals are prohibited.
The treatment of investment property is another way the two accounting standards differ. There is not pronouncement for investment property under U.S. GAAP. Under IFRS, investment property is any property that is held for rental or appreciation. This type of property can be documented at fair value, but only as long as the fair value can be measured dependably and without unnecessary effort or cost. Also, any adjustments to the fair value would not run through equity accounts. They would run through the profit loss accounts.
Liabilities are present obligations that are a result of a past event. Similarly, under both accounting standards, the event that leads to the liability should be probable. What this means is that it is likely that the liability will be paid. Where the difference between the two accounting standards occurs is in the definition of probable. Under U.S. GAAP, probable means that there is a 75-80% probability that the obligation will be paid. Under IFRS, probable means that there is a 50% probability that the obligation will be paid. It is understandable then that there are more liabilities documented under IFRS than there is under U.S. GAAP.
Revenue recognition is another area in which IFRS and U.S. GAAP differ. The U.S. GAAP offers very precise universal and industry regulation about what institutes revenue. It also is specific about the effect of timing on recognition and how profits should be measured. Under IFRS, the measurement and timing of documentation is not specified. Also, there is no industry specific guidance as to what constitutes revenue. With that said, revenues are most likely to increase under IFRS due to the lack of guidance.
So how does IFRS impact U.S. companies? At this time, since companies that follow the guidelines of GAAP don’t follow IFRS standards for their SEC filings, one may think IFRS has no impact on them. That assumption would be wrong. Since so many companies operate and/or open locations overseas in countries that do use IFRS, it is important to know how the differences in the two accounting standards will affect the companies that that have non-US companies or non-US stockholders, such as investors, customers, or vendors. In this case, U.S. companies can be obligated to afford fiscal information that is complaint with IFRS standards.
There will be those who prefer harmonizing accounting standards and those who will always be against it. As stated previously, it is more common in this day and age for a company to somehow do business in another country, whether it is by customers, vendors, or global expansion. The need for one accounting standard is necessary for companies to be able to accurately be compared financially; however, there is going to be a great cost in doing so. Is the increase in cost worth it is the long run? I guess all we can do is wait and see.
(n.d.). Retrieved February 5, 2015, from http://www.iasplus.com/en/binary/dttpubs/0703ifrsusgaap.pdf Differences Between GAAP and IFRS and Implications of Potential Convergence – Boundless Open Textbook. (n.d.). Retrieved February 5, 2015, from https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/introduction-to-accounting-1/conventions-and-standards-21/differences-between-gaap-and-ifrs-and-implications-of-potential-convergence-131-7049/ Houston, G. (n.d.). The Disadvantages of Harmonizing Accounting Standards. Retrieved February 4, 2015, from http://smallbusiness.chron.com/disadvantages-harmonizing-accounting-standards-25107.html The Finance Professionals’ Post. (n.d.). Retrieved February 5, 2015, from http://post.nyssa.org/nyssa-news/2010/04/current-major-differences-between-ifrs-and-us-gaap.html