In 1973, international accounting standards committee issued international accounting standards (IAS) which lasted till 2000 when they were replaced by IFRS. These are standard based principles, accounting practices guidelines, interpretations and framework adopted by the (IASB) (Epstein & Jermakowicz, 2010). In 2001, IASC was replaces by IASB which was mandated in setting international accounting standards. The objective of IFRS is to make companies financial statements to reflect truth and fair view of companies’ affairs as at particular date (Epstein & Jermakowicz, 2010).
Generally accepted accounting standards are principles and accounting guidelines recognized by a given territory, jurisdiction or most countries especially the United States to supplement the role and objectives of IFRS. Financial statements should be presented, summarized and recorded based on particular generally convections, rules, ethics and standards in a certain jurisdiction i. e. GAAP. Formulation of GAAP and IFRS For consistency and fairness in financial statements which detail the performance of a company, certain rules and standards must apply.
These are commonly referred to as “generally accepted” and all accounting professionals apply them as appropriate and ethical. Failure to apply them in accounting field result to agreed penalty by either body governing the practice or the territory restraining unethical practices to professionals. Various committees and bodies are put in places as setters which formulate and develop these accounting standards. International Financial reporting standards are developed and formulated by International Accounting Standards Board while Generally Accepted Accounting Principles are formulated by local financial reporting standards board.
In the United States, the establishment and development are influenced by the United States Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and Government Accounting Standards Board (GASB) (Miller & Bahnson, 2002). All these bodies and committees have different roles and objectives which are agreed upon on influence to different accounting sectors profession generally accepted principles.
International financial reporting standards are based in International Accounting Standards which are accepted globally. ISA changed its operations in 2000 and IFRS were added to cope with the changing dynamics of global accounting profession. Through discussions, contributions and comparison agreements, different bodies through their representatives contribute to the principles developed by IASB. Complete responsibility in all technical matters that include; preparation and issuing of international financial reporting standards, are based on the selected IASB (ISCF& IASB, 2007).
Thus, the efforts of IASB involves, setting standards, formulating process of adopting standards ensuring the needs of different countries in the globalizing accounting profession (Mwaura & Nyaboga, n. d). Difference between GAAP and IFRS GAAP and IFRS have difference in their jurisdiction of usage, enforcement and the way these standards are formulated. International financial reporting standards are globally recognized accounting standards, which are set by IASC from 1973 to 2001 and from 2001 by IASB. GAAP are accounting standards recognized as “generally accepted” by the United States.
In summarizing, recording and presenting accounting information within a nation, the process is dictated by rules and convection of GAAP in the United States. International accounting standard board does not directly set or control provisions of rules and convections adopted by GAAP. Standards set by this powerful board are based from agreements and suggestions from various local accounting boards e. g. Kenya accounting board (KAS). Various nations will try to incorporate the set standards within the GAAP in their country.
FASB in America has a mandate to set accounting rules, convection and standards that are later adopted by the US GAAP (Mwaura & Nyaboga, n. d). This means that the role of formulating and developing the rules and standards principally lie to the local accounting boards. Various nations have made it compulsory for their accounting practice to adopt IFRS rather than developing jurisdiction GAAP (Mwaura & Nyaboga, n. d). In addition, differences on the implementation and formulation exist in financial presentation between GAAP and IFRS.
These differences are commonly in consolidation, statement of income format, inventory valuation and recognition, earning per share calculations and development cost recognition in financial statement. For example, in United States, consolidated financial statements are prepared on risk and reward models while international financial reporting standards prefers control based model where consolidation is done on the percentage of control and influence in subsidiaries and associates (Forgeas, 2008).
Risks and rewards is more complicated since risk are subjective valued. Extraordinary items such as depreciation and amortization are included in the income statements under IFRS and in the US GAAP are accounted for after net income. This means extraordinary expenses are not taken to contribute net profits (Forgeas, 2008). Under the US GAAP, companies have option to use either LIFO OR FIFO methods of inventory valuation while in IFRS, LIFO method which is historical valuation method is recommended.
When computing for earning per share under IFRS average on interims calculations are not included whereas in the US GAAP, computation requires that individual interim increase in shares be done averagely (Forgeas, 2008). Capitalization on development expenditure is done under IFRS and recognized as fixed asset while in the US GAAP; capitalization is not done on development expenditure but is accounted for in income statement as expenses (Forgeas, 2008). Another difference between GAAP and IFRS is how transactions are interpreted to mean. It is commonly argued that GAAP within a nation is rule based and IFRS is principle based.
This means that transactions are interpreted based on the stated rules and standards. Ruled based interpretations lies with the professional judgment on certain transaction treatments in account. For principle based interpretation, the IFRS provide on more judgmental way to interpret transactions. This implies that principles are there to the interpretation of transaction and in rule based is on the professional judgment. The problems arise on whether judgment is accurate professional judgment or guessed professional judgment to transactions treatment (Forgeas, 2008). Benefits of GAAP and IFRS
Uses of standardized procedures to financial statements summarizing, recording and presentation to the users bears a number of benefits to both the reporting entity and the user such as shareholder, lenders, creditors or the government taxation organ. Adoption of GAAP in the US and IFRS by other countries gives significant economic and financial benefits to decision making. Both approaches give consistency in managing companies and it is easy to compare companies using the same standards. Both standards put strict measures on deviation from the rules and ethics in a particular standard.
In most countries for a company to trade public GAAP and IFRS must be followed and they require all financial statements be subjected to an independent audit and opinion thereby be given on the applicability of standards in the company. These independent accountants (auditors) must certify financial statements and any notes to financial statement have been prepared and to be presented in accordance of either of the standard. These two provide adequate explanations and definitions to transactions, provide needed assumptions to these transaction and methods applied in either computations or accounting for the transaction.
By this, companies are able to follow the requirements year by year enhancing comparisons/benchmarks between companies and consistency in business operations. Valuation of various assets and liabilities both at the start and at the end of the year would be different between companies giving hectic time in comparison and auditing. These two standards enhance transparence and uniformity of valuation procedures of assets. For example, valuation of assets like investment and stocks unrealized profits can be ambiguous if such standards are not in place.
Conclusion To make financial statement present a true and fairly performance and position of the business at a particular date, financial accounting standards are needed. High quality standards need to be set for reliable information that is adequate and useful to investor or creditor. These high quality standards and enforcement will provide transparency in business operations and promote full discloser to financial information which gives consistent application making statement user perform comparison of year by year and among competing companies.