In the Accounting industry, there are various principles and guidelines by which financial accountants, analysts, and organizations need to abide by. The International Accounting Standards Board (IASB) issues standards (IFRS) that have been adopted by the United States and several countries outside of the U.S. (Kimmel, Weygandt & Kieso, 2010). The IFRS along with Generally Accepted Accounting Principles (GAAP), professionals in the accounting industry use these guidelines as a baseline on which accounting practices are built upon. These standards are governed by the Securities and Exchange Commission (SEC) which ultimately oversees U.S. financial markets and accounting standard-setting bodies. Moving forward, the elements of IFRS and GAAP will be discussed to illustrate the similarities and differences and how it relates to Accounting and used in business practice.
IFRS 8-1: Fair-Value Measurement
Fair value measurements provide users of financial statements with an accurate picture of the value of a company’s assets. Both IFRS and GAAP require firms to include information regarding fair value measurements practices in the notes of financial statements. Under either system, companies will be required to report assets at either book value or fair value, depending on the situation. As a general rule of thumb, all assets in the same class must receive the same valuation treatment. In regards to the value of receivables, IFRS uses a two-tiered method that first analyzes individual receivables, and then looks at receivables as a whole to determine if there is any impairment. (KPMG, 2012).
Comparing IFRS to GAAP Essay
IFRS 9-1: Component Depreciation
Component depreciation happens when an asset has fundamentally different parts that should be depreciated with different treatment. Under IFRS, firms are required to use component depreciation if the parts of the asset offer varying patterns of benefit. The reasoning behind this is that it provides a clearing picture of the asset’s book value. This method is also permitted under GAAP, but U.S. companies rarely use it in practice (Ernst & Young 2012)
IFRS 9-2: Revaluation of plant assets
The reevaluation of plant assets can be defined as the process of change values from book value to fair value. This process is required in the event that there have been substantial economic changes in the market have occurred. For example, if a company purchased a building 10 years ago and it has appreciated due to a real estate boom, it can be reevaluated to fair value. If an asset is to be reevaluated under IFRS, it is required that all assets in its class must be treated with the same valuation method. This ensures that companies maintain consistency in valuations for the same types of assets.
IFRS 9-3 Product Development Expenditures
Companies that utilize GAAP standards are required to expense all research and development costs by reporting them on the income statement. In contrast, IFRS only places this requirement on research costs. Once technological viability has been reached, it is optional for a company to start reporting development costs as capital expenditures. This allows the costs to be depreciated over the useful life that the technology provides (Brice, 2009)
Comparing IFRS to GAAP Essay
IFRS 10-2 Contingent Liability
In the most basis sense, a contingent liability is an obligation that has a probability of occurring in the future. These items will not be included in financial statements, but should be disclosed within the notes. The company will also be required to measure the nature of the contingent liability in subsequent accounting periods. (Ernst & Young 2014) Imagine an oil company that was involved in an accidental oil spill in the Pacific Ocean. An example of a contingent liability would be potential fines imposed by the Union for environmental violations. The company may not know the extent of the fines yet, but they should be disclosed as a contingent liability in the notes. Because the fines can be predicted, it is necessary to report the information to users of the financial statements.
Similarities and Differences in Accounting Liabilities The basic principles of accounting for liabilities between GAAP and IFRS nearly identical, but there are several minor differences. On the balance sheet, GAAP requires liabilities be reported in order of liquidity, while IFRS requires reverse order of liquidity. When it comes to reporting interest expenses, GAAP permits both the effective interest rate method and the straight-line method; however IFRS will only allow the effective interest rate method. Furthermore, IFRS has special rules for contingent liabilities, which is not a requirement under GAAP.
In the grand scheme, the differences between IFRS and GAAP are fairly small. Each has specific requirements related to the reporting of assets and liabilities, which can result in slightly different financial results. Both FASB and IASB are working actively to modernize their accounting rules with changes in the evolving business climate. In summary, both systems are important for maintaining high quality accounting standards in the global economy. Comparing IFRS to GAAP Essay
Jerry J. Weygandt – Paul D. Kimmel – Donald E. Kieso – Financial Accounting – Hoboken – John Wiley and sons inc. – 2011 – 7th Ed Retrieved from: http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2009/CPA/Sep/DevCosts. Retrieved from: http://www.ey.com/GL/en/Issues/IFRS/IFRS-Overview
KPMG. 2012. IFRS Compared to US GAAP: An Overview. KPMG