In discussing Equity Accounting standards of GAAP and IFRS we specifically look at Stockholders’ equity in regard to corporations. Of course there are many differences in language; however, we will review some major differences in accounting standards with respect to Equity accounts.
There is a glaring difference in the two methods with regards to Distributions to Owners. Under US GAAP, disregarding dividends paid on unallocated shares (Employee Stock Ownership Plans), tax benefits can be received. It follows that the tax expense is reduced and no allocation is made in stockholders equity. The IFRS impose rules where entities must reduce equity accounts for the amount of any distribution, net of tax benefits. To elaborate, a company under GAAP pays 1 million dollars into pensions and 200 thousand would be the taxable amount. It would reduce the stock holder’s equity by 1 million; the 200 thousand would credit the tax expense. A company under IFRS would report 800 thousand as a debit to the equity account, with no tax liability.
A broader topic is the issuance of equity instruments which includes stock. Minor differences related to stock are observable in linguistics, or account titles. GAAP accounts are labeled Common Stock and IFRS accounts are labeled Share Capital. One significant difference in accounting methods occurs in the presentation of increasing equity, specifically in regard to issuing stock. An IFRS entity may report Par value and nominal value separately in its equity account.
There are some other differences in the accounting practices of IFRS and GAAP to make note of in regard to equity accounts. One difference is the recording of changes in equity. The IFRS implements a financial statement for this specific known as the, “Statement of changes in Equity.” The statement shows more than just changes. First, the statement reports profits or loss; what follows are incomes or expense titled “other comprehensive income.” Lastly, the statement shows changes in accounting policies and the financial effects incurred as a result. It’s used for compliance with IFRS accounting policies, estimates and error rules. US GAAP does not require a separate financial statement and can record changes simply in the notes of financial statements.
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