Comparing IFRS to GAAP Essay
Comparing IFRS to GAAP
GAAP rules for recognition are detailed regarding specific industries, such as real estate and software. It uses the “complete contract method” and has special rules for rendering software services. Organizations can recognize revenue from the sale of goods made delivery from a definitive agreement for a fixed fee that they are reasonably sure they will collect. Under GAAP, companies must wait until the whole process of the contract is complete to recognize revenue. GAAP also has specific types of transactions, and it required public companies to follow rules that are set by the Securities and Exchange Commission.
IFRS Revenue Recognition
IFRS revenue recognition states that revenue can be recorded when it becomes economically significant: IFRS revenue recognition can be defined as “not as strict” as opposed to GAAP. IFRS is considered universal; standard 18 sets forth general principles and examples applicable to all industries. IFRS allows recognition when the rewards and risk of ownership is transferred, giving the buyer control of the goods, revenue is understood and the economic benefits will flow to companies or in other words, you will get paid. IFRS bans the “completed contract method” and under certain circumstances will allow the percentage of completion method. IFRS allows you to combined contracts. However, applies different criteria compared to GAAP. (Ref. Eric Bank, Demand Media).
IFRS Order of liquidity
IFRS does not require a specific order of classification on the Statement of financial position. IFRS provides the same set of objectives for business and non-business entities. The separation of assets and liabilities is required, and deferred taxes are shown on a separate line item on the balance sheet. Minority interests are included in equity as a separate line item. The financial statements include an income statement, balance sheet, changes in equity, footnotes and a cash flow statement. IFRS main goal is to give a financial statement with a clear understanding of the company’s asset structure.
GAAP Order of Liquidity
GAAP has a specific requirement that all accounts are measured by liquidity. The framework has no provision that the expressly requires management to consider the framework in the absence of a standard or interpretation for an issue. GAAP requires a balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement and footnotes. The difference, as opposed to IFRS, is that deferred taxes are shown with the assets and liabilities.
IFRS Commonly used Terms
IFRS terms that are commonly used together are statement of financial position, balance sheet and share capital ordinary to common stock. The statement of financial position and balance sheet are synonymous. The formats may be different. It is made to show a comparison of liabilities and equity to assets. IFRS picked the term “financial position” because it describes the purpose of the statement. The heading stands for the position of receivables and assets on one side and all the liabilities and equity on the other side which can be done at any given date. These statements provide how financial strong the company is. IFRS terms that are commonly used together are share capital ordinary and common stock.
IFRS uses the term share capital ordinary to explain the stakes of the ownership. Common stock is identical to share capital ordinary which shows the equities values that the owners have in exchange for cash. The European Union utilizes the term share capital ordinary which is why it was chosen by the IFRS as the norm. The heading shows the equity shareholders what the capital value is. The heading is equity of net worth subheading.
Understanding Gains, Losses
GAAP defines expenses, revenues, losses, and gains as it correlates with the income statement. The losses and gains would not appear since they do not constitute as operating activities. Even though gains and losses would not appear it will specify the information that would need to be reported on the income statement. It would only allow expenses by description or function. The bottom line would be called as a loss of profit. It prohibits extra ordinary items to be reported in the notes or income statement. The losses and gains that are reported on the income statement are shown separately so the cash flow that can be assessed in the future. Income defines both gains and revenue. Revenue from a company from activities and are in the form of rents, interest, sales, fees, and dividends. Gains are items that are accrued in a form of income from ordinary activities from a company. Gains can include the gains of long-term assets sale. They can be gains from securities.
Securities and Exchange Commission
The Securities and Exchange Commission (SEC) has several aspects to consider when it comes to trying to get the United States to adopt IFRS. First, the people and the overall cost that it would have on their business should be something for SEC to consider. SEC should consider the overall costs impact this will have on businesses. It would cost millions if not billions of dollars for U.S corporations to implement IFRS using a good portion of their time and money to put this into effect. Accounting firms would now have to change their education requirements. In a predictions report released in 2008 by the SEC, it stated that large U. S. based companies with revenues in excess of one billion dollars would be paying more than its European counterparts in converting to IFRS.
In this report, it also states that small businesses could be hit with more costs than larger companies. This is due to the need for new trained staff members that are educated in IFRS and the need for new IT systems to meet the needs of the conversion. The implementation of new systems will also require new training standards for current employees, which will cost companies time and money. The conversion from GAAP to IFRS can and will have an effect on U. S. companies overall operations, taxes, and their internal reporting processes.
The Sarbanes-Oxley Act of 2002 (SOX) was signed into law by President George Bush in response to issues in accounting at several major US companies. It was intended to address corporate responsibility, combat fraud and improve a company’s financial disclosures. Some would argue that guidelines enacted by SOX puts US companies at a disadvantage competitively to companies operating abroad. One principle of the act was the requirement of an independent auditor to evaluate the financial records of businesses at the cost of the business to boot. Executives must certify that the records are accurate and are subject to imprisonment for fraud. The threat of oversight may cause some businesses to refrain from taking the necessary risks to help business grow. The advantages of SOX to some far outweigh the costs.
The most important of them all could be that companies and the executives that run them are kept honest about financial records. The act created an organization with the responsibility of oversight of auditors called the Public Company Accounting Oversight Board. With such oversight, it helps in restoration of public/investor confidence. According to Forbes Magazine a Harvard Business School professor Suraj Srinivasan “Markets have been able to use the information to assess companies more effectively, managers have improved internal processes and the internal control testing.” (Forbes, 2014)
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