Comparing IFRS to GAAP Essay
Although the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) have a lot of similar guidelines and expectations, they also differ in many ways. The IFRS employs more of a “principles based” accounting standards whereas GAAP utilizes more of a “rules based” approach. Even though there are differences between terminology, revenue recognition, gains and/or losses, and statement presentation, both standards do follow the same conceptual guidelines. With the Sarbanes-Oxley Act (SOX) of 2002, the standards expected of foreign countries are significantly less than those that reside as publically owned companies in the U.S. Statement of Financial Position
GAAP v. IFRS
GAAP and IFRS both have similar expectations from companies with regards to the information presented on the statement of financial position. GAAP has a strict requirement that all accounts be listed in order of liquidity with the highest measure of liquidity first. The IFRS does not require a specific order or classification of the accounts. With IFRS the general rule of thumb is that accounts be listed starting with the least liquid accounts listed first. GAAP following companies will have their balance sheets follow the order of current assets, long term assets, current liabilities, long term liabilities, ending with stockholder equity. Generally IFRS standards suggest their statement of financial position in the order of long-term assets, current assets, shareholder equity, long-term liabilities, and lastly current liabilities.
Conceptual Frameworks of Financial Reporting GAAP v. IFRS
While the standards of GAAP and the IFRS are different in many areas, their conceptual framework and general principles provide similar and in most cases, the same information. They both require disclosures with regards to the accounting principles a company follows, and the assumptions made, as well as, any uncertainties that may cause a material adjustment in the future period. Both GAAP and IFRS require that annual financial statements be submitted and include an accurate picture of the company’s financial position. A large difference between GAAP and IFRS is the reporting of assets. GAAP states that assets should be reported using the historical purchase amount, but IFRS allows some assets, like property and equipment, to be recorded at the fair market value.
Terminology GAAP v. IFRS
Some terminology used by GAAP is different from the IFRS, but has the same or similar meaning. The terminology used to differentiate the financial reporting that each agency requires can have different names, but each report ultimately shows the same information. What GAAP lists as stock is commonly referred to as shares for international companies. Common stock, listed in the equity section of a balance sheet or list on the statement of financial position for an international company, the IFRS describes it as share capital-ordinary.
Considerations of SEC to Adopt IFRS
Converting the U.S. GAAP method of accounting into IFRS poses major challenges to huge number of companies in the U.S. The SEC is regulating the activities of these transitions through summarizing feedbacks on the presented roadmaps of IFRS, and outlining a proper approach for the improvement of these transitions. A publication of Deloitte Global Services (2014) stated some key areas that SEC must consider before regulating the IFRS. These are: Sufficient development and application of IFRSs globally
Independence of standard-setting
Education of investors and of various constituency groups
Impact on regulatory environment and issuers
The cost of conversion from U.S. GAAP to IFRS is another risk that SEC must not oversee, since the funding for IFRS deemed to be inconsistent because all funding is currently provided by not-for-profit businesses and the funds for U.S. portion of budget has been futile.
Revenue Recognition IFRS v. GAAP
The elements associated with IFRS and GAAP are similar in many ways. A congruent between International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) is that both specification tend to use a statement of cash flows, income statement and a balance sheet (Nadel, 2010). When confronting cash equivalents and cash, both approaches are essentially similar in characteristic. Furthermore, the leading reciprocal is that both IFRS and GAAP assist in producing financial statements on an accrued basis; generally meaning that revenue is often recognized once it is realized (Nadel, 2010). In the course of time this will assist in a complete merger of both accounting principles in the near future; eventually a merger will assist with the differences associated with both IFRS and GAAP allowing for certain principles to be removed or restructured.
Definitions of Revenues and Expenses
Gains and losses are not included in the definition of revenues and expenses under the IFRS. According to the IFRS, gains and losses would not be included in revenue or expenses because they do constitute operating activities. The IFRS describes revenue as the “gross inflow of economic benefits arising from the ordinary operating activities”. For example, if a cleaning service experiences a gain as a result of a stock investment in the books, this should not be included as a core operating activity, rather, on the financial statements, these items would be classified separately. This will show that gains or losses do not directly impact operational performance, while still improving the understanding of financial statements for users.
Competitive Implications of SOX
The Sarbanes-Oxley (SOX) Act was implemented in July 2002; this act put many motions in place on large publically owned businesses in the U.S. The requirements of the SOX act had an increase on cost in personal liability obligations, internal control improvements, and to the U.S. financial markets. Although the downfall was cost increase on American major businesses; the benefits it enacted placed greater security, which led to higher trust for stockholders and investors. Companies have an audit every 1-3 years. This audit has to be performed by an independent company to include a clear explanation of their finances and strategies to their shareholder, ultimately making it safer for investors and the public to invest in these companies.
As listed above, there are many similarities, and differences of accounting principles that the IFRS and GAAP employ. Some would find it beneficial if both merged into one governing set of principles, but with the SOX act in place and some of the larger differences, only time will tell. Ultimately there are many differences in the IFRS and GAAP, yet the idea for both is to present the public with a clear picture of the company’s financial status.
John Wiley & Sons, Inc. (2000-2011). WileyPLUS [Multimedia]. Retrieved from John Wiley & Sons, Inc, ACC290 website Krishnan, S., & Lin, P., C.M.A. (2012). Inventory valuation under IFRS and GAAP. Strategic Finance, 93(9), 51-58. Retrieved from http://search.proquest.com/docview/1016754559?accountid=458 Nadel, A. A. (2010). Bridging the GAAP to IFRS. Journal of Retirement Planning, 13(2), 9-12, 36-37. Retrieved from http://search.proquest.com/docview/622032837?accountid=458 US Securities and Exchange Commission (SEC) (2014). Deloitte Global Services Limited. IASPlus. Retrieved from http://www.iasplus.com/en/resources/regional/sec