US and international accounting standards: compilation of financial statements
التقرير الفردي
اعداد الطالب محمد ال الشيخ
رقم القيد: 201203833
ACC418المادة :
للدكتور : عادل الغرباوي
Introduction
This report is about the US GAAP or the United States Generally Accepted Accounting Principles and the IFRS or the International Financial Reporting Standards. The aim of this report is arrive at an understanding of what these differing financial reporting standards mean for the firms that adopt them and the implications for firms both in the United States and globally when they decide to report their financial statements based on either of these reporting standards. In addition, this report also considers the historical development of these standards with the GAAP being according to the standards laid down by the FASB or Financial Accounting Standards Board and the IFRS being according to the standards laid down by the IASB or the International Accounting Standards Boards. The key theme in this report is that it makes sense for global firms to adopt IFRS as it would give them a global reach and enable consistent and harmonious interpretation of the financial statements.
Historical Development
Historically, the FASB in the United States was the first to evolve a common set of accounting standards called the GAAP which was a pioneering initiative to ensure consistency and uniformity in reporting financial statements. Indeed, this initiative was so successful that until recently, firms in the developing and emerging economies considered it a matter of pride when they reported their financial statements according to US GAAP since it bestowed them recognition and acceptance in listing on the stock exchanges in the United States (FASB.org, 2015).
However, with the increasing globalization of the world economy, a parallel movement towards actualizing a common standard across the world was felt which gave rise to the IFRS governed by the IASB. Indeed, the impetus for the IFRS came from the European firms which felt that there needs to be a consistent and uniform set of standards for all global firms operating across borders (IFRS.com, 2015).
Currently Applicable Standards
As mentioned in the previous section, though the SEC (Securities Exchange Commission) in the United States is pushing for the implementation and the adoption of IFRS since 2002, there has been little movement in this regard even though there was a mandate for such implementation and a roadmap drawn up for this purpose in 2007. This roadmap clearly stated that 2015 was supposed to have been the year in which the IFRS would be adopted in the United States. However, as 2015 draws to a close, there is no sign of this happening leave alone sticking to the roadmap. Thus, this means that in the United States, the GAAP continues to be the accounting standard for firms (EY.com, 2015).
On the other hand, most global firms worldwide have adopted IFRS reporting requirements in pursuit of their internalization strategies since it is recognized world over as the de facto accounting standards. As has been mentioned elsewhere in this paper, the reason for the adoption of the IFRS worldwide is mainly because of globalization which means that there must be uniformity and consistency in terms of reporting financial statements. The point to be noted here that just as people from across the world have to communicate in a common language to understand each other, global firms have to adopt a uniform and consistent standard that makes harmonization and common interpretation easier for all stakeholders. Thus, the IFRS continues to be the accounting standard worldwide (PWC.com, 2015).
Similarities and Differences
The main difference between the accounting standards followed in the United States and internationally is that the former is a rule based accounting system whereas the latter is a principle based accounting system. For instance, the US GAAP which is regulated by the FASB and is followed in the United States reports transactions based on the financial value whereas the IFRS that is regulated by the IASB treats and reports transactions based on the economic value. This means that the IFRS is more conservative when compared to the US GAAP which is more forward looking in terms of guidance and forecasts (EY.com, 2015).
Having said that, it must be noted that there is also much convergence between the US GAAP and the IFRS as a recent study found that the divergence in the net incomes and revenues was minimal in case of the financial statements of the firms studied as part of the research. In addition, both GAAP and IFRS are also similar in their regulatory requirements though the former is restricted to the US and the latter is applicable globally. Further, both standards converge in terms of reporting and accounting for assets except inventory that is treated differently in these standards. However, it must be noted that the IFRS is more strict when compared to the GAAP which is more flexible and this difference must be kept in mind when comparing and contrasting the standards (PWC.com, 2015).
Implications of the Differences
The previous section outlined the differences between US GAAP and the IFRS. The implications of these differences for firms operating in the United States as well as globally are that the former imposes a more flexible reporting requirements since the GAAP is based on rule based reporting whereas the IFRS which is a principle based system is more conservative and treats transactions based on economic value instead of financial value. This has the implication of ensuring that firms are governed by strict rules of reporting wherein forward guidance and forecasts are more conservative when compared to the GAAP (FASB.org, 2015).
Moreover, the other key implication is that when firms in the United States report according to IFRS, they need to consider the differences in reporting for intangible assets differently since IFRS considers accruals and gains from such intangibles based on present value rather than on future revenues. Moreover, GAAP and IFRS differ in the way the inventories are reported which has implications for the way in which current and liquid assets are accounted for. Lastly, the main implication of the differences is that the IFRS is global in its reach which means that firms in the United States that operate internationally can ensure that their financial statements are consistent across regions and continents thereby making it easier for the analysts and other stakeholders worldwide to interpret them (IFRS.com, 2015).
Conclusion
As can be seen from the preceding discussion, adoption of international accounting standards such as IFRS can provide the global firms that include firms in the United States operating internationally with clear and consistent methods of reporting financial statements. Having said that, it must also be noted that adoption of the IFRS in the United States is happening though there has been little movement in overall adoption as mandated by the SEC. in other words, firms that operate globally are reporting both in GAAP for domestic purposes and in IFRS for international purposes. This situation of dual reporting can be remedied through faster adoption and implementation of the IFRS in the United States.
References
EY.com, 2015. IFRS. [Online]
Available at: http://www.ey.com/GL/en/Issues/IFRS
[Accessed 18 Dec 2015].
FASB.org, 2015. Financial Accounting Standards Board. [Online]
Available at: ttp://www.fasb.org/home
[Accessed 18 Dec 2015].
IFRS.com, 2015. International Financial Reporting Standards. [Online]
Available at: http://www.ifrs.com
[Accessed 18 Dec 2015].
PWC.com, 2015. Price Waterhouse Coopers – IFRS. [Online]
Available at: http://www.pwc.com/gx/en/ifrs-reporting
[Accessed 18 Dec 2015].