DIFFERENCES BETWEEN US GAAP AND IFRS 1
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Date: 29th June 2018
Subject: Differences between US GAAP and IFRS
The standards which control financial reporting and accounting are different in countries, but they are imperative to representing the financial reports of companies. The purpose of this memo is to analyze and discuss the difference between the main types of financial reporting currently used and these would be the US GAAP and the IFRS. In the United States, the basic reporting practices are set forth through the financial accounting standards board or the FASB which is organized in the framework of the generally accepted accounting principles. Some nations have also assimilated this form of accounting such as Australia, though it is fast being overturned as it is considered obsolete compared to the international financial reporting standards or IFRS. Though the Securities and Exchange Commission has openly shown desire to switch from the GAAP to the IFRS even in the US, there has not been a lot of enthusiasm obviously.
GAAP
The US GAAP is the main guidelines and principle for accounting as issued through the financial accounting standards board. These are generally accepted within the industry practices (Difference Between, 2018). This is because the GAAP is widely utilized within the country and has to be adhered to in the event that the financial statements are distributed to the other stakeholders. In the event that a company is listed on the stock exchange then it would have to prepare the financial statements according to the rules provided by the security and exchange commission within the United States.
IFRS
The IFRS originated from England though the standards gained recognition on the global level over a period of time and they have since been used by different nations. The international financial reporting standards outline the treatment of transactions and events in financial statements for the purposes of reporting. These regulations have been developed and issued via the International accounting standards board. It is critically outlined within the International Financial Reporting Standards the way that businesses ought to maintain and report their accounts. The aim of the standards board for the IFRS is the introduction of a universal accounting language in order for the accounts to be easily understood across the board regardless of the nation without the barrier of language.
Differences between the GAAP and the IFRS
There are some accountants who consider the approach to be the main difference between these two systems.
That is the GAAP happens to be based according to rules while the IFRS is based according to principles. This disconnect is found when it comes to particular details and their interpretation. The guidelines of the IFRS provide a less overall room for evaluation and so a lot of the time, they may require a long disclosure on the financial statements. However, the consistent and intuitive standards of the IFRS happen to be more logical and so they may better represent the economics of transactions in business. Now even though the organizations which are behind these two frameworks have engaged severally in talks to reduce the differences between the two frameworks as people switch to the modernized mode, there are still a lot of differences and these are illustrated in the following text.
• LIFO Inventory: the US GAAP allows a corporation to utilize the last in, first out approach of valuing inventory which is not allowed in the IFRS. The LIFO method of evaluating inventory though may result in low levels of reported revenue which can be unusual (Ross, 2018). It does not reflect the actual flow of the inventory a lot of the time and so the position of the IFRS is theoretically correct in this case.
• Rules as opposed to principles: the GAAP is based according to rules and that means it has regulations on how to treat a wide variety of transactions. That means there is unfortunately more mischievousness in the system considering companies may create transactions which are intended for the manipulation of rules to achieve better results at the end of quarters. The rules basis also means the length of the regulations is much more and far more complicated as compared to the IFRS. The IFRS on the other hand, follows principles, where the general guidelines are set in a manner that the users are expected to use their judgment in following of the practices. This implies an ethical perspective that governs the regulations which is not present in the GAAP. In any setting, the companies are charged to consider the most ethical manner of operation and this would be ruled thus in a court.
• Development costs: the GAAP needs all of the developmental costs to be charged expense as they are gotten. It also allows a certain amount of the costs to be amortized and capitalized over a number of periods. The position of the IFRS may be very aggressive and thus allowing for the deferment of costs which ought to have been charged to expense at one time (Bragg, 2017).
• Write down reversals: the GAAP needs that the value of the fixed asset or the inventory asset be done to its market value. The GAAP also needs that the amount of the write down should not be reversed if the market value for the asset then increases. Under the IFRS, the write down may not be reversed if the market value for the asset subsequently increases. According to the IFRS, the write down may be reversed. The GAAP position is also very conservative considering it does not show all of the positive changes which occur within the market.
• Consolidation: the GAAP prefers a model which is oriented as per the risks and rewards model, while the IFRS drifts toward the control model. Some of the entities consolidated in accordance with the FIN 46® might have to be illustrated separately under the IFRS.
• Statement of income: under the IFRS, better items are not apart within the income statement. When it comes to the GAAP, they are illustrated as below the net income.
The convergence of the accounting standards is a recurring theme that considers establishment of accounting standards which will be used in the international scene and to reduce the differences between the US GAAP and the IFRS. Convergence is a form has been going on for a number of years and the efforts at the present may include projects which are geared to the reduction of the differences between the accounting standards.
References
Difference Between. (2018). The Difference between GAAP and IFRS Income Statements.
Retrieved from http://www.differencebetween.net/business/the-difference-between-gaap-
and-ifrs-income-statements/
Ross, S. (2018). What is the difference between GAAP and IFRS? Investopedia. Retrieved from
https://www.investopedia.com/ask/answers/011315/what-difference-between-gaap-and-
ifrs.asp
Bragg, S. (2017). The differences between GAAP and IFRS. Retrieved from
https://www.accountingtools.com/articles/the-differences-between-gaap-and-ifrs.html