INTERNATIONAL FINANCIAL REPORTING STANDARDS V. GAAP

INTERNATIONAL FINANCIAL REPORTING STANDARDS V

INTERNATIONAL FINANCIAL REPORTING STANDARDS V. GAAP

Introduction

Beginning in the 1960's, with the expansion and rising importance of global markets it has become perceptible that a need for universally accepted accounting principles is inevitable. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) possess significant differences. Existing organizations, national and international, are challenged to continually assess the relevance of their objectives, structures, and processes in the context of the international system of the future. Recent debates and arguments tend to discuss the many differences that still exist between the U.S. based GAAP as described by the FASB and the IFRS as described by the IASB. Much of the concern is evident in that it is crucial for the set of standards to converge their principles and express clearer language as to what should be expected by firms in the international arena. Both the FASB and IASB declared in 2002 that important strides would be made to ensure that a convergence of the two principles would be established. The SEC is also heavily involved in this process. Since 2008 the SEC has been involved in creating a roadmap for addressing future integration into IFRS. This roadmap includes voluntary adoption by firms in 2009 and suggests mandatory adoption by 2016. The SEC specifically states that convergence of the two sets of standards will be an important milestone in assessing the IFRS in the U.S.

Basis for Disparity

Within the framework of the IFRS and GAAP standards lay many similarities, although differences do exist, it is important to note that the conceptual framework of the two is essentially the same. The framework of the IFRS is in many ways lifted from the U.S. GAAP. The differences that result in the two are the result of many factors. Listing all the differences that may arise in business practices and transactions is beyond the scope of this paper but some of the factors include, the nature of the business entity, the transactions it enter into, the firms interpretation of general IFRS guidelines, and its accounting procedures.

Differences in accounting exist because when international standards were developed the International Accounting Standards Committee (IASC) had the advantage of being able create the standards based on worldwide standard setters. This resulted in the standards containing elements from a variety of countries around the world. Even when international standards utilized U.S. standards as a benchmark, the IASC took a diverse approach. International standards are deliberate variations of U.S. standards. IFRS standards are broader as the IASC disregarded interpretations and have limited interpretive guidance. The standards implement the embodied principles rather than elucidations to auditors and preparers. The U.S. has a strong legal and regulatory environment. Consequently, comprehensive guidance and industry interpretations are obligatory and a strong perspective approach is a necessity for U.S standards.

Diversities Between Standards

Revenue and expense recognition is disparate between the two standards. A detailed guidance has been established for different industries incorporating standards. Under GAAP, it is required to have occurred to provide sufficient evidence that risks and rewards of ownership have passed. These are the standards recommended by the other local accounting standard organizations in the U.S. IFRS declares two main revenue standards along with limited interpretations related to revenue recognition as guidance. IFRS assumes that the risks and rewards of ownership are transferred to the buyer even though the good have not yet been delivered, so delivery is not always necessary for revenue to be recognized. There are also substantial differences related to when an expense is recognized and the amount to be recognized. An example of this would be the IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than the GAAP.

Significant differences between the standards also exist with respect to equity and debt instruments. Under GAAP, investments in unlisted equity instruments are measured at cost, minus any "temporary impairment", unless the fair value option is being used. IFRS requires, if reliably measurable, equity instruments be measured at fair value. If not, they are measured at cost. GAAP requires debt securities must be classified as trading, available-for-sale or held-to-maturity even if not quoted. Under IFRS, certain debt securities not quoted in an active market can be classified as "loans and receivables." This category is not measured at fair value and does not require the intent to hold the loan to maturity.

Inventory valuation likewise is dissimilar. IFRS prohibits companies from using the LIFO costing inventory. Companies using LIFO will have to transition to other costing methodologies. LIFO is permitted under GAAP. Furthermore, Inventory write-downs are diverse. Under GAAP, reversal of any write-down is prohibited. IFRS requires any write-downs which have been recognized in previous years to be reversed through the income statement in the period in which the reversal occurs.

Conclusion

A convergence of the two sets of standard will not completely eradicate the differences between GAAP and IFRS. Convergence efforts already in place continue to have differences in which no additional convergence work is planned on the Boards' agenda. A total conformance of the words in the standards is essential or interpretation disparities will continue to arise. The cooperation and compliance of national regulators and industry groups is vital in creating a uniform set of global accounting standards. The conformity would include that the groups would have to avoid issuing local interpretations of IFRS and guidance providing exceptions to IFRS principles. It is difficult to distinguish the extent of a convergence between the IFRS and GAAP, but users of financial information should gain a general understanding of the primary similarities and differences between the standards as U.S. companies may potentially adopt international standards.

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