subject: GAAP vs IFRS concepts [print this page] GAAP vs IFRS concepts GAAP vs IFRS concepts
GAAP, or generally accepted accounting principles, and IFRS, or international financial reporting standards, are two different standards of accounting principles. The IFRS has been adopted by the International Accounting Standards Board and consists of International Accounting Standards and other standards that involve financial statements. GAAP are accounting standards that regard the preparation of financial statements. These standards come from the Financial Accounting Standards Board and apply only to American financials and are slowly being phased out to make way for the IFRS to become the overall recognized way of reporting financial statements. The IFRS is becoming increasingly more used across the world including such areas as the European Union, Australia, Africa, and, Asia (Hughes and Sander).
The United States Securities and Exchanges have had recent impacts on the convergence of these two differing principles. It is the understood that it is a necessary to force a union between the IFRS and GAAP to create a unified set of standards and principles. The world's capital market and financial structures would benefit immensely from a unified and unitary set of widespread and globally accepted accounting principles (Hughes and Sander).
The convergence between these two accounting systems is really a step by step process. The objective of the Board is to "establish a global set of high-quality accounting and reporting standards which are understandable by users and enforceable by regulators." The standards must be accepted by all capital markets around the world. Through studies conducted, a convergence measure indicator was created to measure differences between the two accounting systems. The indicator refers to the reductions of differences between GAAP and IFRS (Erchinger and Melcher).
For international contingency, the Office of International Affairs (OIA) primarily protects investors and cooperates with regulatory institutions. The main activities of the OIA consist of three things: analysis of SEC regulations and their impact on foreign markets, participation in the worldwide implementation of accounting standards, cooperation with other regulations (Fosbre, Kraft and Fosbre). Many international institutions are primarily filing their financial statements using only IFRS standards and the United States is having problems with only using US GAAP rules and not adhering to IFRS standards as well. The United States cannot expect the world to reconcile their financial statements using both standards (Erchinger and Melcher).
There are several differences between IFRS and GAAP rules and regulations. Some of these differences involve inventory, property, plant, and equipment, and share-based payments. There are two differences involving inventory valuation. First, is the IFRS does not permit the LIFO or last in first out method that is permitted under GAAP. Additionally, IFRS requires the reversal of inventory write-downs in certain instances, which is prohibited in GAAP. Regarding property, plant, and equipment, the IFRS allows companies to revalue, while GAAP uses historical cost. The last difference between these two standards occurs in share-based payments consisting of volatility, measurement of date, and determination of expense (Hughes and Sander).
The percentage of the world that is using IFRS is growing while the percentage that is using US GAAP is slowly dwindling. Several reporting items have been converged, but there are still numerous aspects that the two boards have not yet comprised which include statement of cash flows, valuation of intangible assets, and comprehensive income. There is a key requisite in order to accept IFRS as primary financial statements. Besides the reconciliation requirement, there is an understanding that consistency in the application and interpretation of IFRS on a worldwide basis is that key requisite. The reconciliation requirement entails users would have to report using both IFRS and GAAP standards (Erchinger and Melcher).
In 2007, the SEC proposed the rule "Acceptance from foreign private issuers of financial statements prepared in accordance with IFRS without reconciliation to US GAAP," which simply states that for foreign users that they can file using IFRS standards and would not need to reconcile to US GAAP standards. This decision was a step towards deregulation of US capital markets and pushes more towards a convergence of the rules base GAAP and the principles based IFRS. There has been an impact on two main sectors regarding allowing foreign markets to use IFRS standards without reconciling using GAAP. The two sectors affected include investors and multinational corporations. For investors, IFRS offers a simple program, while GAAP grows increasingly difficult to operate through. Investors must discuss with potential opportunities what system they will be using during reporting because IFRS is much easier to use. When dealing with multinational corporations, it is prudent to use IFRS because it recognizes revenue when a sale occurs. Whereas with GAAP, it is deferred until the expense is recorded and is matched against revenue. With the rule the SEC passed, corporations will be able to only use IFRS rules without reconciling with GAAP (Fosbre, Kraft and Fosbre).
The world has progressed and the establishment of a regulated accounting standard is needed more and more. The convergence of IFRS and GAAP is a great idea and needs to be launched across the world. A unified set of rules is needed to end confusion with reporting financial statements. Although many parts of the world are concerned with the United States regulating accounting standards, there does not need to be worry because the IFRS is being clearly established through a separate board and is a separate entity from GAAP.
Works Cited
Erchinger, Holger and Winfried Melcher. "Convergence between US GAAP and IFRS: Acceptance of IFRS by the US Securities and Exchange Commission." Accounting in Europe (2007): 123-139.
Fosbre, Anne B., Ellen M. Kraft and Paul B. Fosbre. "The Globalization of Accounting Standards: IFRS versus US GAAP." Global Journal of Business Research (2009): 61-71.
Hughes, Susan B. and James F. Sander. "A U.S. Manager's guide to differences between IFRS and US GAAP." Management Accounting Quarterly (2007): 1-8.
